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![handle is hein.crs/govepur0001 and id is 1 raw text is: Congressional Research Service
Informing the Iegisl9tive debate since 1914
Updated May 13, 2024
Central Bank Digital Currencies
Policymakers have debated whether the Federal Reserve
(Fed) should create a central bank digital currency
(CBDC)-a digital dollar. A CBDC would share some of
the features of cryptocurrencies (crypto)-that is, private
digital currencies such as Bitcoin, which are unsupported
by any government authority. Although no major central
bank has formally launched a CBDC (beyond a pilot
project) to date, this In Focus describes how foreign central
banks, the U.S. Treasury, and the Fed are approaching the
issue and discusses policy issues. 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 has
been too volatile to serve as an effective means of payment,
transaction costs are too high, and it is neither legal tender
nor 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 (i.e., instant
settlement). Real-time payments are growing rapidly but are
not yet ubiquitous in the United States. The introduction of
FedNow in 2023, the Fed's real-time settlement system,
may accelerate their growth. By contrast, developing a
CBDC would take several years of significant information
technology investment and testing.
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 participated in pilot
programs (Projects Hamilton, Cedar, and Agora) to build
technical capacity pending a decision 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,
Treasury, in consultation with various agencies, issued a
report on CBDC in September 2022. That report did not
take a position on whether to pursue a CBDC, but it created
an interagency 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 in September 2022, and the Attorney General
issued a (non-public) opinion on whether legislative
changes would be necessary to issue a CBDC.
Desin 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 pseudonymous. (For
background, see CRS Report R47425, Cryptocurrency:
Selected Policy Issues.) It is unclear which of these features
would be desirable in a CBDC or whether 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/govepur0001&div=1&collection=&method=preview&ext=.png&size=3)