Preconditions for a general-purpose central bank digital currency

Updated: Dec 1, 2021


Money is a social and legal construct underpinned by trust. Conceptions of money have evolved and money has taken many forms over the years. In North America, pre-colonial trade was often conducted in wampum, corn, and fur pelts. In fact, wampum, which are decorative beads made from shells, were recognized as official currency by the Massachusetts Bay Colony in 1650.2 The Federal Reserve note, which was first issued in 1914, is a relatively recent development by historical standards. Today, there are ongoing discussions on a new form of central bank money distinct from physical cash and limited-access central bank deposits. This report focuses on the potential for a general-purpose CBDC that can be used by the public for day-to-day payments.

Crucial to whether "money" is successful is whether it is seen as a safe, stable and reliable instrument. Cash, central bank deposits, and a potential CBDC are all liabilities of the central bank; funds in a bank account are the liability of a commercial bank; and honoring balances on a retail stored value card is an obligation of issuer—but most people do not think of money in terms of their status as a liability and obligation of banks or other entities. What people care about is not the nuances of how money is recorded on a ledger somewhere, but whether the "money" in question can be safely and reliably used to make a purchase today, as well as in the future. Most people take for granted that cash maintains its full value, funds at a bank are secure, and businesses will honor store credit. Seen in this light, a CBDC could offer another form of safe and reliable money.

Interest in central bank digital currencies has increased significantly in recent years in the United States and throughout the world with the introduction of global stablecoins, the growing presence of "bigtech" in payment services, and the prototyping of CBDCs by some central banks.3 The COVID-19 pandemic also highlighted inefficiencies in the retail payments market, specifically in the distribution of economic stimulus funds, and the potential benefits of a CBDC as a complement to currency and coin. Furthermore, several members of the U.S. Congress have introduced bills in the last year that seek to change fundamentally how the U.S. payment system currently functions.4 Research and experimentation are ongoing to help inform the conversation on whether a widely available, digital form of central bank money offers benefits in the United States and should be introduced.

This paper aims to identify some high-level environmental preconditions that support a general-purpose CBDC in the United States. These preconditions are necessary, though not sufficient, and can be broadly grouped into five areas: clear policy objectives, broad stakeholder support, strong legal framework, robust technology, and market readiness. Within each area, detailed elements are discussed. These areas and elements are not exhaustive because many systems, tools, processes, and structures will need to be in place for a CBDC. In addition, many of these elements are interconnected. For example, engaging with a broad array of stakeholders and monitoring market readiness could inform clear policy objectives and vice versa. This paper does not attempt to prescribe how to address these preconditions; it aims to spark further inquiry.

For the United States, whatever specific objectives may arise for a CBDC, they should be consistent with the Federal Reserve's longstanding objectives of the safety and efficiency of the nation's payments system, as well as monetary and financial stability. A CBDC arrangement must be in keeping with these objectives, which have guided the central bank since its establishment in 1913. These objectives should be complemented by the three foundational principles recently outlined by the Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, and Federal Reserve to "do no harm"; complement existing forms of money; and support innovation and efficiency.8 A CBDC arrangement should also support the Federal Reserve's broader work in consumer protection and community development.

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