Recent weeks have seen a surge of interest in Central Bank Digital Currencies (CBDCs), starting with China’s public plans to launch its own and culminating in the Federal Reserve Chairman’s letter to the Hill on the topic. The growing attention to CBDCs is a welcome sign — especially for tech-focused lawyers like us — but before everyone rushes in, we should start assessing some foundational issues.
As Congress and the Federal Reserve consider the possibility of launching a dollar-based CBDC, here are some key questions that they should find answers to first:
– What is the problem that a CBDC in the United States is aiming to solve? To be sure, there are plenty of issues in our national financial infrastructure that CBDCs could partly address, for example: reducing transaction costs; ensuring all citizens have bank accounts; expanding the availability and speed of fund transfers; improving financial stability and oversight; or upgrading our banking software systems. (The Bank of Israel published a useful report laying out some of the different types of CBDCs and the tradeoffs among them.) This may be the most difficult question to answer, but it makes little sense to proceed on CBDCs without deciding our core purpose in doing so.
– Who are the target users of the CBDC? With widespread and often conflicting reports on China’s new digital currency project, it’s not entirely clear who their CBDC will serve: banks, regular people, or both? Beyond China, there are important design tradeoffs on this front: Some versions of a CBDC could be “peer-to-peer” like bitcoin or e-mail, where anyone can participate and send or receive money. Other proposals would just give access to banks and major financial institutions, resulting in more mild but still potentially important efficiency improvements over today’s systems. A related question is who are the intended operators of the CBDC? The Federal Reserve, other federal agencies, some public-private partnership with banks, or technology companies?
– What is the desired impact on public policy? Domestically, could CBDCs have useful applications as a monetary tool to combat recessions or curb overheated economic growth? Should CBDCs constitute a sort of “public option” for certain banking services? Or are various policy considerations essentially secondary to finding a way to upgrade the “rails” that undergird our nation’s financial infrastructure? Internationally, are we worried about other digital currencies gaining traction and threatening the reserve currency status of the dollar? Representative Foster, whose letter spurred Chairman Powell’s CBDC comments, said that his inquiries were motivated by desire to preserve the “primacy of the U.S. dollar” against a “competitive disadvantage” if other countries move first. In any event, the form of the CBDC has to be driven by the impact the CBDC is designed to produce.
– When do we (realistically) plan to launch a CBDC of some sort? The Federal Reserve Chairman has already indicated that he sees no need for the Fed itself to rush into this project and is “carefully monitoring the activities of other central banks.” Meanwhile, the newly-appointed head of the European Central Bank has advocated for CBDCs and the European Union appears to be progressing in that direction; private companies like Facebook, JP Morgan, and Coinbase are proceeding with digital currency systems of their own. Should Washington’s timing reflect a stance on whether the private sector or other countries could “get ahead” of the U.S. dollar? (On a separate, but related, track, the Federal Reserve is making slow progress on a plan to offer real-time gross settlement, which is at least five years off in the United States — but already available in many other countries).
– Why take on the risks of a CBDC at scale? What if there is a cyber-security breach, technical malfunction, or poor deployment? What if a serious competitor to the dollar or SWIFT-based settlement emerges in the meantime or becomes preferred by banks or consumers? How do we assess the downsides and audit the integrity of new technology, against the costs and benefits of the status quo?
These are big questions with major political, economic, and legal ramifications — and different public and private sector stakeholders may view them quite differently. It is good to see the Federal Reserve taking this issue seriously (which we have suggested for some time now). Congress too, has a special role to play, since the Constitution grants it the power to oversee and regulate money, including the Federal Reserve and any CBDC efforts. Congress can shape this matter of national importance by conferring with constituents about their financial needs, holding hearings, and/or enacting statutes and allocating funds to further explore digital currency.
With CBDCs, we have the opportunity to consider major changes to monetary technology and policy. By tackling some of these basic issues first, we can chart a sensible course forward.