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Digital Dollar Not Imminent: The Fed's Pros and Cons

The Fed issued a report Thursday citing the pros and cons of a digital dollar. But it's in no rush to create such a currency.
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Don’t expect anything to happen soon now that The Federal Reserve has issued a report outlining the pros and cons of a digital dollar.

The Fed is in no rush to act, given the complexities of a central bank digital currency (CBDC), as it’s formally called. “The introduction of a CBDC would represent a highly significant innovation in American money,” Thursday’s report said. “Accordingly, broad consultation with the general public and key stakeholders is essential. This paper is the first step in such a conversation.”

The Fed said it’s not doing anything without clear support from Congress and the White House, “ideally in the form of a specific authorizing law.”

As for the benefits of a digital dollar, it “would offer the general public broad access to digital money that is free from credit risk and liquidity risk,” the Fed said. “As such, it could provide a safe foundation for private-sector innovations to meet current and future needs and demands for payment services.”

A CBDC could make the banking system faster more efficient, the Fed said. “A CBDC could potentially be programmed to deliver payments at certain times. Additionally, a CBDC could potentially be used to carry out micropayments.”

A digital dollar also could “streamline cross-border payments by using new technologies, introducing simplified distribution channels, and creating additional opportunities for cross-jurisdictional collaboration and interoperability,” the Fed said.

A CBDC also could help maintain the dollar as the world’s primary reserve currency, especially if it’s threatened by other currencies that have a digital version, the report said.

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A CBDC also could bring people without a bank account into the financial mainstream. More than 7 million—or over 5% of U.S. households—remain unbanked, the Fed said.

“Some have suggested that a CBDC could reduce common barriers to financial inclusion and could lower transaction costs, which could be particularly helpful for lower-income households.”

As for risks of a digital dollar, the safety and stability of the financial system is one, the Fed said. “Because central bank money is the safest form of money, a widely accessible CBDC would be particularly attractive to risk-averse users, especially during times of stress in the financial system,” the Fed said.

“The ability to quickly convert other forms of money—including deposits at commercial banks—into CBDC could make runs on financial firms more likely or more severe.”

A substitution of digital dollars for commercial-bank money could “reduce the aggregate amount of deposits in the banking system, which could in turn increase bank funding expenses, and reduce credit availability or raise credit costs for households and businesses,” the Fed said.

There would also be issues related to protecting consumers’ privacy, preventing financial crimes and cybersecurity for a CBDC.

“Designing appropriate defenses for CBDC could be particularly difficult because a CBDC network could potentially have more entry points than existing payment services,” the Fed said.