Federal Reserve Examines Benefits and Risks of a U.S. Central Bank Digital Currency
On May 26, 2022, the Federal Reserve Board’s Vice Chair Lael Brainard provided testimony on digital assets and the future of finance before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. Recognizing that technology is driving profound change, it has become important to undertake a close examination of the benefits and risks of a U.S. Central Bank Digital Currency (CBDC) so that if a decision to make it a part of the U.S. payment system in the future is made, the Federal Reserve will be prepared. “Today, physical currency provides the public with access to safe central bank money, exchangeable without concern for liquidity or credit risk. The share of U.S. payments made by cash has declined from 31 percent to 20 percent just over the past five years, and the share is even lower for those under age 45.”
Concerns arise with some new forms of digital money that do not share the same protections as commercial bank money, which is built upon deposit insurance, banks’ access to central bank liquidity, and banking regulation and supervision. The already seen volatility of such new forms of money, that can lose their promised value relative to fiat currency, harming consumers or, at large scale, creating broader financial stability risks. In addition, “if private monies—in the form of either stablecoins (cryptocurrencies whose values are tied to those of real-world assets such as the U.S dollar) or cryptocurrencies—were to become widespread,” it could create a “fragmentation of the U.S. payment system into so-called walled gardens.”
However, there are potential risks of a CBDC that must be considered, particularly those associated with “disintermediating banks, given their critical role in credit provision, monetary policy transmission, and payments.” In January, the Federal Reserve issued a discussion paper, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, to solicit public input by the deadline of May 20, 2022 on this important matter.