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Congressional Research Service
Informing the legislitive debate since 1914
Updated April 20, 2023
Central Bank Digital Currencies
The recent proliferation of private digital currencies or
cryptocurrencies unsupported by any government authority,
such as Bitcoin, has led to questions of whether the Federal
Reserve (Fed) should create a central bank digital currency
(CBDC)-a digital dollar that would share some of the
features of these private digital currencies. Although no
major central bank has issued a CBDC to date, this In Focus
describes how foreign central banks, the U.S. Treasury, and
the Fed are approaching the issue. It also examines policy
issues raised by a CBDC. For more detail, see CRS Report
R46850, Central Bank Digital Currencies: Policy Issues.
Background
Contrary to some of its creators' expectations, crypto has
not become widely adopted for payments-its value is too
volatile to serve as an efficient means of payment,
transaction costs are too high, it is not legal tender, and it is
not backed by the full faith and credit of a government. A
CBDC, proponents believe, could overcome these barriers
while taking advantage of the technology pioneered by
crypto to create a more efficient, central-bank-backed
digital payment system.
Within the mainstream financial system, digital payments
are already widespread in the United States. However,
digital payments are not always as fast, inexpensive, or
ubiquitous as some would desire at present. A CBDC would
presumably allow for real-time payments. Real-time
payments are growing rapidly, but not yet ubiquitous, in the
United States-although they may become so after the Fed
rolls out FedNow, its planned real-time settlement system,
in mid-2023. By contrast, developing a CBDC would take
several years of significant IT investment.
Federal Reserve and Treasury Actions
In January 2022, the Fed released a report on CBDC, which
it defined as a digital liability of a central bank that is
widely available to the general public. In the Fed's view,
CBDC transactions would need to be final and completed
in real time, allowing users to make payments to one
another using a risk-free asset. Individuals, businesses, and
governments could potentially use a CBDC to make basic
purchases of goods and services or pay bills, and
governments could use a CBDC to collect taxes or make
benefit payments directly to citizens.
The report identified four characteristics that it argued were
necessary to best serve the needs of the United States,
saying that a CBDC should be (1) privacy-protected to the
extent compatible with deterring criminal use, (2)
intermediated (i.e., retail services would be offered through
financial institutions), (3) widely transferable among
holders, and (4) identity-verified (i.e., not anonymous). The
report took no position on several design features, such as
whether the CBDC would pay interest, whether it could be
used offline, and whether there would be size limits on
transactions or holdings. The report stated that the Fed
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.
The report is not intended to advance a specific policy
outcome and takes no position on the ultimate desirability
of a U.S. CBDC. The Fed has also launched pilot
programs (Projects Hamilton and Cedar) to build technical
capacity in case a decision is made to adopt a CBDC.
In March 2022, President Biden issued Executive Order
14067 on digital assets, which stated that the U.S.
government should prioritize timely assessments of
potential benefits and risks [of a U.S. CBDC] under various
designs to ensure that the United States remains a leader in
the international financial system. Pursuant to that order,
the Treasury Secretary, in consultation with various
executive branch officials, issued a report on the potential
implications of adopting a CBDC in September 2022. That
report did not take a position on whether to pursue a CBDC,
but it created an inter-agency working group led by
Treasury to further consider the issue. In addition, Treasury
issued a framework for international engagement, the White
House Office of Science and Technology Policy issued a
technical evaluation of CBDC in September 2022, and the
Attorney General issued a (non-public) opinion on whether
legislative changes would be necessary to issue a CBDC.
Design Considerations
A CBDC would allow holders to store value and make
payments digitally and would be backed by the Fed (as is
the case for physical currency), but other features are
unresolved. Crypto generally records transfers on public,
decentralized (or distributed) ledgers stored using
blockchain technology. Often individuals' accounts are
protected using cryptography and identified with
pseudonyms. (For background, see CRS Report R47425,
Cryptocurrency: Selected Policy Issues.) It is unclear which
of these features would be desirable in a CBDC or to what
extent a CBDC might be built upon existing payment
systems instead.
From an end-user perspective, CBDC proposals range from
a payment system similar to the status quo to one that is
fundamentally different. At one end of the spectrum of
proposals, a CBDC accessible only to banks may differ
only slightly from the current system given that wholesale
payment systems are already digital. At the other end,
proposals for consumers to be able to hold CBDCs in
accounts at the Fed would fundamentally change the role of
the Fed and its relationship with consumers and banks. The
Fed's report envisioned a middle ground where end users](ViewImageLocal?handle=hein.crs/goveliz0001&div=1&collection=&method=preview&ext=.png&size=3)