The Executive Summary identifies the purpose of the paper as “the first step in a public discussion”. It is intended to be a starting point in public dialogue and questions are welcome by clicking here: https://www.federalreserve.gov/apps/forms/CBDC. They point out specifically that it is not meant to signal that the Fed will specifically move to create a CBDC, simply that it is being discussed and considered.
The Background section explains that the Fed has evolved payment technologies over time as the world has evolved starting with a check clearing system, then the ACH system currently used by banks for processing electronic funds transfers and a new system the Fed committed to creating in 2019 called FedNow which is meant to provide 24/7/365 interbank payments.
Due to recent developments, they are now considering a US CBDC. According to the document, they have been studying this for several years and are continuing to solicit reviews, including from the public as they explore whether or not this makes sense.
The Key Topics covered in the paper are:
- Discussions on the existing forms of money
- The current state of the US payment system
- Various digital assets that have emerged in recent years
- Other cryptocurrencies
- Uses and functions
- Potential benefits and risks
- Related policy considerations
Mostly rehashes the previous information and adds one very key item that is one of the biggest takeaways from the paper. That is: The Fed does not plan to move forward in issuing a CBDC without support from Congress and the executive branch in the form of specific law authorizing the issuance of a US CBDC.
THE EXISTING FORMS OF MONEY
They identify the following forms of money and detail the risks and benefits associated with these:
- Central bank money – physical currency issued by the Fed
- Commercial bank money – a digital form of money most commonly used by the public
- Nonbank money – digital money held at nonbank financial providers (specifically highlight mobile apps)
THE PAYMENT SYSTEM
Most US based payments rely on the ACH system or wire transfers to move money around. There is little to no risk in the settlement of these funds because they are either the central bank or commercial bank monies which promotes stability.
Recent Improvements to the Payment System
They discuss improvements in making payments faster, cheaper, more convenient and accessible. Here they reference the RTP interbank network and the FedNow Service which is scheduled to debut in 2023.
With regard to nonbank money, they highlight potential risk and instability to users due to a “lack of equivalent protections” although they do not highlight what specific risks they are concerned about.
Remaining Challenges for the Payment System
They highlight that many Americans lack access to digital banking and payment services and that some forms of payment (especially cross-border payments) remain slow and costly. They cite figures starting >5% of US households remain unbanked and an additional ~20% more rely on costly nonbanking services like money orders, check cashing services and payday loans.
They suggest that the fact the traditional banking system does not offer a truly competitive solution to some of these services limits competition and therefore drives prices for these services quite high and that reducing these costs would benefit economic growth and reduce inequality.
They reference cryptocurrencies directly for the first time here and mention that they are not used widely as payment while specifically highlighting limitations on transaction throughput, energy consumption and fraud as potential concerns for existing currencies.
They mention that stablecoins have emerged and are generally used for trading of other digital assets while firms are also exploring ways to use them as a form of payment.
They state that this report will not dive deeply into stable coins but reference the paper put out by the President’s Working Group on Financial Markets (available here: https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf – not sure if a link to a pdf is a good idea, so I removed the link but you can copy/paste) specifically noting that concerns about the increasing use of stable coins could lead to issues such as:
- Destabilizing runs on the stable coin
- Disruptions in the payment system
- The concentration of economic power
The report mentions that there are gaps in regulatory authority that currently limit the government’s ability to reduce this risk and mention that the above linked report from the PWG recommends Congress act to promote legislation that would allow regulation of these markets.
CENTRAL BANK DIGITAL CURRENCY
Here they highlight that they are considering issuance of a CBDC if and only if it can address the issues of concern previously outlined in the paper. Currently physical currency is the only central bank money that is accessible directly by consumers however, a CBDC would also be