The Federal Reserve Board of Governors and several Federal Reserve Banks are intensifying efforts to develop a central bank digital currency (CBDC) for the United States. Loretta Mester, President of the Federal Reserve Bank of Cleveland, outlined the central bank's progress during a speech at the 20th Anniversary Chicago Payments Symposium, highlighting a legislative proposal that could fundamentally reshape America's financial infrastructure.
Direct Fed Accounts for Every Citizen
Mester stated that the experience with emergency payments during the coronavirus pandemic has accelerated work on the digital dollar. She detailed that legislation has proposed each American could hold an account at the Fed where digital dollars would be deposited as liabilities of the Federal Reserve Banks, potentially enabling direct emergency payments from the central bank. This would bypass the traditional commercial banking system. Other proposals, she noted, aim to create a new payment instrument called "digital cash" — essentially physical currency in digital form, but possibly without the anonymity of paper money.
Some digital dollar designs would allow the central bank to issue CBDC directly into end-user wallets using central-bank-facilitated transfer and redemption services, without commercial bank intermediaries. Mester emphasized this shift could make emergency distributions faster and more ubiquitous.
Technology Labs and Global Competition
The Federal Reserve Board of Governors operates a Technology Lab (Techlab) that has been building platforms and testing a range of technologies relevant to digital currencies and other payment innovations. Staff from several Federal Reserve Banks, including software developers, are contributing to this effort. "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," said Federal Reserve Board Governor Lael Brainard.
Regionally, the Federal Reserve Bank of Boston has partnered with the Massachusetts Institute of Technology (MIT) to experiment with existing and new technologies that could underpin a digital dollar. This multi-year initiative launched in August 2020. Meanwhile, the Federal Reserve Bank of New York has established an innovation center in collaboration with the Bank for International Settlements (BIS) to identify critical trends and fintech relevant to central banks.
These efforts are partly a response to global developments. Central banks worldwide are accelerating their own CBDC research in reaction to Facebook's proposed Libra cryptocurrency and China's digital yuan, which is already being piloted in major cities including Beijing and Hong Kong. The U.S. aims to stay competitive in the evolving digital currency landscape.
Risks, Privacy, and Monetary Policy
Mester stressed the need to evaluate potential risks, costs, benefits, and policy issues surrounding a digital dollar, including financial stability, market structure, security, privacy, and monetary policy. She emphasized that the demand and use cases of a CBDC must be assessed to determine "whether such a central bank digital currency would allow for quicker and more ubiquitous payments in times of emergency and more generally."
The Federal Reserve has been researching CBDC-related issues for some time, but no official timeline for issuance has been announced. The ongoing experiments and partnerships indicate that the U.S. is laying the groundwork for a digital dollar while carefully balancing innovation with the need to protect the existing financial system. What do you think about having an account at the Fed for digital dollars? Share your views in the comments below.