US Fed asks for input on potential digital currency

The US Federal Reserve has published a discussion paper that sets out the potential benefits and risks of a central bank digital currency (CBDC) as it considers whether to create a US CBDC.

The discussion paper Money and Payments: The US dollar in the age of digital transformation, which invites comments from the public and stakeholders, “does not favor any policy outcome”.

It is the “first step in a discussion of whether and how a CBDC could improve the safe and effective domestic payments system”, according to the Fed.

The US central bank said that while no decision has been made on the creation of a CBDC, analysis has suggested that if one were created in the US, that it would need to be “privacy-protected, intermediated, widely transferable, and identity-verified”.

Among the pros listed in the discussion paper are that a US CBDC would give the general public and businesses “broad access to digital money that is free from credit risk and liquidity risk” and, in addition, that it has the potential to improve cross border payments.

However, the downsides are ensuring that a CBDC would preserve monetary and financial stability, as well as complement existing means of payment.

The Federal Reserve said that preserving the privacy of citizens and maintaining the ability “to combat illicit finance” are among the policy considerations it also needs to take into account.

The central bank has confirmed that it will only take further steps toward developing a CBDC “if research points to benefits for households, businesses, and the economy overall that exceed the downside risks, and indicates that CBDC is superior to alternative methods”.

Federal Reserve chairman Jerome Powell said: “We look forward to engaging with the public, elected representatives, and a broad range of stakeholders as we examine the positives and negatives of a central bank digital currency in the United States.”

The Fed has asked for public comment on more than 20 questions in order to help it “fully evaluate” a potential CBDC, with a deadline of 20 May 2022, to submit answers.

Earlier this month, the House of Lords Economic Affairs Committee concluded that there is “no convincing case” for a UK CBDC and found that while a “digital pound” may provide some advantages, it could present significant challenges for financial stability and the protection of privacy.