This article considers alternatives for considering the Central Bank Digital Currency (CBDC) in the United States. He points out that the introduction of the CBDC is unlikely to significantly improve the current US money and payment system. A more compelling reason to consider the CBDC is to prepare the US system for future threats, especially those related to the rise of private and foreign digital currencies. Therefore, it seems that the United States does not need to issue a CBDC immediately, but the United States needs to consider CBDC technology now for future use.
In the last few years, the Central Bank Digital Currency (CBDC) has become an increasingly pressing issue in policy making. In the latest Bank for International Settlements survey involving 81 central banks, 90% of central banks are investigating CBDC More than half have moved to the development or experimental stage. So far, the Bahamas and Nigeria have launched a live CBDC, and China and the East Caribbean countries have released large-scale pilot versions.
The United States is currently considering and discussing the outlook for the issuance of the CBDC. In January, the Federal Reserve released the following white paper: Learn about the potential benefits and risks of deploying USCBDC We are looking for a wide range of public comments. In March, President Joe Biden signed a presidential directive. Call for consideration of creating a US CBDC..
CBDC, by definition, is a central bank liability issued digitally to the general public. Central banks have traditionally issued two types of debt.
- Electronic central bank deposits, also known as reserves
Access to the former is limited to qualified financial institutions operating on high-value payment systems, so you can think of it as a wholesale CBDC. The latter is available to the general public. Therefore, the CBDC can be thought of as a digital form of physical cash. Because the CBDC is in digital form, it functions differently than physical cash and can be used for a variety of purposes.
There was a lot of general debate about the pros and cons of issuing the CBDC.1 This article critically considers the alternative discussion. The purpose is to identify the most compelling reasons to consider the US CBDC and thus shed light on policy discussions.
Do you want to stay at the top of the central bank’s digital currency innovation?
First, let’s consider some common but unconvincing arguments for implementing the US CBDC. One view is that the United States should not lag behind other countries in CBDC innovation. However, this argument is too vague to distinguish between the specific situations facing each country.
The situation in the United States is clearly different from many developing countries promoting the CBDC. In some of these countries, the majority of the population does not have a bank account and is heavily dependent on cash, the private financial sector is inefficient or insufficient to provide digital payment services to the public. .. In such cases, the CBDC will be a useful tool for modernizing payment systems through digitalization.
However, in developed countries like the United States, most of the population is in banks and there are many efficient and innovative electronic payment options to meet public needs. Therefore, the cost-benefit considerations for the United States to issue a CBDC are very different.2
Would you like to improve your current payment system?
Another argument in favor of the introduction of the CBDC is to improve the current US money and payment system. However, this discussion may not be powerful when considering a complete cost-benefit analysis.
It’s plausible that the CBDC will bring some improvements to the current system, but it’s probably small. Financial inclusion could be one such area. Recent Federal Reserve SurveyEconomic well-being of US households in 20216% of the U.S. adult population does not have a bank account, and some consumers who do not have a bank account believe that this is due to high bank charges or lack of trust in the bank. It shows that there is also. If the CBDC can reduce these frictions, it may help promote financial inclusion to some extent, but the impact is limited given the small proportion of the population without bank accounts.
Another possible benefit is improved payment efficiency. Payment systems have many network effects. As a result, there is always concern about lack of market power and competition, as seen in payment cards and other payment sectors.3 The CBDC may offer additional competition to improve market performance. However, given the payment services that the Fed already operates and plans to deploy, such as the FedNow real-time payment system, the incremental profits from the CBDC may be insignificant.
On the other hand, these potential improvements need to be weighed against the cost of launching a CBDC. This can be significant due to the confusion that the CBDC can cause. One of the potential turmoil is the elimination of economic intermediaries. CBDCs can compete with commercial bank funds and other financial assets, which can increase the cost of financing banks and other financial sectors. This can reduce credit availability and increase credit costs for households and businesses, as described in the next article. Economics review Paper “Does the central bank need to issue digital currencies?“
Fiscal stability is another concern. Because the CBDC is risk-free, market participants can withdraw bank deposits and other assets to rush to the CBDC during market stress, making financial markets more vulnerable. In addition, issuing a CBDC increases the operational burden on the central bank and can create additional risk entry points in the payment system.
Therefore, the net profit that the CBDC can bring to the current system is probably small. In fact, many existing issues may be better addressed by a less confusing approach. For example, providing targeted subsidies and support can help people who do not have a bank account, and regulatory interventions can address competitive issues.
Do you want to maintain public access to central bank money?
