Reading 2022-03-08

Metadata

• Ref:: Fed
• Title:: Money and Payments: The U.S. Dollar in the Age of Digital Transformation
• Author:: the Fed
• Year of publication:: 2022
• Category:: News
• Topic:: #topic.cryptoasset
• Related::
  • Hacker News | The Fed released a paper outlining pros and cons of a “digital dollar”
  • Hacker News | U.S. is considering a radical rethinking of the dollar for today's digital world
  • Boston Fed | Project Hamilton Phase 1 Executive Summary

Notes from reading

Federal Reserve Board releases discussion paper that examines pros and cons of a potential U.S. central bank digital currency(CBDC)

For a nation's economy to function effectively, its citizens must have confidence in its money and payment services

a CBDC is defined as a digital liability of a central bank that is widely available to the general public. While Americans have long held money predominantly in digital form—for example in bank accounts recorded as computer entries on commercial bank ledgers—a CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank

the existing forms of money

• Central bank money is a liability of the central bank. In the United States, central bank money comes in the form of physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve
• Commercial bank money is the digital form of money that is most commonly used by the public. Commercial bank money is held in accounts at commercial banks
• Nonbank money is digital money held as balances at nonbank financial service providers. These firms typically conduct balance transfers on their own books using a range of technologies, including mobile apps

The different types of money carry different amounts of credit and liquidity risk

• Central bank money carries neither credit nor liquidity risk, and is therefore considered the safest form of money
• Commercial bank money has very little credit or liquidity risk due to federal deposit insurance, the supervision and regulation of commercial banks, and commercial banks' access to central bank liquidity
• Nonbank money lacks the full range of protections of commercial bank money and therefore generally carries more credit and liquidity risk

Stablecoins are a more recent incarnation of cryptocurrency that peg their value to one or more assets, such as a sovereign currency or commodity. Stablecoins pegged to the U.S. dollar are predominantly used today to facilitate trading of other digital assets

CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified

• Privacy-protected: Protecting consumer privacy is critical
• Intermediated: The Federal Reserve Act does not authorize direct Federal Reserve accounts for individuals. Under an intermediated model, the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments. An intermediated model would facilitate the use of the private sector's existing privacy and identity-management frameworks; leverage the private sector's ability to innovate; and reduce the prospects for destabilizing disruptions to the well-functioning U.S. financial system
• Transferable: For a CBDC to serve as a widely accessible means of payment, it would need to be readily transferable between customers of different intermediaries. The ability to transfer value seamlessly between different intermediaries makes the payment system more efficient by allowing money to move freely throughout the economy
• Identity-verified: a CBDC intermediary would need to verify the identity of a person accessing CBDC

Uses and Functions of a CBDC

• CBDC transactions would need to be final and completed in real time, allowing users to make payments to one another using a risk-free asset
• Individuals, businesses, and governments could potentially use a CBDC to make basic purchases of goods and services or pay bills, and governments could use a CBDC to collect taxes or make benefit payments directly to citizens
• a CBDC could potentially be programmed to, for example, deliver payments at certain times

Potential Risks and Policy Considerations for a CBDC

• Changes to Financial-Sector Market Structure
  • A CBDC could fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the central bank
  • Banks currently rely (in large part) on deposits to fund their loans. A widely available CBDC would serve as a close—or, in the case of an interest-bearing CBDC, near-perfect—substitute for commercial bank money.
  • An interest-bearing CBDC could result in a shift away from other low-risk assets, such as shares in money market mutual funds, Treasury bills, and other short-term instruments.
  • A non-interest-bearing CBDC, for example, would be less attractive as a substitute for commercial bank money
• Safety and Stability of the Financial System
  • Traditional measures such as prudential supervision, government deposit insurance, and access to central bank liquidity may be insufficient to stave off large outflows of commercial bank deposits into CBDC in the event of financial panic
• Efficacy of Monetary Policy Implementation
  • A CBDC's design would influence how it might affect monetary policy
• Privacy and Data Protection and the Prevention of Financial Crimes
  • Any CBDC would need to strike an appropriate balance between safeguarding consumer privacy rights and affording the transparency necessary to deter criminal activity
• Operational Resilience and Cybersecurity
  • Threats to existing payment services—including operational disruptions and cybersecurity risks—would apply to a CBDC as well
  • a CBDC could enhance the operational resilience of the payment system if it were designed with offline capability (that is, if it allowed some payments to be made without internet access)

Overview of a typical payment:

Circulation of Federal Reserve Notes

danielmarkbruce: you don't actually have money in a bank account.... You are owed money by a bank. Everyone is actually passing back and forth IOUs from banks when they pay for things digitally (or by check). It's one reason why there is a lot of complexity behind the scenes when you pay digitally. It's also the reason FDIC insurance exists. If you think about the fact that my "money" is an IOU from Chase and your "money" is an IOU from Bank of America - how do I send you "money"? It's a complicated dance with lots of different database entries. A central bank digital dollar would be IOUs from the central bank. It's closer to cash.