US Fed sparks debate with white paper on CBDC

As in many other countries around the world, people in the USA are also considering their own digital central bank currency (CBDC). On Thursday, the US Federal Reserve released a white paper weighing the pros, cons, and costs of such a project. However, it makes no statement as to whether the US should pursue such a project. In the next 120 days, the Fed wants to collect comments on the project via an online form.

“We look forward to engaging with the public, elected officials and a wide range of stakeholders as we explore the pros and cons of a central bank digital currency in the United States , ” said Fed Chair Jerome Powell.

Peculiarities of a US CBDC

According to the whitepaper, a CBDC would not go through a bank like other “traditional” digital payment systems in the US do. However, the central bank would have a claim on the CBDC, much like physical dollars are “Federal Reserve Notes” owned by the holder. The project would follow an “intermediate model” that would allow banks and payment service providers to set up accounts or digital wallets that would need to support the digital dollar. However, banks are concerned that such an approach would reduce their deposit base.

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According to Fed officials, an American CBDC would “provide a secure digital payment option for homes and businesses as the payment system evolves.” It would also speed up digital payments between the US and abroad. However, the downsides of such a currency are also highlighted:

“Problems include maintaining financial stability and ensuring that the digital dollar complements existing means of payment.”

The officials also stated that the privacy of American citizens must be protected when using the CBDC. It is worth remembering that many CBDCs have come under criticism for privacy violations, among other things. The whitepaper also notes that ways to combat the use of CBDC for illicit financial transactions need to be developed.

Project sparks internal Fed debate

The project has sparked debate among top Fed officials, with Fed Governor Lael Brainard saying delaying the project is unsustainable. She pointed to the development of CBDC in competing economies, the most advanced of which is China. Some officials concurred, saying that not having a CBDC would weaken the US’s position as holder of the global reserve. Opponents say the US already has various digital payment systems.

However, the Fed has made it clear that it will not go ahead with planning a digital dollar without clear support from the Executive Branch and Congress, ideally in the form of specific agency legislation.

It is also worth noting that the Boston Fed and the Massachusetts Institute of Technology (MIT) are working separately on the technological aspects of a US central bank digital currency. This includes a possible coding that should be published as early as next month.