The Fed opens the debate on the American digital currency | Foodman CPAs and Advisors

A report examines the pros and cons of CBDC

The Federal Reserve is considering issuing a central bank digital coin (CBDC), according to a new report examining the pros and cons of such a move. Issuing this digital currency would be the first type of new currency issued by the Fed since the printing of the first $10 bill in 1914.

According to the report, the United States would issue a central bank digital currency (CBDC) that would be stored in apps or “digital wallets” on our smartphones. NPR’s David Gura calls it “a radical overhaul of the dollar for today’s digital world.”

We could use this digital currency to instantly pay for goods and services, as we currently do with Venmo, Stripe, or Apple Pay. No physical money would change hands. A crucial test for a potential CBDC, according to the report, is whether it would prove superior to other methods.

Technological innovation has recently ushered in a wave of digital assets with characteristics similar to those of money, the report notes. These “cryptocurrencies” are derived from a combination of cryptography and distributed ledger technologies, which together form a basis for decentralized peer-to-peer payments.

Looking around the world, it seems unlikely that the government will give up control of its currencies. Governments seem to feel the need to keep control of their money supply and interest rates. Could a currency update be an answer?

The first step of the Fed

The Federal Reserve Act of 1913 created the American central national banking system “to provide the nation with a secure, flexible, and stable monetary and financial system.” Although the law has since been amended several times, the recent rapid growth of the digital currency industry has spurred Fed scrutiny.

Federal Reserve Chairman Jerome H. Powell said the report is a first step in what could be a long process. It is intended to start a conversation about digital currency with policy makers as well as to gather feedback from everyday people.

The Fed’s report stresses that it will not proceed with issuing a CBDC “without clear support from the executive branch and Congress, ideally in the form of specific enabling legislation.”

There are concerns, however, that by moving slowly, the United States will let other countries shape the standards for national digital currencies. Could this lead to a decrease in the position of the US dollar as the world’s reserve currency?

Review of Benefits and Risks of CBDCs

The 33-page report summarizes the current national payment system. It discusses the different types of digital payment methods and assets that have emerged in recent years, including stablecoins and other cryptocurrencies. These provide a basis for decentralized peer-to-peer payments. It concludes by examining the potential benefits and risks of a CBDC and identifies specific policy considerations.

A Federal Reserve press release highlights the differences between today’s digital forms of holding and moving money. Bank accounts, online transactions and payment applications all use digital transfers.

The money used in these transactions “are liabilities of private entities, such as commercial banks”. Conversely, according to the Fed, “a CBDC would be a liability of a central bank, like the Federal Reserve.” Here are the highlights of the report:


Reduce or eliminate fees. When you make a contactless payment today, there are several steps behind the scenes, each involving transaction fees. In 2020, these costs amounted to more than $110 billion, which were generally borne by companies.

With a digital dollar, you could theoretically cut out those middlemen.

A new foundation for the payment system. A CBDC could potentially act as a bridge between different payment services, old and new. It could also maintain the centrality of safe and reliable central bank money in a rapidly digitalizing economy.

Like existing forms of commercial bank money and non-bank money, a CBDC would enable the general public to make digital payments. A CBDC would be a liability of the Federal Reserve. However, this would not require mechanisms like deposit insurance to maintain public confidence, nor would a CBDC depend on the support of an underlying asset pool to maintain its value.

A CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk.

Stimulate innovation. A CBDC could also help level the playing field in payment innovation for private sector companies of all sizes, eliminating some costs and risks.

Global reserve. A CBDC could help the US dollar maintain its status as the world’s reserve currency. The international role of the dollar also allows the United States to influence the norms of the global monetary system.

