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1 1 (March 20, 2020)

handle is hein.crs/govcaux0001 and id is 1 raw text is: FF.$ March 20, 2020 Financial Innovation: Central Bank Digital Currencies Certain observers assert that private digital currencies such as Bitcoin, Ethereum, and the Facebook-proposed Libra could become widely accepted forms of payment. In response, some analysts suggest central banks should issue central bank digital currencies (CBDCs) to maintain government-issued money's central economic role. Although no major central bank has issued a CBDC to date, this In Focus describes how foreign central banks and the Federal Reserve (Fed) are approaching the issue. It also examines policy issues raised by a CBDC. Traditional electronic payment systems enable the transfer of fiat currency (i.e., money backed by government decree) and are operated by banks and central banks that record transfers between accounts on private ledgers. Although these systems generally offer fast, convenient, and safe payment options, they involve significant costs, physical infrastructure, and sometimes delays. In recent years, privately issued digital currencies that is, money that has no physical form and is not supported by any government authority have been developed, but have not become widely adopted for payments. These systems generally record transfers on public (or distributed), decentralized ledgers protected by blockchain technology. Often individuals' accounts are identified with a pseudonym not directly linked to users' real identities. For more information, see CRS In Focus IF10824, Financial Innovation: Cryptocurrencies , by David W. Perkins. Proponents of private digital currencies assert they could provide more efficient payments with greater financial privacy than when payments are made with banks. Skeptics, however, doubt that these currencies can effectively serve as money, because they are not legal tender (i.e., no legal requirements to accept them exist) and their value has been very volatile, among other reasons. Observers also warn that these digital currencies could facilitate money laundering and other crimes; expose consumers to poorly understood risks and losses; and hinder the ability of central banks to implement and transmit monetary policy. Private digital currencies' lack of centralized authority their main appeal to many of the proponents is often a cause of their challenges and risks. Some observers suggest that central banks should issue CBDCs to realize the touted benefits of digital currencies in a way that would reduce the obstacles and risks. &)esign ,,'s dert or s A CBDC would allow holders to store value and make payments digitally and would be backed by central banks (as is the case for physical currency), but other features are unresolved. Design choices include whether the digital currency would be used for wholesale or retail transactions, the degree of anonymity granted to users, whether it would pay interest, and whether the digital currency would be a digital version of the existing legal tender or a separate parallel legal tender. It is also unclear whether private digital currencies' features, such as decentralized ledgers and blockchain, are needed to make a CBDC succeed. Instead, a CBDC might be built upon existing systems, though presumably that would require several years of significant IT investment. Proposals vary on these design features, and, as a result, CBDCs could range from modestly to fundamentally different from the current financial system, wherein banks store value and make payments digitally from accounts held at the Fed. Proposals that vary fundamentally from the current system are those that allow nonbank firms or individuals to have digital access to money directly from the Fed and, in some cases, open digital accounts at the Fed. Many governments around the world are researching, testing, preparing to launch, or have launched CBDCs. In late 2019, a Bank of International Settlements (BIS) survey found 80% of responding central banks are engaged in research, experiments, or work related to the development and use of CBDCs. Around 40% have progressed from conceptual research to experiments, and another 10% have developed pilot projects. Some have committed to introducing a CBDC 20% of central banks (mostly in emerging markets) indicate they are likely to launch one within the next six years (Figure 1). Figure I. Likelihood of Central Banks Issuing a CBDC NOWN, Likely \\ Possible Short term 1-3 ers Medium term 1,-6 years ..................... ....... ....... --- m s ......... .................................. lmwwxxxxxxxxx .............................. .......... ................... .......... ................... .......... 2 0 1 8 .................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EN .................. I .................. ............ ............. ............. ............ .......... ............. ---- . ............ ............ ........... ............. --- ... . . . . . . . . . . . . . . . . . . . 2019 ............. ............ ........... ............. --- ... ............ ........... ............. ---- ------------ - ------- 0 , -1 1) 40 Sharp& respnridents Unlikely 60 80 i0o SLke& 'con, br s l reyfikeh~and 'sonent h /ikyl' [rtvhf; com rbines very unhkely' cmd womet.what suslby', Source: BIS survey. Note: Likelihood of a general purpose CBDC. With international variations in central bank legal structures, economic fundamentals, and CBDC motivations, '.0 K~:> p\w -- , gmmp goo mppm qq\ a , q 'S I 11LULANJILiN,

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