Copied from a Reddit Post:
I read the Fed Report on CBDCs so you don't have to.
TLDR;
I’ve read the new Fed study so you don’t have to. These were my key takeaways:
-
The Fed does not currently plan to issue a CBDC but they are strongly considering it.
-
They would not move forward without legislation directing them to do so and there is a clear benefit to the US consumers and economy that outweighs the benefits as compared to the risks.
-
A US CBDC would give people direct access to digital currency issued by the government – existing digital currencies are controlled exclusively by banks.
-
A US CBDC could help the unbanked and underbanked gain access to their money without the paying exorbitant fees like they currently do through check cashing services, payday loans, wire transfers, etc.
-
KYC would be an absolute requirement (despite allusions to privacy in the paper).
-
A US CBDC would be free of credit and liquidity risk (unlike existing stablecoins).
-
They would potentially consider limiting the amount of a CBDC that an individual or entity may hold or accumulate in a short amount of time.
-
Lastly – my impression is that one of their biggest concerns is how an interest bearing CBDC would impact existing financial instruments like T-bills and other bonds although they acknowledge that the cat may already be out of the bag on that one.
I’m a bit long winded, so it turned out to be a bit longer than I expected but it’s still considerably shorter than the actual report. Hopefully it’s helpful to some people.
EXECUTIVE SUMMARY
The Executive Summary identifies the purpose of the paper as “a first step in a public discussion”. It is intended to be a starting point in a public dialog and questions are welcome by clicking here: https://www.federalreserve.gov/apps/forms/CBDC. They point out specifically that it is not meant to signal that the Fed will specifically move to create a CBDC, simply that it is being discussed and considered.
The Background section explains that the Fed has evolved payment technologies over time as the world has evolved starting with a check clearing system, then the ACH system currently used by banks for processing electronic funds transfers and a new system the Fed committed to creating in 2019 called FedNow which is meant to provide 24/7/365 interbank payments.
Due to recent developments they are now considering a US CBDC. According to the document they have been studying this for several years and are continuing to solicit reviews, including from the public as they explore whether or not this makes sense.
The Key Topics covered in the paper are:
- Discussions on the existing forms of money
- The current state of the US payment system
- Strengths
- Challenges
- Various digital assets that have emerged in recent years
- Stablecoins
- Other cryptocurrencies
- CBDCs
- Uses and functions
- Potential benefits and risks
- Related policy considerations
INTRODUCTION
Mostly rehashes the previous information and adds one very key item that is one of the biggest takeaways from the paper. That is: The Fed does not plan to move forward in issuing a CBDC without support from Congress and the executive branch in the form of specific law authorizing the issuance of a US CBDC.
THE EXISTING FORMS OF MONEY
They identify the following forms of money and detail the risks and benefits associated with these:
- Central bank money – physical currency issued by the Fed
- Commercial bank money – digital form of money most commonly used by the public
- Nonbank money – digital money held at nonbank financial providers (specifically highlight mobile apps)
THE PAYMENT SYSTEM
Most US based payments rely on the ACH system or wire transfers to move money around. There is little to no risk in the settlement of these funds because they are either central bank or commercial bank moneys which promotes stability.
Recent Improvements to the Payment System
They discuss improvements in making payments faster, cheaper, more convenient and accessible. Here they reference the RTP interbank network and the FedNow Service which is scheduled to debut in 2023.
With regard to nonbank money they highlight potential risk and instability to users due to a “lack of equivalent protections” although they do not highlight what specific risks they are concerned about.
Remaining Challenges for the Payment System
They highlight that many Americans lack access to digital banking and payment services and that some forms of payment (especially cross-border payments) remain slow and costly. They cite figures stating >5% of US households remain unbanked and an additional ~20% more rely on costly nonbanking services like money orders, check cashing services and payday loans.
They suggest that the fact the traditional banking system does not offer a truly competitive solution to some of these services limits competition and therefore drives prices for these services quite high and that reducing these costs would benefit economic growth and reduce inequality.
DIGITAL ASSETS
They reference cryptocurrencies directly for the first time here and mention that they are not used widely as payment while specifically highlighting limitations on transaction throughput, energy consumption and fraud as potential concerns for existing currencies.
They mention that stablecoins have emerged and are generally used for trading of other digital assets while firms are also exploring ways to use them as a form of payment.
