Last week, the nonpartisan U.S. Congressional Research Service published a paper on central bank digital currencies (CBDC), following up on a document issued by the Federal Reserve last month. The new paper states that a CBDC will crowd out at least one of five other offerings. But while most people agree on this, they disagree which one will be crowded out.
The five things that a central bank digital dollar might compete with include:
While the paper explores most of these, it rightly points out that the particular design of a CBDC will make a huge difference, particularly for payment systems. Some designs could encourage innovation and competition, particularly those including non-bank payment providers. On the other hand, if the Federal Reserve provides the network, it could crowd out traditional and new payment providers. The Fed might struggle to maintain an innovative platform in the future.
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