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Some Thoughts on the Fed’s CBDC Report

Summary:
Economists within the Federal Reserve System have been musing about central bank digital currency for a while now. For example, yours truly provided a few thoughts on the possibility way back in 2015 (see here) and most recently here. But the views of individual Fed researchers are simply our own personal views. What people are really interested in is an official view--namely the view of the Board of Governors of the Federal Reserve. At long last, their report is now available here). The report makes it clear that the Fed has no immediate plans to issue a CBDC. The main purpose of the report is to provide some background information, discuss the potential costs and benefits of a CBDC, and solicit feedback from the general public. It is a very nice educational piece. There was nothing

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Economists within the Federal Reserve System have been musing about central bank digital currency for a while now. For example, yours truly provided a few thoughts on the possibility way back in 2015 (see here) and most recently here. But the views of individual Fed researchers are simply our own personal views. What people are really interested in is an official view--namely the view of the Board of Governors of the Federal Reserve. At long last, their report is now available here). 

The report makes it clear that the Fed has no immediate plans to issue a CBDC. The main purpose of the report is to provide some background information, discuss the potential costs and benefits of a CBDC, and solicit feedback from the general public. It is a very nice educational piece. There was nothing really new in it for people who have been following the discussion over the past few years, but there was one thing I found interesting (and potentially important). The interesting part, I think, has to do with their definition of CBDC:

For the purpose of this paper,  a CBDC is defined as a digital liability of the Federal Reserve that is widely available to the general public.
I used bold font to highlight the important part in the passage above. Most of the digital money Americans use today consists of dollar credits in transaction accounts that reside in the broader bank sector (which includes non-banks providing digital payment services). This form of digital money is technically a liability of private sector agencies, not the government. Is this an important distinction to make? I'm not sure--I suppose it depends on what one thinks is important. 

For one thing, the Board's adopted definition appears to rule out the "wholesale CBDC" proposal that some have advocated for (including myself). Wholesale CBDC (also referred to as "synthetic CBDC" or "sCBDC") is essentially a narrow-banking proposal (which has a long history in the banking policy debate). 

In my writings, I contrasted "wholesale CBDC" with "retail CBDC," the latter of which I interpreted as a product that is both a liability of the Federal Reserve and a payment service managed by the Federal Reserve. I thought this latter property was a bad idea--the Fed should probably not get involved with the challenges of retail banking. I missed the possibility of separating the legal status of digital money from the agencies responsible for managing digital money accounts. As George Selgin explains well here, the Board's definition of CBDC means a privately-intermediated liability of the Federal Reserve (George calls this iCBDC to distinguish it from sCBDC). 

Speaking for myself, I'd be happy with either an sCBDC or an iCBDC (assuming they are properly designed). My main concern was over the prospect of a government agency operating a large retail business. Both sCBDC and iCBDC are intermediated products--we can let the private sector manage the day-to-day operations of processing payments. George, however, believes that sCBDC should be preferred to iCBDC for reasons that he spells out here (I'm not sure I share his concerns).

My own view is that the distinction between sCBDC and iCBDC will be of interest mainly to lawyers and regulators (John Kiff points me to this IMF report). From an economic perspective, the two products appear to be very close--if not perfect--substitutes (again, assuming their design is optimized). The practical difference between a Federal Reserve liability and a private liability fully-insured by the government seems almost non-existent to me. But I'm willing to be persuaded otherwise. 


David Andolfatto
Construction worker turned academic turned central banker. Opinions expressed here are my own, not St. Louis Fed nor U.S. Fed Reserve System.

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