They state that this report will not dive deeply into stable coins but reference the paper put out by the President’s Working Group on Financial Markets (available here: https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf - not sure if a link to a pdf is a good idea, so I removed the link but you can copy/paste) specifically noting that concerns about the increasing use of stable coins could lead to issues such as:
- Destabilizing runs on the stable coin
- Disruptions in the payment system
- Concentration of economic power
The report mentions that there are gaps in regulatory authority that currently limit the government’s ability to reduce this risk and mention that the above linked report from the PWG recommends Congress act to promote legislation which would allow regulation of these markets.
CENTRAL BANK DIGITAL CURRENCY
Here they highlight that they are considering issuance of a CBDC if and only if it can address the issues of concern previously outlined in the paper. Currently physical currency is the only central bank money that is accessible directly by consumers, however a CBDC would also be directly accessible and therefore provide the general public with a second form of currency that is directly accessible.
My editorial note here: This is simply my interpretation of what that last paragraph means. The important part that they are trying to contrast here is that existing digital moneys are exclusively controlled by the banks. You cannot initiate an ACH transfer without the bank actually moving the money for you. The distinction made in the previous paragraphs makes it clear that a US CBDC would be outside of the traditional banking system, ie exist on a blockchain.
They go on to state that they will continue to consider a wide range of options for a CBDC although they are not 100% committed to creating one. These are the key points any US CBDC would need to meet:
- Privacy-protected – need to strike an appropriate balance between safeguarding privacy and transparency needed to deter criminal activity (My note: existing physical currency technically does this in the form of serialized bills, however in any practical sense it is completely fungible and non-traceable, I would be very interested to hear how they plan to maintain privacy while also accomplishing this transparency, later in the report there are indications that this allusion to privacy is not sincere – I will be submitting a question on this topic and advise all of you to do the same)
- Intermediated – The Fed would hold the liability of the CBDC itself, however individuals would use banks and nonbank service providers through the use of digital wallets.
- Transferable – This simply notes that it would have to be readily transferable to be effective.
- Identity-verified – KYC clearly defined (My note: so much for the privacy they outlined earlier in this section.)
Uses and Functions of a CBDC
This simply states that transactions could amount to almost anything but require real-time finality in a risk free manner. They also discuss smart contract functionality although don’t call it out by name by saying “Additionally, a CBDC could potentially be programmed to, for example, deliver payments at certain times.”
Potential Benefits of a CBDC
They highlight CBDCs as a new foundation and bridge between payment services in a safe centralized manner. They highlight again that this would be a direct access to digital money that is free from credit and liquidity risk (My note: I think this is actually a valid point. None of us truly trust Tether to be doing what they say they’re doing. Of course the US dollar is going to devalue over time through issuance of new dollars, but so would existing stable coins and a USD CBDC will always be worth the same as a physical USD and therefore will never completely fail unless the USD does. I don’t trust that a USDT will never crash relative to USD.)
They mention that while existing digital moneys have their own forms of protection, none of these are perfect and US CBDC would specifically manage risk better. This in turn would level the playing field for companies interested in dealing with digital payments and allow innovation in other areas while not having to worry about the risk of accepting digital currencies as they currently exist while allowing for the before mentioned smart contract capability and also making micro-transactions possible on a large scale which isn’t currently feasible with bank moneys.
Improvements to Cross-Border Payments
Like the title says, a US CBDC would potentially be able to make cross-border payments more readily available to the general public.
Support the Dollar’s International Role
They discuss the benefits of having the dollar be the world reserve currency of choice and how modernizing access to it would help to maintain that obviously beneficial position.
Financial inclusion
CBDCs could help economically vulnerable households get access to the financial system due to the speed, security and low cost of these types of transactions. They highlight this particular thing as a high priority for the Fed.
Extend Public Access to Safe Central Bank Money
Here they highlight the fact that while physical cash is the only form of money that consumers have direct access to, very little of the modern world relies on physical currencies which means the banking system is inserted (unnecessarily it is implied) into every transaction. They also note that it would be meant to work along side physical cash, not in place of it.
CONTINUED...
Copied from a Reddit Post:
I read the Fed Report on CBDCs so you don't have to.
TLDR;
I’ve read the new Fed study so you don’t have to. These were my key takeaways:
-
The Fed does not currently plan to issue a CBDC but they are strongly considering it.
