January 2022. The US Federal Reserve published a white paper on Central Bank Digital Currency, and the window for public comment is open until May 20, 2022.
The white paper lays out a conceptual model of CBDC starting from the very definition of it: CBDC is a digital liability of the Central bank, thus, analogous to a digital form of paper money.
Then the paper outlines four key features of such CBDC that in Fed’s opinion would best serve the needs of the United States: 1) privacy protection, 2) intermediated model, 3) transferrable and 4) identity-verified. While combining the first with the last one requires, somewhat counter facing design efforts, and the transferability feature is obvious, the most discussion is now around the intermediated model of the CDBC.
Intermediation, in this context, means that Fed does not want to skip the commercial banking layer in its reach to individual accounts (the main target for disruption by crypto). Commercial banks and regulated “non-bank” financial service providers will provide, in the intermediated model, services to manage their CBDC holdings and payments, will operate in existing privacy and identity management frameworks.
According to the paper the main benefits sought by Fed with regards to CBDC introduction are (in the given order):
· Meet needs and demands for, lay foundations for innovations in, the digital economy
· Improving cross border payments
· Support the dollar’s international role
· Increasing the financial inclusion for underserved and lower-income households
· Replacement of the cash with a digital equivalent with similar features
The area for concerns that Fed’s paper discusses is the unanticipated effect CBDC can have on established balances in the financial and monetary system. For example, it is expected that existence of such versatile tool as CBDC might leave other commercial bank products without demand.
The questions, that the paper seeks comments for, unveil more details about the design tasks and concerns that Fed is working now with:
1. What additional potential benefits, policy considerations, or risks of a CBDC may exist that have not been raised in this paper?
2. Could some or all of the potential benefits of a CBDC be better achieved in a different way?
3. Could a CBDC affect financial inclusion? Would the net effect be positive or negative for inclusion?
4. How might a U.S. CBDC affect the Federal Reserve’s ability to effectively implement monetary policy in the pursuit of its maximum-employment and price-stability goals?
5. How could a CBDC affect financial stability? Would the net effect be positive or negative for stability?
6. Could a CBDC adversely affect the financial sector? How might a CBDC affect the financial sector differently from stablecoins or other nonbank money?
7. What tools could be considered to mitigate any adverse impact of CBDC on the financial sector? Would some of these tools diminish the potential benefits of a CBDC?
8. If cash usage declines, is it important to preserve the general public’s access to a form of central bank money that can be used widely for payments?
9. How might domestic and cross-border digital payments evolve in the absence of a U.S. CBDC?
10. How should decisions by other large economy nations to issue CBDCs influence the decision whether the United States should do so?
11. Are there additional ways to manage potential risks associated with CBDC that were not raised in this paper?
12. How could a CBDC provide privacy to consumers without providing complete anonymity and facilitating illicit financial activity?
13. How could a CBDC be designed to foster operational and cyber resiliency? What operational or cyber risks might be unavoidable?
14. Should a CBDC be legal tender?
15. Should a CBDC pay interest? If so, why and how? If not, why not?
16. Should the amount of CBDC held by a single end user be subject to quantity limits?
17. What types of firms should serve as intermediaries for CBDC? What should be the role and regulatory structure for these intermediaries?
18. Should a CBDC have “offline” capabilities? If so, how might that be achieved?
19. Should a CBDC be designed to maximize ease of use and acceptance at the point of sale? If so, how?
20. How could a CBDC be designed to achieve transferability across multiple payment platforms? Would new technology or technical standards be needed?
21. How might future technological innovations affect design and policy choices related to CBDC?
22. Are there additional design principles that should be considered? Are there trade-offs around any of the identified design principles, especially in trying to achieve the potential benefits of a CBDC?
Please comment with your views on any of the above questions.