What’s Next for CBDCs

By JP Schnapper-Casteras and Misha Guttentag

Much has happened — in public health and in central banking — since our last post spelling out some key questions on Central Bank Digital Currencies (CBDCs). Congress is holding hearings, the Federal Reserve and other central banks are actively publishing CBDC research, and foreign and private sector projects are moving ahead.

It’s no coincidence that all this activity is occurring now. We see three main causes: China’s push towards rolling out its CBDC (though many details remain unverified), the continued development of Libra (with mixed reactions), and, more pressingly, the COVID-19 pandemic. In the United States, our struggle to quickly disperse funds to many millions of Americans has exposed our public financial infrastructure as outdated and ill-equipped for this crisis or crises to come. 

Venn Diagram showing how CBCDs fit at the intersection of "Central Bank-issued money" and "Digital Money"
(image adapted from the Bank of England’s 2020 CBDC Discussion Paper)

At a fundamental level, CBDCs represent an opportunity to “fill gaps in the payment landscape,” as the Bank of Canada explained in research released this week. From a consumer and commercial perspective, a CBDC provides a “digital cash” alternative to today’s high-fee, low-privacy electronic payments. With CBDCs, individuals can pay electronically (in person or online) without sacrificing their privacy, and merchants can accept these payments at lower cost. From a policy perspective, a CBDC could offer a variety of other tools and benefits, especially for the one in four American households that are currently unbanked or “underbanked.”

Broadly, the debate over the U.S. digital dollar has quickly shifted from a question of if, to when and how. More pointedly, we see these as the three big questions to be hashed out next:

1. How private will the CBDC be? 

Privacy in payments is a public good that promotes social welfare and protects against price discrimination, as the Bank of Canada recently highlighted. To address the “current trend of declining privacy in payments,” the Bank’s research proposes designing CBDC as “‘enhanced cash’—to reduce the carrying and handling costs associated with cash and enable electronic transfers, while retaining cash’s distinctive desirable features [such as privacy, universal accessibility, and no transaction fees].” Yet several prominent central banks, including the Bank of England, essentially assume that any CBDC won’t have cash-like privacy guarantees. Why not? As the Financial Times recently reported, fears over privacy “are a massive obstacle to switching to CBDCs,” and, given some central bank communications, these fears seem justified.

At the same time, it is important to underscore that CBDC privacy (or lack thereof) is a political question. Whether the digital dollar protects privacy may come down to whether the voting public and other stakeholders demand that CBDCs carry the same privacy guarantees as cash — or if they will accept a CBDC where everyone’s transaction data is recorded with their identities (and/or sold to third parties). For what it’s worth, we think a CBDC without at least some cash-like privacy, especially if accompanied by efforts to phase out paper cash, could quickly turn into a political firestorm and sour public perception on CBDCs. It is also worth highlighting what former CFTC Chairman Christopher Giancarlo told Congress this week: “It may turn out that the United States has an ace to play in the contest for the future of digital money: privacy rights. Coding traditional American ideals of economic freedom and balanced privacy into a digital dollar will surely enhance its global appeal.” We agree — the U.S. has plenty to gain from preserving privacy in its digital dollar.

2. What role will Congress play? 

The legislative branch should play an essential role in CBDC design. As we highlighted in December, the U.S. Constitution empowers Congress with the ultimate authority to oversee and regulate money, and some of CBDC decisions involve policy decisions that should not be left to the Federal Reserve. More specifically, Congress has plenty of tools at its disposal, including funding local pilot programs, issuing CBDC design parameters to the central bank, beginning a trial rollout of U.S. Post Office Banking, or even minting $1 trillion coins to ship reloadable debit cards to every American. Big decisions about the future of money — particularly amid a historic pandemic and economic shocks — should be met by a Congress willing to think and act big, too. 

3. How will the private sector be involved? 

Federal Reserve Chairman Jerome Powell recently dismissed the idea of private sector involvement in the development of a CBDC, but other current and former senior officials, such as Brian Brooks (Acting Comptroller of the Currency) and Christopher Giancarlo (former CFTC Chairman) disagree. Will we see the Federal Reserve launch a CBDC wholly on its own? Or will we see a few different Fed-endorsed “digital dollars” piloted simultaneously, perhaps some issued by the Fed and others by private companies or banks? It may be worth exploring a hybrid licensing framework whereby the federal government sets out technical, regulatory, and oversight requirements for the private sector to issue competing “digital dollars,” while still preserving the benefits of a Fed-run “public option.”


All told, CBDCs remain a fast-moving policy area with far-reaching implications, both in a pandemic and beyond. As Chairman Powell testified, “we owe it to the public that we serve to be up to speed [on CBDCs].” In the meantime, we’ll continue to monitor further developments in this space (as part of our CBDC practice) and are always interested in hearing from potential stakeholders. 

Key Questions on Central Bank Digital Currencies

By JP Schnapper-Casteras and Misha Guttentag

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.