“Over the last few years, we have seen other governments make real progress in establishing a central bank digital currency,” said Rep. Himes. He added, “The longer the United States government waits to embrace this innovation, the further we fall behind both foreign governments and the private sector.”
Providing clear legislative support for CBDC
The January consultation paper from the Federal Reserve mentioned that it would ideally like clear legislative support before proceeding with digital dollar. In May this year, Republicans quizzed the Fed Vice Chairman Lael Brainard on whether the Fed would proceed in the absence of legislation. A key motivation for Himes in publishing the proposal is to get the ball rolling on legislation. President Biden also laid down a deadline in his March executive order, saying the Fed must publish a detailed paper within six months.
The digital dollar paper
Himes outlines the many benefits a US CBDC could provide. Unlike privately-issued stablecoins and crypto-assets, it would be backed by the full faith and credit of the US government. It can also facilitate cross-border transfers with faster settlement times and cheaper costs. The paper further mentions how it may also support the dollar’s role as the global reserve currency since it is a digital equivalent to the US dollar. Lagging behind when it comes to developing a CBDC could put pressure on the dollar’s dominance.
Domestically, the digital currency may also improve financial inclusion by encouraging the unbanked and underbanked to participate in the financial system. A 2019 report found that 19% of American adults are either unbanked or underbanked, with a lack of trust being the reason for a third of them. The CBDC could improve trust, and also encourage non-bank institutions to participate in intermediary services, increasing overall accessibility and convenience.
The paper discusses various risks, a permissioned semi-distributed architecture and a preference for account-based wallets that verifies wallet holders rather than a token-based structure. However, this may also come with privacy and security risks, which the Fed should consider during development and work towards setting a global example for privacy. More generally, a US CBDC should remain adaptable and flexible to changes in the future.
In other news, the Boston Fed has been working with MIT on a multiyear hypothetical CBDC and Accenture has been providing funding for the private Digital Dollar Project working on CBDC pilot programs.