The US Fed has just released a ~ 20 page paper that examines pros and cons of a potential U.S. central bank digital currency (aka CBDC). In the spirit of ‘first principles’ I recommend you read it directly
OR … you can just continue here as I summed it up nicely for you 📝
The paper provides a unique regulatory perspective into the potential impact of CBDCs on mainstream financial services and the percieved impact on stability of financial systems. It is , suprisingly , honest about the benefits of CBDCs to users and how it can improve the efficiency of payment systems while , at the same time, acknowledging the potential disintermedation of banks. There are a few good arguments on the need for a balance between privacy and prevention of financial crime ( or just crime!)
For starters, I like the way CBDC is defined for the scope of the paper
A CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank
The definition is fascinating with a clear warning to traditional financial services players that CBDCs will disintermediate traditional banking.It also acknowledges the need for a platform for future innovations and looming threat for other countries launching CBDCs and threat to the domination of USD
The paper sets the tone at the begining itself by naming 5 key functions of the US Fed
- conducts the nation’s monetary policy
- promotes the stability of the financial system
- promotes the safety and soundness of individual financial institutions
- fosters payment and settlement system safety and efficiency
- promotes consumer protection and community development
Benefits of CBDC
The paper acknowledges benefits of CBDCs namely
- a convenient, electronic form of central bank money
- give entrepreneurs a platform on which to create new financial products and services
- support faster and cheaper payments (including cross-border payments)
- expand consumer access to the financial system
- with the safety and liquidity
In the words of US Fed
help to level the playing field in payment innovation for private-sector firms of all sizes
provide a safe foundation for private-sector innovations
mitigate risks from the prolifielration of stablecoins and other cryptocurrencies, which require mechanisms to reduce liquidity risk and credit risk
a CBDC could potentially be programmed to deliver payments at certain times
a CBDC could potentially be used to carry out micropayments
potential to streamline cross-border payments
preserve the dominant international role of the U.S. dollar
So, what are other countries doing about CBDCs?
It is perhaps worth a pause to look at global efforts towards CBDCs. By one count, at least 90+ central banks are exploring the viability of launching their own native digtial crypto currency.
Digtial yuan is already live with a growing userbase in China — China’s digital yuan wallet now has 260 million individual users
Digtal Sterling — Bank of England has not yet made a decision on whether to introduce CBDC. Meanwhile , politicians are still resistant to the idea of britcoin
Digitial rupee — India’s central bank (RBI) is currently working towards a phased implementation strategy and examining use cases for CBDC which could be implemented with little or no disruption
Singapore view — A retail CBDC is one of the options for the future of money and payments that the central bank of Singapore is exploring
Wholesale CBDCs — Project JURA explores the direct transfer of euro and Swiss franc wholesale central bank digital currencies (wCBDCs) between French and Swiss commercial banks
El Salvador stands out from the lot by , controversially , accepting Bitcoin as legal tender .
Jamaica plans to roll out it’s own CBDC in 2022 after a recent succesful pilot
It may not come as a surpise if the first CBDC is launched by one of the emerging market countries — ready to disrupt the incumbent finacial system
Talking of downside
There are a few downsides that the paper touches:
- how it might affect financial-sector market structure
- cost and availability of credit, the safety and stability of the financial system
- efficacy of monetary policy.
Potential risks and policy considerations for a CBDC
A CBDC could / would
fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the central bank.
reduce the aggregate amount of deposits in the banking system, which could in turn increase bank funding expenses
result in a shift away from other low-risk assets, such as shares in money market mutual funds, Treasury bills, and other short-term instruments
result in the ability to quickly convert other forms of money into CBDC and could make runs on financial firms more likely
lead to depositors prefering CBDC over bank deposits
need to strike a balance between privacy and crime prevention
need a resilient infra to deter cyber security risks
Opinionated Summary
“The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law “ — from the whitepaper
The tone of the paper is very balanced and seemingly agnsotic. Just publishing the paper itself is a promising, but a tiny step towards an eventual CBDC (The paper is open to feedback from public with a set of 22 questions)
However, the world and other central banks are not wating. At least 90 countries are exploring the lauch of CBDCs. Least of all — private crypto currencies continue to capture the imagination of wider public (for the right or wrong reasons). Despite the constant price fluctuation , popular cryptos are here for good and challenging the domination of USD
In summary, if you are excited about a digital dollar , please calm down , we are still a long way from potential launch of #CBDC #digitaldollar from the US.
The first digital dollar maybe the Jamaican one!