Yet another debate for implementing the CBDC is to maintain public access to secure central bank money. Currently, the only central bank money available to the general public is cash. Studies show that the United States, like many other developed countries, has made a long-term transition from cash to electronic payments over the years.Four
If this trend continues, one may be concerned that the public will eventually lose direct access to central bank funds. However, this concern can be injustice. In the current system, the Fed provides wholesale CBDC services to commercial banks via reserves, and banks provide retail payment services to end users. The transition from cash to digitized commercial bank money poses little concern to end users, and probably most, as banks are well regulated and most commercial bank money is guaranteed by the government. You won’t be worried.
A more compelling reason to consider US central bank digital currencies
So is there any other more compelling reason for the US to consider the CBDC (probably not yet published)? The answer is yes. It has to do with ensuring our payment system in the future against new challenges, especially the potential rise of private and foreign digital currencies.
In the last decade or so, innovative developments have been made in the field of digital currencies. Bitcoin, the most prominent cryptocurrency to date, debuted in 2009. Since then, many cryptocurrencies have been launched and the market has grown explosively. In November 2021, the total amount of cryptocurrencies reached nearly $ 3 trillion.
Despite this huge growth, Bitcoin and other cryptocurrencies have been volatile in valuation and have not been able to be effective payment methods or value storage methods. Stablecoins — a particular type of cryptocurrency — was developed to address this issue by maintaining stable values. Some major fintech companies are also planning to launch Stablecoin, taking advantage of technology and customer networks. For example, Global Stablecoin, proposed by Facebook (now Meta), has received a lot of attention and scrutiny from policy makers and the general public.Five
Although still in its infancy, digital currencies (especially Stablecoin) will open up new markets and meet potential demands such as trading digital assets, enabling decentralized finance and facilitating cross-border payments. It shows great potential. As more applications and use cases are discovered and developed, their scope in payment systems can grow significantly and can be widely used in everyday transactions.
However, the growth of digital currencies could pose new challenges to our payment systems and the broader economy. Here are some notable examples.
- Networking effects associated with digital platforms could allow private digital currency issuers to lock in users and gain market power.
- Collecting, storing, and accessing transactional data can raise consumer privacy concerns.
- Different digital currencies may not be interoperable and may cause fragmentation of the payment system.
In addition to these, fiscal stability is an urgent concern. Private digital currencies are much more risky to execute because they are not regulated or insured like commercial bank money. The crash of Stablecoin TerraUSD is a recent example.6 Such practices can spread contagiously through market panic and fire sales, causing turmoil in the financial sector and the economy.
It may also be concerned that digital currencies developed by private or foreign entities could “invade” the US currency sovereign and weaken the US dollar’s position as an international reserve currency.
Addressing these concerns through regulation is optional, but not always effective. In that case, the CBDC can be a valuable and powerful tool. When properly designed and operated, USCBDC can:
- Help discipline the digital currency space to contain market power and improve consumer protection
- It bridges various digital currencies and acts as an anchor and reference for each account.
- Compete for vulnerable or fraudulent digital currencies to increase financial stability
- Helps protect and maintain the role of the US dollar in implementing monetary policy and serving as an international reserve currency
Our discussion of why the United States considers the CBDC leads us to the following policy implications: First, there seems to be no urgent need for the United States to issue a CBDC. In the current money and payment system, the federal government provides wholesale CBDCs to commercial banks through reserves, allowing tightly regulated banks to provide retail payment services to end users through insured commercial bank money. increase. It is unlikely that the CBDC will significantly improve the current system. Rather, the premature launch of the CBDC can cause unwanted confusion.
However, the United States needs to investigate CBDC technology to prepare its payment systems for future threats, especially those related to the rise of domestic and foreign digital currencies. It takes time to investigate and evaluate the design and functionality of the CBDC, so it is recommended that you start earlier than you do later. Moreover, given that many countries around the world are actively researching and developing the CBDC, the United States does not need to rush to launch the CBDC, but the United States, for example, with respect to the process. You may not want to miss the opportunity to participate and potentially lead. For standard setting and international cooperation.
Finally, the CBDC is one way to deal with the rise of private and foreign digital currencies. Regulation can also play an important role. For example, policy makers may consider directly regulating non-bank digital currency issuers or adjusting banking regulations to make banks compete in the field of digital currencies. Nonetheless, the CBDC can be a potentially useful policy tool, and it would be wise for policy makers to investigate and prepare in every aspect.
Zhu Wang is Vice President of Research on Financial and Payment Systems in the Research Division of the Federal Reserve Bank of Richmond. This article has benefited from discussions with colleagues at the Richmond Fed. Thanks to Kartik Athreya, Hubert Ennis, Borys Grochulski, Arantxa Jarque, Toan Phan, Bruno Sultanum and Russell Wong for their helpful comments.