Fed issues paper on CBDCs as ‘first step’ in determining how digital payments could improve safety, effectiveness

Pros and cons of a U.S. central bank digital currency (CBDC) are examined in a discussion paper released by the Federal Reserve Thursday, the agency said, which also seeks public comment.

The Fed described the papers as a “first step in a discussion of whether and how a CBDC could improve the safe and effective domestic payments system.” The paper takes no policy position, the Fed asserted.

“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 Chair Jerome H. Powell said in a statement.

The paper addresses, the Fed said, several issues including the state of the domestic payments system and different types of digital payment methods and assets that have emerged in recent years, including stablecoins and other cryptocurrencies.

The paper also examines the potential benefits and risks of a CBDC and identifies specific policy considerations, the Fed said. Among the considerations: could a CBDC negatively or positively affect financial stability; would it adversely affect the financial sector differently from stablecoins or other nonbank money; should CBDC be legal tender; should it pay interest; what types of firms should serve as intermediaries for CBDCs; and what should be the role and regulatory structure for the intermediaries.

(A report issued in November by the Treasury Department’s “President’s Working Group on Financial Markets,” along with the Federal Deposit Insurance Corp. [FDIC] and the Office of the Comptroller of the Currency [OCC], envisioned stablecoins subject to a federal regulatory framework through an act of Congress – including by requiring that stablecoins may only be issued by federally insured depository institutions, which are banks, thrifts, and credit unions.)

“Other key policy considerations include how to preserve the privacy of citizens and maintain the ability to combat illicit finance,” the Fed said.

Comments will be due in four months (120 days), the Fed said.

Federal Reserve Board releases discussion paper that examines pros and cons of a potential U.S. central bank digital currency (CBDC)