Fed reply to US Congress inquiry on CBDC

Fed chair Jerome Powell replied to an inquiry from congressman French Hill outlining the central bank’s strategy on central bank digital currencies (CBDC).  Powell wrote that the Fed is monitoring developments closely as central banks around the world “are actively exploring” options, but is not currently developing CBDC in the US.

From the letter, (published by Politico financial services reporter Zachary Warmbrodt on Twitter): “In analyzing the potential costs and benefits of general purpose CBDC, we are carefully monitoring the activities of other central banks to identify potential benefits that may be relevant in the US context. To date, our observation is that many of the challenges they hope to address do not apply to the US context including disuse of physical cash, narrow reaching or highly concentrated banking sectors, or poorly developed payment infrastructures more generally.”

For private sector initiatives, Facebook’s Libra was mentioned in particular as a digital currency project under scrutiny.

Aside from monitoring global central bank and private sector initiatives, Powell outlined the Fed’s internal research. From the letter: “We also continue to conduct our own research related to general purpose CBDC, including conducting small-scale research-oriented technology experiments aimed at giving us hands-on experience to better understand the opportunities and limitations of possible technologies behind general purpose CBDC. These efforts position the Federal Reserve to be able to react more expeditiously to rapid developments in this arena.”

Powell added that several significant legal questions are yet to be addressed, such as whether it would constitute legal tender and how the rights and obligations in such a system would be determined. Other policy implications that would need to be considered are: the potential impact on monetary policy, financial structure, financial stability, and other technological and security risks.

Operational challenges that would need to be addressed meanwhile are: increased exposure to cyberattacks, the need to potentially open and provide service to accounts which could number in the hundreds of millions, and questions associated with alternative technologies being able to achieve the reliability, integrity, and scalability as central bank systems in use today.

Read the full letter




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