Central Bank Digital Currencies

Central Bank Digital Currencies

Updated May 13, 2024
Central Bank Digital Currencies
Policymakers have debated whether the Federal Reserve
holders, and (4) identity-verified (i.e., not anonymous). The
(Fed) should create a central bank digital currency
report took no position on several design features, such as
(CBDC)—a “digital dollar.” A CBDC would share some of
whether the CBDC would pay interest, whether it could be
the features of cryptocurrencies (crypto)—that is, private
used offline, and whether there would be size limits on
digital currencies such as Bitcoin, which are unsupported
transactions or holdings. The report stated that the Fed
by any government authority. Although no major central
“does not intend to proceed with issuance of a CBDC
bank has formally launched a CBDC (beyond a pilot
without clear support from the executive branch and from
project) to date, this In Focus describes how foreign central
Congress, ideally in the form of a specific authorizing law.”
banks, the U.S. Treasury, and the Fed are approaching the
The report “is not intended to advance a specific policy
issue and discusses policy issues. For more detail, see CRS
outcome and takes no position on the ultimate desirability
Report R46850, Central Bank Digital Currencies: Policy
of a U.S. CBDC.” The Fed has also participated in pilot
Issues.
programs (Projects Hamilton, Cedar, and Agora) to build
technical capacity pending a decision to adopt a CBDC.
Background
Contrary to some of its creators’ expectations, crypto has
In March 2022, President Biden issued Executive Order
not become widely adopted for payments—its value has
14067 on digital assets, which stated that the U.S.
been too volatile to serve as an effective means of payment,
government “should prioritize timely assessments of
transaction costs are too high, and it is neither legal tender
potential benefits and risks [of a U.S. CBDC] under various
nor backed by the “full faith and credit” of a government. A
designs to ensure that the United States remains a leader in
CBDC, proponents believe, could overcome these barriers
the international financial system.” Pursuant to that order,
while taking advantage of the technology pioneered by
Treasury, in consultation with various agencies, issued a
crypto to create a more efficient, central-bank-backed
report on CBDC in September 2022. That report did not
digital payment system.
take a position on whether to pursue a CBDC, but it created
an interagency working group led by Treasury to further
Within the mainstream financial system, digital payments
consider the issue. In addition, Treasury issued a framework
are already widespread in the United States. However,
for international engagement, the White House Office of
digital payments are not always as fast, inexpensive, or
Science and Technology Policy issued a technical
ubiquitous as some would desire at present. A CBDC would
evaluation in September 2022, and the Attorney General
presumably allow for real-time payments (i.e., instant
issued a (non-public) opinion on whether legislative
settlement). Real-time payments are growing rapidly but are
changes would be necessary to issue a CBDC.
not yet ubiquitous in the United States. The introduction of
FedNow in 2023, the Fed’s real-time settlement system,
Design Considerations
may accelerate their growth. By contrast, developing a
A CBDC would allow holders to store value and make
CBDC would take several years of significant information
payments digitally and would be backed by the Fed (as is
technology investment and testing.
the case for physical currency), but other features are
unresolved. Crypto generally records transfers on public,
Federal Reserve and Treasury Actions
decentralized (or distributed) ledgers stored using
In January 2022, the Fed released a report on CBDC, which
blockchain technology. Often individuals’ accounts are
it defined as “a digital liability of a central bank that is
protected using cryptography and pseudonymous. (For
widely available to the general public.” In the Fed’s view,
background, see CRS Report R47425, Cryptocurrency:
“CBDC transactions would need to be final and completed
Selected Policy Issues.) It is unclear which of these features
in real time, allowing users to make payments to one
would be desirable in a CBDC or whether a CBDC might
another using a risk-free asset. Individuals, businesses, and
be built upon existing payment systems instead.
governments could potentially use a CBDC to make basic
purchases of goods and services or pay bills, and
From an end-user perspective, CBDC proposals range from
governments could use a CBDC to collect taxes or make
a payment system similar to the status quo to one that is
benefit payments directly to citizens.”
fundamentally different. At one end of the spectrum of
proposals, a CBDC accessible only to banks may differ
The report identified four characteristics that it argued were
only slightly from the current system given that wholesale
necessary “to best serve the needs of the United States,”
payment systems are already digital. At the other end,
saying that a CBDC should be (1) privacy-protected to the
proposals for consumers to be able to hold CBDCs in
extent compatible with deterring criminal use, (2)
accounts at the Fed would fundamentally change the role of
intermediated (i.e., retail services would be offered through
the Fed and its relationship with consumers and banks. The
financial institutions), (3) widely transferable among
Fed’s report envisioned a middle ground where end users
https://crsreports.congress.gov

