A U.S. Central Bank Digital Currency (CBDC) is the digital representation of a U.S. dollar issued by the Federal Reserve.
Stablecoins can represent a dollar but are privately issued and the stability of that dollar relies on the issuing company.
CBDCs are better because they are backed by governments. Consumers will hesitate to use stablecoins due to security, volatility, and regulatory concerns. CBDCs and stablecoins might coexist but central banks and consumers would benefit from a currency with the same utility as cash, less volatility and independence from private entities.
Governments around the world are considering launching their own CBDC and some are in the process. Some are issuing the currencies directly to consumers while others are using the currencies to intermediaries, like banks. Some have a centralized database and others are using distributed ledgers. Out of 105 central banks exploring the technology, 63 have not decided on a strategy, 50 are testing their own version of a CBDC.
The Fed will not issue a CBDC without the support of the Executive branch and Congress in the form of a law passed. Now is the time for Congress to begin the process of passing a law to issue a U.S. CBDC. A U.S. CBDC will not replace current payment systems but will offer consumers and merchants an alternative.
There are two categories of U.S. banking, wholesale and retail. Wholesale banking is business with other businesses, banks, and other financial institutions. Retail banking is business with the public. Wholesale cares about security, ease of transaction, fraud, and loss prevention.
The Fed should allow wholesale banking to use a wholesale CBDC to transfer funds. It would make the settlement, clearing, and interbank transfers faster, cheaper, and more efficient and eliminate credit risk. Only qualified institutions will be able to use the wholesale CBDC. The focus of the white paper is on a retail CBDC.
Three advantages of a U.S. CBDC
Money is constantly evolving and the way we use money today would surprise people of the past. A U.S. CBDC will keep the U.S. at the forefront of innovation, encourage entrepreneurship and spark the development of transformative payment technologies.
It is important not to focus too much on the technology’s inefficiencies. The current state of blockchains resembles the internet in the 1990s when we could hardly imagine what was possible.
The U.S. benefits from being the reserve currency and other currencies have attempted to challenge its reserve status. If the U.S. falls behind on developing a CBDC, competing currencies will have more of a competitive edge.
19% of Americans are unbanked largely due to trust issues and often pay for more expensive financial products like payday loans, check cashing services, and money orders. A U.S. CBDC would allow non-financial institutions to offer intermediary services. Those services can be offered outside of business hours, no minimum deposits, and will increase access to financial services.
Policymakers and the Fed should consider integrating a U.S. CBDC in Federal programs like the Special Nutrition Assistance Program (SNAP), Social Security, and the Special Supplemental Nutrition Program for Women, Infants, and Children.