Alt-M Analysis: Where the U.S. Feds CBDC Proposal Goes Wrong

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Alt-M | George Selgin | Jan 22, 2022

money and payments U.S. dollar in the age of digital transformation - Alt-M Analysis: Where the U.S. Feds CBDC Proposal Goes Wrong The Fed's long-awaited report on central bank digital currencies is finally out. Although the report makes it clear that the Fed has no immediate plans to issue a digital currency, it does point to the approach the Fed would be inclined to take were it to do so.

That approach would have the Fed supply a retail digital currency to the general public indirectly, using private-sector financial intermediaries, including but not limited to commercial banks, as its agents. Those private intermediaries would then be responsible for managing customers' central bank digital currency (CBDC) holdings and payments.

Intermediated versus "Synthetic" Central Bank Digital Currency

Superficially, the Fed's preferred approach seems identical to the "synthetic" central bank digital currency (sCBDC) approach first recommended by Tobias Adrian back in 2019. In that approach, both bank and nonbank private-sector payment service providers can have accounts with their central banks and hold those central banks' digital liabilities.

See: Rep. Emmer introduced legislation to prohibit the Federal Reserve from issuing a CBDC for use by individuals

Retail digital currency ("eMoney") is supplied exclusively by these private-sector payment service providers, but is fully backed by central bank reserves that are ring-fenced from those providers' other creditors. The result, Adrian says, is one in which the public may be said to hold and transact in central bank money "by proxy."

Adrian refers to his sCBDC plan as "a public-private partnership." It remains the case, nonetheless, that the central bank itself only supplies "wholesale" digital currency. Another article summarizing the sCBDC plan makes this especially clear. In a sCBDC arrangement, it says,

the central bank is not offering accounts to the general public but instead to private EMIs, who then use the sCBDC as a 100% backup for their e-money. This is an important difference between CBDC and sCBDC. … Similar to current e-money, [sCBDC] constitutes a claim against one specific e-money institute.

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Download the 40 page PDF 'Money and Payments: The U.S Dollar in the age of Digital Transformation' --> here

Cato Institute | Nicholas Anthony | Jan 21, 2022

After nearly a year, the Federal Reserve has finally released its discussion paper on central bank digital currencies (CBDCs). For a 40‐page document, the findings were actually rather thin. It seems the Fed is still undecided, but it is leaning towards launching a CBDC that would protect privacy without permitting anonymous use, be intermediated (or hosted) by private banks, and be easily transferable. In other words, it would be much like what already exists.

The U.S. payments system––one that does resemble that of a developing nation––is long overdue for an upgrade, but that is not to say that upgrades are not underway.

See: China’s CBDC Now Has 261 Million Users with $14 Billion in completed Transactions

Financial inclusion is a worthy goal as well, but one that similarly falls flat. The discussion paper devotes just two paragraphs to the “possible benefit of financial inclusion,” and it ultimately concludes with a request for research that would confirm the possibility. However, research already shows that the number of unbanked individuals has been declining every year. So, again, it’s possible that this is one problem that will be fixed before a CBDC is launched. Second, 75% of the unbanked say that they are simply uninterested in having a bank account. And third, two of the key reasons for being unbanked are concerns about privacy and trust. Considering the public’s trust in the government is at historic lows, it’s unlikely a CBDC will be winning any hearts. Thus, it is again unclear how much of a benefit a CBDC will be here.

Maybe it shouldn’t be such a surprise that the discussion paper was finally released considering CBDC legislation is also underway. However, it’s still unclear what the Fed has been doing since May 2021. What started as a “summer publication” soon became “expected in the fall” and then “in the coming weeks.” Now that it is finally here, it seems that the Fed and Congress have a long road ahead if they wish to justify such a program to the public. The first place they should start is in identifying how a CBDC can be anything more than a solution in search of a problem.

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