Fed kicks off digital dollar issuance debate in new report

The United States Federal Reserve (Fed) has published a report on central bank digital currencies (CBDCs).

Among other things, the document released on Thursday (20) highlights that the creation of a digital version of the dollar could give Americans a “secure digital payment option” as well as “faster payment options between countries”.

On the other hand, it would pose risks to financial stability and raise privacy concerns. Furthermore, the creation of a CBDC would also change the market structure of the financial sector, change reserve management practices and monetary policies.

“The introduction of a CBDC would represent a highly significant innovation in American money. Thus, broad consultation with the general public and key stakeholders is essential. “The Federal Reserve does not intend to proceed with issuing a CBDC without clear support from the executive branch and Congress, ideally in the form of a specific authorizing law.”

Is Digital dollar coming?

The document does not offer a clear signal on the Fed’s position regarding the possibility of launching a CBDC. But Fed says that while no decision has been made, current analysis suggests that a U.S. CBDC, if created, “would better meet the needs of the United States by being privacy-protected, brokered, widely transferable, and identity-verified.” .

Then, the text emphasizes that protecting consumer privacy is fundamental. Therefore, any CBDC would need to strike a balance between safeguarding privacy rights and providing the necessary transparency to deter criminal activity.

Uses and Functions of a CBDC

According to the Fed, transactions with CBDCs would need to be completed in real time. for users to make quick transactions.

“Individuals, companies and governments can use a CBDC to make basic purchases of goods and services or pay bills. And governments can use a CBDC to collect taxes or make benefit payments directly to citizens. In addition, a CBDC can be programmed to, for example, deliver payments at certain times,” the Fed said.

On the benefits, the Fed emphasized that an eventual digital dollar could keep money central in a rapidly digitizing economy.

Finally, he said that a CBDC could generate new features to meet speed and efficiency requirements.

Cross-border payments

The Fed specifically scored the benefits of a CBDC on cross-border payments. As the report highlights, digital currency could simplify cross-border payments, introducing streamlined distribution channels and creating additional opportunities for collaboration and interoperability across jurisdictions.

But the body noted that this would require international coordination to address, for example, standards and infrastructure.

Dollar dominance

Another potential benefit of a CBDC, according to the Fed, concerns the dominant role of the US dollar:

“The dollar is the most used currency in the world for payments and investments; It also serves as the world’s reserve currency. The dollar’s international role benefits the US by, among other things, reducing transaction and borrowing costs for US households, businesses and government. The dollar’s ​​international role also allows the United States to influence the patterns of the global monetary system.”

Potential risks of a CBDC

The Fed also highlights the possible risks arising from the introduction of a CBDC. The list of risks includes: changes in the financial sector’s market structure; security and stability of the financial system; implementation of monetary policy; privacy and data protection; financial crimes and cybersecurity.

Ultimately, the Fed said it will only move forward in developing a CBDC if its research points to benefits for households, businesses and the wider economy that outweigh the downside risks.

“Furthermore, the Federal Reserve would only pursue a CBDC in the context of broad public and intergovernmental support.”

The Fed provided a link to receive comments on a CBDC.