Federal Reserve Remains Far From So-Called 'Digital Dollar,' But Has Begun Considering It

The Federal Reserve on Thursday released a report on central bank digital currencies that says it has started considering a "digital dollar" but offers no official position on its implementation.

Central bank digital currency, or CBDC, is digital type of central bank money widely available to the public, according to the Fed website. Central bank money is money that is the central bank's responsibility. However, CBDC would be the Fed's responsibility, compared to current digital money, which is the liability of a commercial bank.

The 40-page report says it is "the first step" in creating a discussion with the public and key stakeholders about the potential introduction of a CBDC. It asks the public to comment on the paper, answering any questions listed in the report through a form by May 20.

"The Federal Reserve's initial analysis suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified," the report says.

Potential benefits of a CBDC are listed in the report, including giving the public access to digital money free from credit risk and liquidity, improving cross-border payments, supporting the dollar's role internationally, and fostering the financial inclusion of lower-income households.

Some potential drawbacks of a CBDC listed in the report include its impact on monetary policy implementation, as well as risks in privacy protection and financial stability.

"A CBDC could fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the central bank," the report says.

Federal Reserve, Report, Digital Dollar
Some potential drawbacks of a central bank digital currency listed in the Federal Reserve's report include its impact on monetary policy implementation, privacy protection and financial stability risks. Above, the Federal Reserve Building is seen through a fence on June 17, 2020, in Washington, D.C. Olivier Douliery/AFP via Getty Images

The reports notes that it does not intend to push a specific policy outcome nor offers an official position on the "ultimate desirability of a U.S. CBDC." It said the Fed does not intend to implement a CBDC without "clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law."

While the Fed may be considering a CBDC, it is likely years away from actually issuing it, according to the Associated Press.

Not all central bank officials are in support of a CBDC, AP reported. Christopher Waller, a member of the Fed's Board of Governors, expressed skepticism regarding the currency. On the other hand, Lael Brainard, another board member and President Joe Biden's nomination to be vice chair of the Fed, expressed support for a CBDC.

Advocates for the digital dollar are concerned that the delay in its implementation will allow global competitors to push forward past the U.S., according to CNBC. For example, China has already started moving forward with its own digital currency.

Federal Reserve Chair Jerome Powell said last March that the Fed would proceed with caution, AP reported.

"As the world's principal reserve currency ... we have an obligation to be on the cutting edge of understanding the technological challenges," Powell said then, according to AP. "But ... we don't need to rush this project. We don't need to be first to market."