FX.co ★ Fed releases white paper on CBDC plans

The Federal Reserve has released its long-awaited white paper on the digital dollar. The Fed did not take any sides, listed pros and cons of enacting a central bank digital currency (CBDC), and asked for public input.

According to the Fed's document, the CBDC could represent a highly significant innovation in American money and would require public consultations involving all interested sides.

As expected, the central bank stated it would not issue a CBDC without legislation from Congress and the White House allowing it to do so.

The Federal Reserve did not give any political recommendations, but noted pros and cons of such a digital currency. Furthermore, the Fed would continue to explore a wide range of design options for a CBDC, the paper said.

A digital currency could help support faster and cheaper payments, expand consumer access to the financial system, and help preserve the dollar's international status as a reserve currency, among other benefits, the Fed said.

If many countries create their own more attractive CBDCs, global use of the dollar could decrease. A US CBDC might thus help preserve the international role of the dollar.

The Fed warned about risks created by a CBDC, including issues related to the resulting changes to the structure of the US financial system, concerns about its security and stability, CBDC's potential influence on the monetary policy, cybersecurity, privacy and data protection.

A digital dollar would "best suit" US needs if it were intermediated through the current financial system, the white paper said.

The Federal Reserve will collect comments on the issue for 120 days until May 20.

"The Federal Reserve will only take further steps toward developing a CBDC if research points to benefits for households, businesses, and the economy overall that exceed the downside risks, and indicates that CBDC is superior to alternative methods," the regulator concluded.