The Federal Reserve released a discussion paper on January 20 on the potential issuance of a US central bank currency, otherwise known as the CBDC. The document covers the pros and cons of a CBDC and invites the public, not just professionals, to participate. under discussion as to whether the Fed or Congress should consider a CBDC.
A CBDC, or central bank digital currency, is a kind of fiat or digital currency issued by the central bank. The best-known cryptocurrencies, such as Bitcoin or Ethereum, are decentralized digital currencies, which means that the government does not have full authority over them, and the organizations that issue them are usually private entities. As a CBDC is controlled by the central bank, it is not defined as a cryptocurrency.
The US central bank currently allows only two forms of central bank money; physical currency issued by the Fed and digital balances held by commercial banks with the Fed. Although people know that money is held digitally, like in bank accounts or in apps like Cash App or Venmo, a CBDC would be the responsibility of the Fed and not just any bank.
The Fed is considering issuing a CBDC because it could serve as another form of payment that people would use in their daily purchases and to support their households and businesses.
Another benefit of allowing CBDC as a payment method is that international payments could take place more efficiently. Essentially, a digital dollar would change the financial system like never before by allowing global payments to be processed faster and consumers to have better access to the financial system.
However, as society evolves, some professionals say this process will take years to embed into society. Jonathan McCollum, President of Federal Government Relations for
Davidoff Hutcher & Citron says if government doesn’t start right away, it won’t serve a big purpose and more money could be lost in the long run.
The Fed has also said the final decision will rest with Congress, and until there is a clear approval, it won’t start any time soon.
Arguments against a CBDC are also made because this foreign currency presents many potential challenges in addition to its rewards. On the one hand, there are fears that the centralization of digital currencies will lead to competition between private banks.
Moreover, a CBDC could completely transform the financial system, which could have a significant impact on the cost of credit for households and businesses.
While there are several arguments for and against issuing a CBDC, some have also offered solutions. If issued correctly, households and businesses would have an additional form of safe digital currency.
Ultimately, the Fed did not come to a single conclusion regarding the issuance of the CBDC, and much of that decision will be up to Congress and the public.
The Fed has opened public comments for its paper and is allowing such comments up to four months before or if it reaches a final consensus. Any comments or concerns can be submitted here, where the public is given 22 short-answer questions that continue to challenge the pros and cons of a CBDC.