Fed takes ‘first step' in weighing digital currency issuance pros, cons

Without favoring any policy outcome, the Federal Reserve released a report on the pros and cons of issuing a central bank digital currency.

The introduction of a CBDC — a digital form of legal tender — would represent a highly significant innovation in American money, the Fed said in its 40-page report Thursday. "This paper is the first step in such a conversation," the Fed said.

In examining the benefits, the Fed noted in its report that a CBDC "could provide a safe, digital payment option for households and businesses as the payments system continues to evolve and may result in faster payment options between countries."

But there may also be downsides, including how to ensure a CBDC would preserve monetary and financial stability as well as complement existing means of payment, the Fed said. Other key policy considerations are how best to preserve the privacy of citizens and maintain the ability to combat illicit finance, the Fed added.

As a liability of the Fed, a CBDC would not require mechanisms like deposit insurance to maintain public confidence, nor would a CBDC depend on backing by an underlying asset pool to maintain its value, the report noted. "A CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk," the report said.

And while no decisions have been made on whether to pursue a CBDC, analysis to date suggests that a potential U.S. CBDC would work best if it were privacy-protected, intermediated, widely transferable and identity-verified, the Fed said.

Of note, the Fed said it does not intend to proceed with issuance of a CBDC without "clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law."

The report posed more than 20 questions to the public on CBDCs, and comments will be accepted for 120 days.

"We look forward to engaging with the public, elected representatives, and a broad range of stakeholders as we examine the positives and negatives of a central bank digital currency in the United States," Federal Reserve Chairman Jerome H. Powell said in a news release.

Sen. Pat Toomey, R-Pa., ranking member on the Senate Banking Committee and a cryptocurrency proponent, said in a statement that the Fed's report is an important step in acknowledging the permanence of cryptocurrencies and their underlying technologies.

However, "While the report mentions the importance of CBDC privacy, I'm concerned the Fed does not clearly explain how it would protect consumer transaction data," Mr. Toomey said. "There's also a question in my mind whether the Fed's report implies that a CBDC would not allow for direct peer-to-peer transactions. This characteristic is fundamental."

The Senate Banking Committee in June held a hearing on CBDCs. Neha Narula, director of the Digital Currency Initiative at Massachusetts Institute of Technology, told committee members that there are myriad open questions regarding how a U.S. CBDC should operate — including how users might access it and how to protect consumer privacy — but the upside is immense.

"Digital currency offers an opportunity for a ground-up redesign of our payment systems," Ms. Narula said at the hearing. "If built in the right way, a digital dollar might empower users and create a platform for innovation in payments, much as the internet created a platform for innovation by facilitating the transfer of information."

The Federal Reserve Bank of Boston announced a partnership in 2020 with MIT's Digital Currency Initiative to perform technical research related to a CBDC.