Federal Reserve Releases Take on Central Bank Digital Currencies

Thursday (January 20)— the Federal Reserve (Fed) released its 40-page report on central bank digital currencies (CBDC), which implied that it prefers banks and other financial institutions to manage clients’ digital accounts.

In the report, Fed elaborated on the potential advantages and disadvantages of CBDC. The topic itself has raised public debates and comments, making the release of the report highly anticipated. Supposedly, the report was planned to be released in the summer of 2021.

Brief Summary Fed’s Report on Potentials of CBDC

Advantages of CBDC

According to the Fed’s report, a CBDC may have a role in establishing a new foundation for the payment system. They added that it could potentially connect various payment services, both the old and new ones. The Fed also indicated that CBDC might be capable of maintaining the centrality of safe and trusted central bank money amidst a rapidly digitizing economy.

Disadvantages of CBDC

Despite recognizing the benefits of CBDC to US consumers and the broader financial system, the FED raised its potential risks. The FED stated that CBDC might alter the roles and responsibilities of the private sector and the FED itself, resulting in changes in the structure of the US financial system. 

Moreover, the central bank recognized the role of central bank money as the safest form of money. Hence, CBDC may particularly pose risks to customers. The FED also added CBDC’s possible role in altering the supply of reserves in the banking system, manifesting in monetary policy implementation and interest rate control.

The 40-page report also determined that CBDC would require an appropriate balance between securing consumer privacy rights and providing the transparency needed to prevent criminality. Additionally, the FED indicated how CBDC could threaten existing payment services.

Fed’s proceeding on CBDC

Fed Chairman Jerome Powell has not shown total commitment to CBDC, while Fed Governor Lael Brainard has shown their interest in CBDC. There were also other Fed officials that expressed their concerns regarding CBDC, citing that its benefits are unclear.

According to Powell, “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.”

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