Scarinci Hollenbeck, LLC
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201-896-4100 info@sh-law.comFirm Insights
Author: Scarinci Hollenbeck, LLC
Date: February 11, 2022
The Firm
201-896-4100 info@sh-law.comThe Federal Reserve recently took its first step toward establishing a central bank digital currency (CBDC). Its paper, entitled Money and Payments: The U.S. Dollar in the Age of Digital Transformation (Fed Paper), explores the risks and benefits of CBDCs and solicits feedback from stakeholders.
The Federal Reserve defines a CBDC as a digital liability of a central bank that is widely available to the general public. In many ways, CBDCs are a digital form of paper money.
As the Federal Reserve notes, rapid technological advances have resulted in a host of new private-sector financial products and services, including digital wallets and mobile payment apps, as well as new digital assets such as cryptocurrencies and stablecoins. These technological advances have also led central banks around the globe to explore the potential benefits and risks of issuing a CBDC.
While there are already numerous forms of digital money, a CBDC would differ because it would be a liability of the Federal Reserve, not of a commercial bank. As the Fed Paper explains, central bank money carries neither credit nor liquidity risk, and is therefore considered the safest form of money.
“Today, Federal Reserve notes (i.e., physical currency) are the only type of central bank money available to the general public. Like existing forms of commercial bank money and nonbank money, a CBDC would enable the general public to make digital payments,” the Fed Paper states. “As a liability of the Federal Reserve, however, a CBDC would not require mechanisms like deposit insurance to maintain public confidence, nor would a CBDC depend on backing by an underlying asset pool to maintain its value. A CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk.”
The Fed Paper discusses how a CBDC might fit into the U.S. monetary policy, as well as how it may help address existing challenges to the country’s existing payment system. While improvements to the U.S. payment system have focused on making payments faster, cheaper, more convenient, and more accessible, the Federal Reserve notes that many still lack access to digital banking and payment services, and some payments—especially cross-border payments—remain slow and costly.
The Fed Paper goes on to discuss whether a potential CBDC would address these needs. In doing so, the Federal Reserve highlights several risks and benefits of establishing a CBDC.
With regard to potential benefits, the Fed Paper states that a CBDC could potentially serve as a new foundation for the payment system and a bridge between different payment services, both legacy and new. It could also maintain the centrality of safe and trusted central bank money in a rapidly digitizing economy. Other specific benefits include:
The Federal Reserve also emphasizes that a potential CBDC is not without risks and raises complex policy issues and risks. The Fed Paper specifically discusses the following:
As the Federal Reserve expressly states, the Fed Paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a U.S. CBDC. Rather, the Federal Reserve is “committed to soliciting and reviewing a wide range of views as it continues to study whether a U.S. CBDC would be appropriate,” the Fed Paper states.
The Federal Reserve’s request for public comment is the first step in a “broad consultation” that will also include targeted outreach and public forums. The Fed Paper also expressly states that the Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.
Feedback must be provided by May 20, 2022. Given the potential impact of CBDCs on the financial industry, we encourage businesses to consider providing feedback and staying on top of legal developments in this rapidly developing area.
If you have any questions or if you would like to discuss the matter further, please contact me, Maryam Meseha, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
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