The Fed’s Paper on a U.S. Digital Currency Offers Few Signs of How the Regulator Is Leaning

The Federal Reserve Board released a paper Thursday afternoon on the question of a central bank digital currency for the United States, and even though the Fed would play a crucial role in any such venture, observers looking for hints on how the central bank is leaning on the issue will be disappointed.

Indeed, the Fed, which calls the release a “discussion paper,” makes no bones about its neutrality on the question, a subject that has gained considerable momentum in the payments industry over the past year or so as nations around the world examine the pros and cons. “The paper does not favor any policy outcome,” says the Fed in related news release.

The paper also arrives as scores of nations move closer to issuing a digital form of their national currency. Some observers point particularly to China, which is said to be near to introducing a digital version of its yuan. About 90 countries altogether are in various stages of investigating or developing a CBDC, according to the Atlantic Council, a Washington, D.C.-based think tank that tracks the technology. 

The Fed’s 40-page document, entitled “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” sets out the advantages and drawbacks of a virtual dollar and invites comment from industry observers. “The Fed’s thoughtful, long-anticipated white paper discussing a potential CBDC is studiously neutral,” Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based payments consultancy, tells Digital Transactions News in an email message. “That’s calculated and I think moves the ball a few yards down the field. One has to wonder, however, why it took so long.”

Grover is the author an in-depth examination of the concept of CBDCs and of the advantages and drawbacks of a digital dollar issued by the nation’s central bank. The article will appear in the upcoming February issue of Digital Transactions magazine.

While arriving at no conclusion of its own, the Fed evenhandedly sets out the advantages and drawbacks of a CBDC for the United States. Advantages include swifter and easier cross-border payments and the potential to draw more lower-income citizens into the payment system. Among the disadvantages is the potential to reduce funds commercial banks rely on for lending, a particularly acute risk if the CBDC is interest-bearing.

The idea of a government-backed CBDC project has simmered quietly in the payments industry for years, but gained prominence nearly three years ago as a potential counterbalance to the private sector’s Libra initiative, introduced by Facebook Inc. Facing a storm of objections from central bankers and other concerned parties, some original backers of the Libra project withdrew. The project has since been renamed Diem.

While some critics argue the Fed is moving too cautiously on the issue of a digital dollar, the central bank itself notes it will need authorization from Congress to act on creating a CBDC. This, some observers say, presents an interesting contrast to its action nearly three years ago to go ahead with a real-time payments platform called FedNow. “Unlike with FedNow, at least the Fed acknowledges it doesn’t have the authority to launch a CBDC,” notes Grover.

Ultimately, as a crucial player in the nation’s banking system and as a banking regulator, the Fed may have little choice other than to move cautiously on the issue of a CBDC. Its latest study paper, Grover observes, is “of a piece with the Fed’s carefully cultivated reputation for apolitical technocratic competence, notwithstanding that in fact the Fed is the consummate political actor.”