-
They would not move forward without legislation directing them to do so and there is a clear benefit to the US consumers and economy that outweighs the benefits as compared to the risks.
-
A US CBDC would give people direct access to digital currency issued by the government – existing digital currencies are controlled exclusively by banks.
-
A US CBDC could help the unbanked and underbanked gain access to their money without the paying exorbitant fees like they currently do through check cashing services, payday loans, wire transfers, etc.
-
KYC would be an absolute requirement (despite allusions to privacy in the paper).
-
A US CBDC would be free of credit and liquidity risk (unlike existing stablecoins).
-
They would potentially consider limiting the amount of a CBDC that an individual or entity may hold or accumulate in a short amount of time.
-
Lastly – my impression is that one of their biggest concerns is how an interest bearing CBDC would impact existing financial instruments like T-bills and other bonds although they acknowledge that the cat may already be out of the bag on that one.
I’m a bit long winded, so it turned out to be a bit longer than I expected but it’s still considerably shorter than the actual report. Hopefully it’s helpful to some people.
EXECUTIVE SUMMARY
The Executive Summary identifies the purpose of the paper as “a first step in a public discussion”. It is intended to be a starting point in a public dialog and questions are welcome by clicking here: https://www.federalreserve.gov/apps/forms/CBDC. They point out specifically that it is not meant to signal that the Fed will specifically move to create a CBDC, simply that it is being discussed and considered.
The Background section explains that the Fed has evolved payment technologies over time as the world has evolved starting with a check clearing system, then the ACH system currently used by banks for processing electronic funds transfers and a new system the Fed committed to creating in 2019 called FedNow which is meant to provide 24/7/365 interbank payments.
Due to recent developments they are now considering a US CBDC. According to the document they have been studying this for several years and are continuing to solicit reviews, including from the public as they explore whether or not this makes sense.
The Key Topics covered in the paper are:
- Discussions on the existing forms of money
- The current state of the US payment system
- Strengths
- Challenges
- Various digital assets that have emerged in recent years
- Stablecoins
- Other cryptocurrencies
- CBDCs
- Uses and functions
- Potential benefits and risks
- Related policy considerations
INTRODUCTION
Mostly rehashes the previous information and adds one very key item that is one of the biggest takeaways from the paper. That is: The Fed does not plan to move forward in issuing a CBDC without support from Congress and the executive branch in the form of specific law authorizing the issuance of a US CBDC.
THE EXISTING FORMS OF MONEY
They identify the following forms of money and detail the risks and benefits associated with these:
- Central bank money – physical currency issued by the Fed
- Commercial bank money – digital form of money most commonly used by the public
- Nonbank money – digital money held at nonbank financial providers (specifically highlight mobile apps)
THE PAYMENT SYSTEM
Most US based payments rely on the ACH system or wire transfers to move money around. There is little to no risk in the settlement of these funds because they are either central bank or commercial bank moneys which promotes stability.
Recent Improvements to the Payment System
They discuss improvements in making payments faster, cheaper, more convenient and accessible. Here they reference the RTP interbank network and the FedNow Service which is scheduled to debut in 2023.
With regard to nonbank money they highlight potential risk and instability to users due to a “lack of equivalent protections” although they do not highlight what specific risks they are concerned about.
Remaining Challenges for the Payment System
They highlight that many Americans lack access to digital banking and payment services and that some forms of payment (especially cross-border payments) remain slow and costly. They cite figures stating >5% of US households remain unbanked and an additional ~20% more rely on costly nonbanking services like money orders, check cashing services and payday loans.
They suggest that the fact the traditional banking system does not offer a truly competitive solution to some of these services limits competition and therefore drives prices for these services quite high and that reducing these costs would benefit economic growth and reduce inequality.
DIGITAL ASSETS
They reference cryptocurrencies directly for the first time here and mention that they are not used widely as payment while specifically highlighting limitations on transaction throughput, energy consumption and fraud as potential concerns for existing currencies.
They mention that stablecoins have emerged and are generally used for trading of other digital assets while firms are also exploring ways to use them as a form of payment.
