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A Brief Take on the Federal Reserve's CBDC Report

A Brief Take on the Federal Reserve’s CBDC Report

Federal Reserve – CBDC report – 1/20/22

On January 20, 2022, the Federal Reserve published a highly anticipated whitepaper discussing the pros and cons of introducing a central bank digital currency (or “CBDC”). The Fed acknowledged that creating a CBDC would “best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified.” In addition, they noted that a CBDC would support the international positioning of the US dollar by enhancing global commerce, improving international remittances, and reducing inequality. However, if adopted, a CBDC could also result in declined banking deposits, which would increase bank funding costs, and raise credit costs for households and businesses. The Fed may need to increase its own balance sheet to accommodate CBDC growth, similar to the impact of issuing increased amounts of physical currency.

The Fed echoed the sentiments raised in the 2021 PWG report, which urged the lawmakers to “act promptly to enact legislation that would ensure payment stablecoins and payment stablecoin arrangements are subject to a consistent and comprehensive federal regulatory framework” to preserve “market integrity, investor protection, and illicit finance.”

Although the regulator referred to a CBDC as “a highly significant innovation in American money,” it also firmly stated that it “does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.”

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