FED Releases Central Bank Digital Currency Report

There’s been plenty of central bank and government chatter on cryptos in recent months. Just yesterday, a U.S Congress subcommittee hearing took place on cryptos and the environment.

Central banks have also raised concerns over the effects of cryptos on financial stability. Late last year, the Bank of England talked of the need for a global crypto regulatory framework. One common view is that the existence of an unregulated crypto market diminishes the effects of monetary policy.

In recent years, however, central banks have been active in researching and, in some cases, rolling out their own central bank digital currencies (CBDCs).

Last week, we reported on the Bank of Israel’s progress towards an e-shekel and reviewed the current CBDC landscape. According to CBDC Tracker, just two countries have fully developed and issued CBDCs, these being The Bahamas and Nigeria. A number, however, are in pilot phases, while others are in proof-of-concept and research phases.

For the U.S, it’s still early days when it comes to CBDCs, with the U.S in the research stage. The lack of progress on the CBDC front has had some lawmakers critical of the FED’s progress. Earlier this month, lawmakers had pressed FED Chair Powell on the status of the FED’s review that had been due out last summer.

The FED’s CBDC Review

Having been pressed by lawmakers for the release of the FED’s CBDC review, the FED released its highlight anticipated report on CBDCs on Thursday.

Salient points from the report include:

• Well-designed and appropriately regulated stablecoins (USD Coin / Tether) could potentially support faster, more efficient, and more inclusive payment options.
• Increased use of stablecoins, however, raises a number of concerns that include:
  • Potential for destabilizing runs.
  • Disruptions in the payment system.
  • Concentration of economic power.
• While the FED made no decisions on whether to pursue a CBDC, analysis to date suggests that a potential U.S CBDC would best serve the needs of the U.S with the following attributes: privacy-protected; intermediated; widely transferable; and identity-verified.
• In addition to the normal uses of funds, a CBDC could be programmed for a payment delivery at a given time.
• Potential CBDC benefits would include:
  • Maintaining the centrality of safe and trusted central bank money in a rapidly digitizing economy.
  • Streamlining cross-border payments.
  • Support the Dollar’s international role.
  • Promote financial inclusion.
  • Extend public access to safe central bank money.
• Potential risks, however, would include:
  • Changes to financial-sector market structure.
  • Safety and stability of the financial system.
  • Efficacy of monetary policy implementation.
  • Privacy and data protection and prevention of financial crimes.
  • Operational resilience and cybersecurity.

With a number of key issues to consider, the report called for key stakeholders to comment on a series of questions provided within the report. Additionally, the FED stated that it would conduct targeted outreach and convene public forums to enable dialogue in relation to CBDCs.