Updated April 20, 2023
Central Bank Digital Currencies
The recent proliferation of private digital currencies or
whether the CBDC would pay interest, whether it could be
cryptocurrencies unsupported by any government authority,
used offline, and whether there would be size limits on
such as Bitcoin, has led to questions of whether the Federal
transactions or holdings. The report stated that the Fed
Reserve (Fed) should create a central bank digital currency
“does not intend to proceed with issuance of a CBDC
(CBDC)—a “digital dollar” that would share some of the
without clear support from the executive branch and from
features of these private digital currencies. Although no
Congress, ideally in the form of a specific authorizing law.”
major central bank has issued a CBDC to date, this In Focus
The report “is not intended to advance a specific policy
describes how foreign central banks, the U.S. Treasury, and
outcome and takes no position on the ultimate desirability
the Fed are approaching the issue. It also examines policy
of a U.S. CBDC.” The Fed has also launched pilot
issues raised by a CBDC. For more detail, see CRS Report
programs (Projects Hamilton and Cedar) to build technical
R46850, Central Bank Digital Currencies: Policy Issues.
capacity in case a decision is made to adopt a CBDC.
Background
In March 2022, President Biden issued Executive Order
Contrary to some of its creators’ expectations, crypto has
14067 on digital assets, which stated that the U.S.
not become widely adopted for payments—its value is too
government “should prioritize timely assessments of
volatile to serve as an efficient means of payment,
potential benefits and risks [of a U.S. CBDC] under various
transaction costs are too high, it is not legal tender, and it is
designs to ensure that the United States remains a leader in
not backed by the “full faith and credit” of a government. A
the international financial system.” Pursuant to that order,
CBDC, proponents believe, could overcome these barriers
the Treasury Secretary, in consultation with various
while taking advantage of the technology pioneered by
executive branch officials, issued a report on the potential
crypto to create a more efficient, central-bank-backed
implications of adopting a CBDC in September 2022. That
digital payment system.
report did not take a position on whether to pursue a CBDC,
but it created an inter-agency working group led by
Within the mainstream financial system, digital payments
Treasury to further consider the issue. In addition, Treasury
are already widespread in the United States. However,
issued a framework for international engagement, the White
digital payments are not always as fast, inexpensive, or
House Office of Science and Technology Policy issued a
ubiquitous as some would desire at present. A CBDC would
technical evaluation of CBDC in September 2022, and the
presumably allow for real-time payments. Real-time
Attorney General issued a (non-public) opinion on whether
payments are growing rapidly, but not yet ubiquitous, in the
legislative changes would be necessary to issue a CBDC.
United States—although they may become so after the Fed
rolls out FedNow, its planned real-time settlement system,
Design Considerations
in mid-2023. By contrast, developing a CBDC would take
A CBDC would allow holders to store value and make
several years of significant IT investment.
payments digitally and would be backed by the Fed (as is
the case for physical currency), but other features are
Federal Reserve and Treasury Actions
unresolved. Crypto generally records transfers on public,
In January 2022, the Fed released a report on CBDC, which
decentralized (or distributed) ledgers stored using
it defined as “a digital liability of a central bank that is
blockchain technology. Often individuals’ accounts are
widely available to the general public.” In the Fed’s view,
protected using cryptography and identified with
“CBDC transactions would need to be final and completed
pseudonyms. (For background, see CRS Report R47425,
in real time, allowing users to make payments to one
Cryptocurrency: Selected Policy Issues.) It is unclear which
another using a risk-free asset. Individuals, businesses, and
of these features would be desirable in a CBDC or to what
governments could potentially use a CBDC to make basic
extent a CBDC might be built upon existing payment
purchases of goods and services or pay bills, and
systems instead.
governments could use a CBDC to collect taxes or make
benefit payments directly to citizens.”
From an end-user perspective, CBDC proposals range from
a payment system similar to the status quo to one that is
The report identified four characteristics that it argued were
fundamentally different. At one end of the spectrum of
necessary “to best serve the needs of the United States,”
proposals, a CBDC accessible only to banks may differ
saying that a CBDC should be (1) privacy-protected to the
only slightly from the current system given that wholesale
extent compatible with deterring criminal use, (2)
payment systems are already digital. At the other end,
intermediated (i.e., retail services would be offered through
proposals for consumers to be able to hold CBDCs in
financial institutions), (3) widely transferable among
accounts at the Fed would fundamentally change the role of
holders, and (4) identity-verified (i.e., not anonymous). The
the Fed and its relationship with consumers and banks. The
report took no position on several design features, such as
Fed’s report envisioned a middle ground where end users
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Central Bank Digital Currencies
would access CBDC and related services through financial
mark a fundamental shift in the Fed’s role—the Fed does
institutions. Thus, depending on its attributes, a domestic
not provide retail services to the public currently—and
CBDC could potentially compete with crypto, foreign
would have the potential to displace private payment
CBDCs, private payment platforms, or banks. CBDC
systems and banks, which could affect the availability of
proponents differ as to which of these they would like it to
credit to households and businesses. From a typical
compete with. CBDCs are more likely to compete with
economic perspective, government provision of private
crypto as a payment means for legal commerce than in their
goods is desirable only if there is a market failure or the
other current uses (e.g., as speculative investments or as
service has the characteristics of a public good. It is unclear
payment means for illicit activities).
whether the U.S. payment or banking systems suffer from
market failures that a CBDC could address.