Financial inclusion: especially for economically vulnerable households and communities through, among other benefits

  • Enable the unbanked to participate in our increasingly cashless financial system.
  • More than 7 million, or more than 5% of American households, are still unbanked. Nearly 20% more have bank accounts, but still rely on more expensive financial services such as money orders, check cashing services and payday loans.
  • Access to digital payments would also make it easier for the federal government to distribute benefits. For example, the establishment of a digital dollar during the pandemic could have allowed the government to transfer relief payments directly into digital wallets.
  • Enable fast and cost-effective payment of taxes
  • Enable timely and cost-effective delivery of salaries, tax refunds, and other federal payments.
  • If enough people use the CBDC, its release could put pressure on credit card companies and payment processors to lower fees in order to compete.
  • Intermediation: In an intermediated model, potential intermediaries could include commercial banks and regulated non-bank financial service providers that would operate in an open market for CBDC services.

An intermediate model would be

  • Facilitate the use of existing private sector privacy and identity management frameworks
  • Harnessing the innovation capacity of the private sector
  • Reduce the risks of destabilizing disruptions to the proper functioning of the US financial system.

Transferable: For a CBDC to serve as a widely accessible means of payment, customers of different intermediaries should be able to easily transfer funds.

Identity Verification: Financial institutions in the United States are subject to strict rules designed to combat money laundering and the financing of terrorism. A CBDC should be designed to comply with these rules, just as banks and other financial institutions currently verify the identity of their customers.

Improvements to cross-border payments: In the document, the Fed explains that a US CBDC would improve cross-border payments by

  • Use new technologies
  • Implementation of simplified distribution channels
  • Create additional opportunities for collaboration and interoperability between jurisdictions.

Currently, the high costs have a significant impact on households that carry out remittance transactions. The high costs of cross-border payments also affect small businesses that make infrequent global payments to suppliers. Reducing these costs could benefit economic growth, improve global trade, improve international remittances and reduce inequality.

However, achieving these potential improvements would require significant international coordination to address issues such as:

  • common standards and infrastructure
  • legal frameworks
  • prevent illicit transactions
  • cost and implementation time.


Confidentiality is paramount The most controversial issue in the design of a digital dollar, according to the Fed, is privacy. It also recalls the importance of respecting the rules “designed to combat money laundering and the financing of terrorism”.

Changes in the market structure of the financial sector For example, a widely available US CBDC would serve as a close substitute for commercial bank currency. This could then reduce the amount of deposits in the banking system and potentially reduce credit availability or increase credit costs for households and businesses.

Similarly, an interest-bearing CBDC could lead to a forfeiture of other low-risk assets, such as

  • money market UCITS units,
  • Treasury bills and other short-term instruments.

A move away from these other low-risk assets could reduce credit availability or increase credit costs for businesses and governments.

Works on financial institutions: The ability to quickly convert other forms of money – including commercial bank deposits – into CBDCs could make runs on financial companies more likely or more serious.

Traditional measures to prevent large outflows of deposits from commercial banks to CBDCs in the event of a financial panic may be insufficient.

Operational resilience and cybersecurity Securing the CBDC would be difficult. A CBDC could improve the operational resilience of the payment system if designed with offline capability. In this case, it would allow certain payments to be made without Internet access.

Today, many digital payments cannot be executed during natural disasters or other significant disruptions, and affected areas must rely on in-person cash transactions. Central banks are currently investigating whether offline CBDC payment options would be feasible.

Volatility If the CBDC bore interest, the interactions between the CBDC and the implementation of monetary policy would be more pronounced and more complicated.

Consumers, businesses and potentially others could decide to reduce their holdings of bank deposits, treasury bills and investments in money market mutual funds and increase their holdings of CBDCs.

The potential for significant foreign demand for CBDCs in this scenario would further complicate the implementation of monetary policy.

Changes in interest rates and other market factors could also significantly affect public demand for CBDCs over time.

Major update needed To implement a digital dollar, the US government would need to modernize the country’s financial infrastructure to ward off attacks.

It would take five to ten years to introduce a digital currency in the United States, according to several experts, but they argue that policymakers cannot sit idly by.

Invited public comment until May 20

The report invites the public to comment if and how a CBDC could improve the safe and efficient national payment system,

The Board document invites public comment on more than 20 questions through May 20, 2022, via the FED’s CBDC comment form.