The Federal Reserve Bank has released a highly anticipated report on digital assets, weighing out the risks and benefits of central bank digital currencies (CBDCs) and the implications of digital money.
In the report, the Fed doesn’t take a hard stance on digital currencies, but does take an elaborate look at how stablecoins and CBDCs could benefit an increasingly digital global financial system. The report does not reveal any plans to create a US digital dollar, nor any hints at doing so.
According to the Fed, a dollar-backed CBDC would “would offer the general public broad access to digital money that is free from credit risk and liquidity risk.”
“As such, it could provide a safe foundation for private-sector innovations to meet current and future needs and demands for payment services. All options for private digital money, including stablecoins and other cryptocurrencies, require mechanisms to reduce liquidity risk and credit risk.”
At the same time, the Fed says that all the available mechanisms so far “are imperfect,” and that the adoption of digital money could present risks to both individuals and the financial system at large.
One of the challenges of creating a digitized financial system, according to the Fed, is the fact that 5% of U.S households remain completely unbanked, and an additional 20% are banked but rely on costly financial services such as money orders, check-cashing services, and payday loans.
The report points to an effort by the Federal Reserve Bank of Atlanta to create a Special Committee on Payments Inclusion, which is a a public-private sector collaboration that is working to promote access to digital payments for vulnerable populations.
The Fed says that “cryptocurrencies have not been widely adopted as a means of payment in the United States,” and that they remain subject to extreme volatility, are difficult to use without service providers, and have “severe limitations on transaction throughput.”
“Many cryptocurrencies also come with a significant energy footprint and make consumers vulnerable to loss, theft, and fraud.”
The report opens up the discussion of digital assets to the people, and invites stakeholders and the public to ask or answer questions on the topic. Some of the questions include:
- What additional potential benefits, policy considerations, or risks of a CBDC may exist that have not been raised in this paper?
- Should a CBDC be legal tender?
- Should a CBDC pay interest? If so, why and how? If not, why not?