They state that this report will not dive deeply into stable coins but reference the paper put out by the President’s Working Group on Financial Markets (available here: https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf - not sure if a link to a pdf is a good idea, so I removed the link but you can copy/paste) specifically noting that concerns about the increasing use of stable coins could lead to issues such as:
- Destabilizing runs on the stable coin
- Disruptions in the payment system
- Concentration of economic power
The report mentions that there are gaps in regulatory authority that currently limit the government’s ability to reduce this risk and mention that the above linked report from the PWG recommends Congress act to promote legislation which would allow regulation of these markets.
CENTRAL BANK DIGITAL CURRENCY
Here they highlight that they are considering issuance of a CBDC if and only if it can address the issues of concern previously outlined in the paper. Currently physical currency is the only central bank money that is accessible directly by consumers, however a CBDC would also be directly accessible and therefore provide the general public with a second form of currency that is directly accessible.
My editorial note here: This is simply my interpretation of what that last paragraph means. The important part that they are trying to contrast here is that existing digital moneys are exclusively controlled by the banks. You cannot initiate an ACH transfer without the bank actually moving the money for you. The distinction made in the previous paragraphs makes it clear that a US CBDC would be outside of the traditional banking system, ie exist on a blockchain.
They go on to state that they will continue to consider a wide range of options for a CBDC although they are not 100% committed to creating one. These are the key points any US CBDC would need to meet:
- Privacy-protected – need to strike an appropriate balance between safeguarding privacy and transparency needed to deter criminal activity (My note: existing physical currency technically does this in the form of serialized bills, however in any practical sense it is completely fungible and non-traceable, I would be very interested to hear how they plan to maintain privacy while also accomplishing this transparency, later in the report there are indications that this allusion to privacy is not sincere – I will be submitting a question on this topic and advise all of you to do the same)
- Intermediated – The Fed would hold the liability of the CBDC itself, however individuals would use banks and nonbank service providers through the use of digital wallets.
- Transferable – This simply notes that it would have to be readily transferable to be effective.
- Identity-verified – KYC clearly defined (My note: so much for the privacy they outlined earlier in this section.)
Uses and Functions of a CBDC
This simply states that transactions could amount to almost anything but require real-time finality in a risk free manner. They also discuss smart contract functionality although don’t call it out by name by saying “Additionally, a CBDC could potentially be programmed to, for example, deliver payments at certain times.”
Potential Benefits of a CBDC
They highlight CBDCs as a new foundation and bridge between payment services in a safe centralized manner. They highlight again that this would be a direct access to digital money that is free from credit and liquidity risk (My note: I think this is actually a valid point. None of us truly trust Tether to be doing what they say they’re doing. Of course the US dollar is going to devalue over time through issuance of new dollars, but so would existing stable coins and a USD CBDC will always be worth the same as a physical USD and therefore will never completely fail unless the USD does. I don’t trust that a USDT will never crash relative to USD.)
They mention that while existing digital moneys have their own forms of protection, none of these are perfect and US CBDC would specifically manage risk better. This in turn would level the playing field for companies interested in dealing with digital payments and allow innovation in other areas while not having to worry about the risk of accepting digital currencies as they currently exist while allowing for the before mentioned smart contract capability and also making micro-transactions possible on a large scale which isn’t currently feasible with bank moneys.
Improvements to Cross-Border Payments
Like the title says, a US CBDC would potentially be able to make cross-border payments more readily available to the general public.
Support the Dollar’s International Role
They discuss the benefits of having the dollar be the world reserve currency of choice and how modernizing access to it would help to maintain that obviously beneficial position.
Financial inclusion
CBDCs could help economically vulnerable households get access to the financial system due to the speed, security and low cost of these types of transactions. They highlight this particular thing as a high priority for the Fed.
Extend Public Access to Safe Central Bank Money
Here they highlight the fact that while physical cash is the only form of money that consumers have direct access to, very little of the modern world relies on physical currencies which means the banking system is inserted (unnecessarily it is implied) into every transaction. They also note that it would be meant to work along side physical cash, not in place of it.
Potential Risks and Policy Considerations for a CBDC
Changes to Financial-Sector and Market Structure
- Could fundamentally change the system
- A fully functional CBDC could reduce deposits in central banks leading to higher overhead and impact to credit availability to households and business.
- Interest bearing CBDC accounts could replace T-bills and other short-term low risk investments which would impact credit availability for business and governments.
- Design could mitigate these impacts including making it non-interest bearing *(My note: not s