The Federal Reserve is making significant strides toward the development of a central bank digital currency (CBDC), with recent speeches and initiatives revealing the depth of its engagement. Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, outlined the central bank's digital dollar efforts during the 20th Anniversary Chicago Payments Symposium. She highlighted that the pandemic's experience with emergency payments has accelerated work in this area.
Individual Accounts at the Fed
Mester noted that legislation has been proposed to create individual accounts at the Fed for every American, where digital dollars could be deposited as liabilities of Federal Reserve Banks and used specifically for emergency payments. She added that other proposals envision a new payments instrument — digital cash — that would resemble physical currency but in digital form, potentially without the anonymity of physical cash. Some designs would allow the central bank to issue CBDC directly into end-user wallets using Fed-facilitated transfer and redemption services, bypassing commercial banks entirely.
Federal Reserve Tech Lab and Multi-Bank Collaboration
The Fed's Board of Governors has established a technology lab, known as Techlab, which builds platforms and tests a range of technologies relevant to digital currencies and payment innovations. Staff from several Federal Reserve Banks, including software developers, contribute to this effort. Lael Brainard, a Federal Reserve Board Governor, previously stated: “Given the dollar’s important role, it is essential that the Federal Reserve remain on the frontier of research and policy development regarding central bank digital currencies.” Beyond the Board, individual Reserve Banks are actively engaged. The Federal Reserve Bank of Boston has launched a multi-year initiative with the Massachusetts Institute of Technology (MIT), starting in August 2020, to experiment with existing and new technologies that could underpin a digital dollar. The Federal Reserve Bank of New York has formed an innovation center in partnership with the Bank for International Settlements (BIS) to identify critical trends and financial technology relevant to central banks.
Risks, Benefits, and Global Competition
Mester emphasized the need to thoroughly evaluate potential risks, costs, benefits, and policy issues surrounding a digital dollar, including financial stability, market structure, security, privacy, and monetary policy. She stressed that demand and use cases for a CBDC must be assessed to determine whether such a currency would enable faster and more ubiquitous payments during emergencies and under normal conditions. Meanwhile, central banks worldwide are accelerating their CBDC research in response to Facebook's Libra cryptocurrency project and China's imminent digital yuan, which is already being tested in several major cities including Beijing and Hong Kong. The Fed's efforts place it at the center of a global race to modernize payment systems and maintain the dollar's dominant role in the digital age.