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What The U.S. Federal Reserve Omits in its CBDC Paper

What The U.S. Federal Reserve Omits in its CBDC Paper

The U.S. Federal Reserve has issued a discussion paper today on central bank digital currencies (CBDCs). The paper is meant to serve as the first step in a public discussion about CBDCs between the Federal Reserve and stakeholders.

The documentation offers a basic background on what CBDCs are and how they may impact citizens. As a part of the discussion, the paper depicts potential benefits and risks of implementing a CBDC. Specifically, the Fed cites the following:

Benefits

  • Safely Meet Future Needs and Demands for Payment Services
  • Improvements to Cross-Border Payments
  • Support the Dollar’s International Role
  • Financial Inclusion
  • Extend Public Access to Safe Central Bank Money

Risks

  • Changes to Financial-Sector Market Structure
  • Safety and Stability of the Financial System
  • Efficacy of Monetary Policy Implementation
  • Privacy and Data Protection and the Prevention of Financial Crimes
  • Operational Resilience and Cybersecurity

Ultimately, the 35 page document leaves out a key issue when it comes to CBDCs: governmental control. A government-issued CBDC would allow the government to dictate how, where, and when currency holders spend their funds. As an example, consider unemployment money issued in the form of a CBDC. The government could restrict the funds to not work at businesses categorized as liquor stores or bars.

Restrictions such as these aren’t necessarily a bad thing. In some cases, giving the government control over government-issued funds makes a lot of sense. In fact, it is even common practice in programs such as WIC, which offers low income mothers access to healthy foods.

However, if there’s one thing Americans love, it’s freedom. And if citizens receive their paycheck in the form of a CBDC, it’s likely they won’t want the government to control their spending. When it comes to monitoring citizens’ spending of CBDCs, however, the Fed did note the risk of balancing privacy with the need to prevent financial crimes. Under the Potential risks section, the paper states, “Any CBDC would need to strike an appropriate balance between safeguarding consumer privacy rights and affording the transparency necessary to deter criminal activity.”

The purpose of the paper is to essentially open up the discussion of CBDCs with the American people. While the Fed makes it clear it may not necessarily proceed with issuing a CBDC, it proposes 22 questions to readers in an effort to gather comments from all stakeholders. If you’re interested, you have until May 20, 2022 to submit your thoughts.

While the concept of CBDCs is fairly new in the financial services world, the conversation around the new form of cryptocurrencies is being taken quite seriously. At the moment, 90 countries are currently exploring or launching their own CBDC. In fact, TechCrunch reported earlier this week that China’s digital Yuan wallet now has 260 million users.