International CBDC Initiatives
According to the Atlantic Council (a DC-based think tank),
Some proponents believe a CBDC could promote financial
114 jurisdictions around the world were engaged in CBDCs
inclusion, but that would depend largely on whether the
at some level (researching, piloting, or launching) at the end
CBDC would be less expensive and easier to access than
of 2022. The Bahamas, Jamaica, Nigeria, and the Eastern
banking services. (Under current law, the Fed would have
Caribbean Central Bank are among a handful of
to provide the CBDC at cost.) However, a CBDC could also
jurisdictions that have launched CBDCs. Although no
harm underserved populations if it led to reduced
major economy has fully launched a CBDC, China is the
acceptance of less costly payment options, such as cash.
furthest in its digital currency development. China has
piloted the digital yuan (e-CNY) in 15 provinces and across
Some proponents claim that because bank runs pose
a multinational financial framework. Several central banks
systemic risk, a partial shift from private bank accounts to
in advanced economies are also researching and piloting
CBDC would increase financial stability. In contrast, others
CBDCs. For example, the European Central Bank is
assert CBDC could make bank runs more likely by offering
conducting a two-year investigation phase on a potential
an alternative to bank accounts that people could switch to
digital euro, the Bank of England published a consultation
during times of bank distress. Cyberattacks also pose
paper on a potential digital pound, and the Swiss National
systemic risk, and it is unclear whether a CBDC would
Bank has tested a wholesale CBDC. The “Innovation Hub”
make the financial system more or less resilient to them.
at the Bank for International Settlements (BIS, an
international organization of central banks) is working with
A CBDC that provided complete anonymity would
a range of countries on CBDC research projects, including
seemingly be incompatible with current policies designed to
cross-border pilots.
curb money laundering and other illicit activities. Thus, it
may be necessary to track and store information about
Central banks around the world are interested in CBDCs for
CBDC users and their transactions. This would reduce
a variety of reasons, including greater control of the
individuals’ privacy but might be more effective at
economy, stronger surveillance of financial transactions,
preventing illicit activity. Dealing with privacy implications
consumer preferences for digital payments, and increased
and technical challenges in rolling out new technology
access to financial products for underbanked populations.
would expose the Fed to reputational risk, potentially
According to a survey of central banks conducted by the
bringing into question its political independence, which is
BIS in late 2021, central banks are increasingly interested in
viewed as beneficial to monetary policy. However,
using CBDCs to improve the efficiency of cross-border
proponents argue that a CBDC would improve the
payments. Countries such as China, Iran, Russia, and
effectiveness of monetary policy because it could transmit
Venezuela also view CBDCs as a way to reduce reliance on
interest rate changes directly to consumers—including,
the dollar and reduce vulnerability to U.S. sanctions.
potentially, negative interest rates if CBDCs displaced cash.
Issues for Congress
CBDC initiatives in other countries could have implications
In the United States, unlike some other countries that are
for the United States. For example, some Members of
considering CBDCs, the existing payment system features
Congress have expressed concerns that, if a major central
trusted methods for digitally delivering funds. Although
bank successfully develops a CBDC that can be used for
real-time payments (i.e., instant settlement) are not yet
cross-border transactions, the use of the U.S. dollar globally
ubiquitous, they are expected to be soon. Whether a CBDC
could decline, challenging the status of the U.S. dollar as
would achieve equivalent or better performance at lower
the world’s dominant reserve currency.
cost remains unknowable until detailed proposals have been
made. Cross-border payments have been identified as
In the absence of congressional action, no consensus has yet
offering greater potential gains in cost and speed, but they
emerged within the Fed or Administration on whether to
raise more legal and practical challenges than domestic use.
adopt a CBDC after years of debate. If desired, Congress
could hasten or prohibit the adoption of a CBDC through
A major policy consideration is the extent to which a
legislation. In the meantime, bills have been introduced to
CBDC would displace private activity. If available to
address the potential effects on the dollar and the
consumers, CBDCs could partially displace crypto and
maintain government’s central role in issuing money—
international financial system of other countries, such as
China, developing CBDCs.
whether this is desirable depends largely on an individual’s
view of those currencies. In the more expansive vision for
CBDCs, anyone could hold CBDCs in a Fed account for, at
Marc Labonte, Specialist in Macroeconomic Policy
a minimum, making payments or storing value. This would
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Central Bank Digital Currencies

IF11471
Rebecca M. Nelson, Specialist in International Trade and
Finance


Disclaimer
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