Digitalization is enabling consumers and businesses to transfer value instantaneously, technology platforms to scale up rapidly in payments, and new digital currencies to facilitate these payments. By transforming payments, digitalization has the potential to deliver greater value and convenience at lower cost. But there are risks. Some of the new players are outside the financial system’s regulatory guardrails, and their new currencies could pose challenges in areas such as illicit finance, privacy, financial stability, and monetary policy transmission.
Cryptocurrencies vary across multiple attributes, including whether the arrangement is open to everyone or only approved entities and whether they are intended for general-purpose use or for wholesale use. If not managed effectively, liquidity, credit, market, or operational risks—alone or in combination—could affect financial stability, triggering a loss of confidence and run-like behavior.
The precise nature of the risk would be driven in part by how the stablecoin is tied to an asset (if at all), the underlying legal arrangements, and the features of the asset itself. For smaller economies, there may be material effects on monetary policy from private-sector digital currencies as well as foreign central bank digital currencies. In many respects, these effects may be the digital version of “dollarization,” with the potential for a faster pace and wider scope of adoption.
The prospect for rapid adoption of global stablecoin payment systems has intensified calls for central banks to issue digital currencies in order to maintain the sovereign currency as the anchor of the nation’s payment systems. In a Bank for International Settlements survey of 66 central banks, more than 80% of central banks report being engaged in some type of central bank digital currency (CBDC) work.
The motivations for this work range from payments safety and robustness for advanced economies to payments efficiency for emerging economies. The latest survey suggests there is greater openness to issuing a CBDC than a year ago, and a few central banks report that they are moving forward with issuing a CBDC. Building on the tremendous reach of its mobile payments platforms, China is reported to be moving ahead rapidly on plans to issue a digital currency.
Given the dollar’s important role, it is essential that we remain on the frontier of research and policy development regarding CBDC. Like other central banks, we are conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC. We are collaborating with other central banks as we advance our understanding of central bank digital currencies.
In assessing CBDC in the U.S. context, there are policy and design issues to explore, as well as legal considerations. It is important to consider whether a new form of digital central bank liability might improve the payment system, taking into account the innovations offered by the private sector. We would need to consider whether adding a new form of central bank liability would reduce operational vulnerabilities from a safety and resilience perspective. Another consideration is whether a CBDC would reduce complexity in payments, improve end-to-end processing, or simplify recordkeeping. With regard to cross-border payments, it is important to consider what would be required in terms of cross-border cooperation for CBDCs to address current frictions and reduce costs.
It is also vital to consider the implications for the broader financial system of the issuance of a CBDC. In light of considerations of privacy and guarding against illicit activity, issuance of a digital currency would raise important questions about what kinds of intermediaries might provide CBDC transaction accounts for consumers. While some proposals are centered on commercial bank intermediaries, others propose new types of intermediaries that might develop with a narrow focus on payments. New types of intermediaries in turn could create a need for new types of accounts and new forms of oversight.
There are also important legal considerations. It is important to understand how the existing provisions of the Federal Reserve Act with regard to currency issuance apply to the CBDC. It is also important to consider whether CBDC would have legal tender status, depending on the design. While the legal framework is well-established with regard to the rights and protections for Federal Reserve notes in the current system, it is untested for new instruments such as CBDC and, more generally, other digital currencies. A different approach may be necessary to ensure that holders of CBDC have appropriate protections, including privacy rights, fraud protection, digital identity safeguards, and data protection.
These are some of the issues that would need to be addressed before deciding to issue a CBDC in the United States. Some of the motivations for a CBDC cited by other jurisdictions, such as rapidly declining cash use, weak financial institutions, and underdeveloped payment systems, are not shared by the United States. Physical cash in circulation for the U.S. dollar continues to rise because of robust demand, and the dollar plays an important role globally. We have a robust and diverse banking system that provides important services, along with a widely available and expanding variety of digital payment options.
The digitalization of currencies and payments is being driven by technology players that are bringing new business models to this space and fresh attention to age-old questions. While the potential for seamlessly integrated and lower-cost transactions brings important benefits, digitalization also brings risks. In the United States no less than in other major economies, the public sector needs to engage actively with the private sector and the research community to consider whether new guardrails need to be established, whether existing regulatory perimeters need to be redrawn, and whether a CBDC would deliver important benefits on net.