Federal Reserve releases long-awaited paper on potential central bank digital currency
The Federal Reserve finally issued a much-delayed advisory paper yesterday, speaking out on the pros and cons of developing its own central bank digital currency (CBDC), but without drawing any firm conclusions.
Why is this important: All over the world there are now 23 CBDCs either as a pilot or officially launched. They have gone from a theoretical concept to real digital money, changing the way governments and millions of people use money – but not in the United States
Between the lines: Although the Fed document does not one way or another advocate whether the United States should begin development, the language used in the document indicates that it is very open to the idea that Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center, told Axios.
- “Part of the reason why they are [open to it] it’s that they see countries around the world exploring CBDCs,” says Jonathan McCollum, President of Federal Government Relations for Davidoff Hutcher & Citron. “I think they understand that the United States has an important role to play in creating some sort of [international] standards.”
The big picture: A digital dollar would be legal tender pegged to the value of the physical dollar and backed by the Fed.
- Central banks are considering CBDCs in order to maintain control over monetary policy in the face of growing cryptocurrency adoption, and because they could enable more efficient government payments and financial inclusion.
- It is also a question of international influence: the candidate for the vice-presidency of the Fed, Lael Brainard, for his part, said last year that she couldn’t “wrap [her] head around,” the U.S. having none, given the dollar’s current dominance in international payments — and China’s lead in developing its own digital yuan.
China is the largest economy with a pilot, and from november around 140 million people had opened digital wallets, China’s central bank said.
- For the upcoming Winter Olympics in Beijing, Chinese authorities are encouraging athletes and businesses to use the digital yuan, in a bid to introduce it internationally, Bloomberg reported.
How it works: Globally, central banks have so far used existing financial networks — like banks, fintechs and even telecom companies — to distribute CBDCs to citizens, eCurrency CEO Jonathan Dharmapalan told Axios.
- It is noticeable, because “if you go back a few years, there were these ideas out there that people were going to have Fed apps on their phones. But that’s not happening,” adds Lipsky.
However, consumer adoption has been slow – partly because existing electronic payment systems are quite convenient, according to reports on China’s efforts. Ditto in Nigeria, the largest economy to have officially launched a CBDC.
- In Nigeria, consumers go through a cumbersome process to set up the digital wallet app and connect it to their bank account, says Naomi Aladekoba, who is based in Nigeria for the Atlantic Council. But once that’s done, using the wallet is simple and efficient, with instant transfers – much like using Venmo in the US, she says.
- Nigeria plans to roll out a program in which users will not need smartphones – only a national identification number – to use the digital currency. With significant monetary savings, this could help alleviate the crippling challenge that the frequent lack of correct change poses to sellers and consumers, Aladekoba says.
And after: In the United States, there is a 120-day comment period on the new document, after which the Fed may issue a follow-up.
- But the ball is effectively in Congress’s court: the Fed has unequivocally stated that it will not move forward on any development of the CBDC without legislative action granting it authority.