Central Bank Digital Currencies
would access CBDC and related services through financial
credit to households and businesses. From a typical
institutions. Thus, depending on its attributes, a domestic
economic perspective, government provision of private
CBDC could potentially compete with crypto (notably
goods is desirable only if there is a market failure or the
stablecoins), foreign CBDCs, private payment platforms, or
service has the characteristics of a public good. It is unclear
banks. CBDC proponents differ as to which of these they
whether the U.S. payment or banking systems suffer from
would like it to compete with. CBDCs are more likely to
market failures that a CBDC could address.
compete with crypto as a payment means for legal
commerce than their other current uses (e.g., as speculative
Some proponents believe a CBDC could promote financial
investments or as payment means for illicit activities).
inclusion, but that would depend largely on whether the
CBDC would be less expensive and easier to access than
International CBDC Initiatives
banking services. (Under current law, the Fed would have
According to the Atlantic Council (a DC-based think tank),
to provide the CBDC at cost.) However, a CBDC could also
134 jurisdictions around the world were engaged in CBDCs
harm underserved populations if it led to reduced
at some level (researching, piloting, or launching) as of
acceptance of less costly payment options, such as cash.
March 2024. The Bahamas, Jamaica, and Nigeria are
among a handful of jurisdictions that have formally
Some proponents claim that because bank runs pose
launched CBDCs. Although no major economy has
systemic risk, a partial shift from private bank accounts to
formally launched a CBDC, China is the furthest in its
CBDC would increase financial stability. In contrast, others
digital currency development. China has piloted the digital
assert CBDC could make bank runs more likely by offering
yuan (e-CNY), with about 260 million wallet users in China
an alternative to bank accounts that people could switch to
and across a multinational financial framework. Several
during times of bank distress. Cyberattacks also pose
central banks in advanced economies are also researching
systemic risk, and it is unclear whether a CBDC would
and piloting CBDCs. For example, the European Central
make the financial system more or less resilient to them.
Bank is in a two-year preparation phase for a digital euro,
the Bank of England is beginning work on a digital pound,
A CBDC that provided complete anonymity would
and the Swiss National Bank has announced plans to test a
seemingly be incompatible with current policies designed to
wholesale CBDC. The “Innovation Hub” at the Bank for
curb money laundering and other illicit activities. Thus, it
International Settlements (an international organization of
may be necessary to store information about CBDC users
central banks) is working with a range of countries on
and their transactions. This would reduce individuals’
CBDC research projects, including cross-border pilots.
privacy but might be more effective at preventing illicit
activity. Dealing with privacy implications and technical
Central banks around the world are interested in CBDCs for
challenges in rolling out new technology would expose the
a variety of reasons, including greater control of the
Fed to reputational risk, potentially bringing into question
economy, stronger surveillance of financial transactions,
its political independence, which is viewed as beneficial to
consumer preferences for digital payments, increasing
monetary policy. However, proponents argue that a CBDC
access to financial products for underbanked populations,
would improve the effectiveness of monetary policy
and enhancing payments efficiency. Countries such as
because it could transmit interest rate changes directly to
China, Iran, Russia, and Venezuela also view CBDCs as a
consumers—including, potentially, negative interest rates if
way to reduce reliance on the dollar and reduce
CBDCs displaced cash.
vulnerability to U.S. sanctions.
Issues for Congress
CBDC initiatives in other countries could have implications
for the United States. For example, some Members of
In the United States, unlike some other countries that are
Congress have expressed concerns that, if a major central
considering CBDCs, the existing payment system features
bank successfully develops a CBDC that can be used for
trusted methods for digitally delivering funds, with growing
cross-border transactions, the use of the U.S. dollar globally
use of real-time payments. Whether a CBDC would achieve
could decline, challenging the status of the U.S. dollar as
equivalent or better performance at lower cost remains
the world’s dominant reserve currency.
unknowable until detailed proposals have been released.
Cross-border payments have been identified as offering
In the absence of legal changes after years of debate, no
greater potential gains in cost and speed, but they raise
consensus has yet emerged within the Fed or the
more legal and practical challenges than domestic use.
Administration on whether to adopt a CBDC. If it desires,
Congress could hasten or prohibit the adoption of a
A major policy consideration is the extent to which a
CBDC—or set parameters around adoption—through
CBDC would displace private activity. If available to
legislation. On May 7, 2024, the House Financial Services
consumers, CBDCs might partially displace stablecoins and
maintain government’s central role in issuing money—
Committee reported H.R. 5403, which would prohibit the
Fed from issuing a CBDC. On November 8, 2023, the
whether this is desirable depends largely on an individual’s
House passed H.Amdt. 696 to H.R. 4664, which would
view of those currencies. In the more expansive vision for
prohibit funding to the Treasury CBDC working group, but
CBDCs, anyone could hold CBDCs in a Fed account for, at
this provision was not included in the full-year FY2024
a minimum, making payments or storing value. This would
mark a fundamental shift in the Fed’
appropriations bill (P.L. 118-47).
s role—the Fed does
not provide retail services to the public currently—and
would have the potential to displace private payment
Marc Labonte, Specialist in Macroeconomic Policy
systems and banks, which could affect the availability of
https://crsreports.congress.gov

Central Bank Digital Currencies

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

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF11471 · VERSION 3 · UPDATED