The Federal Reserve Board has opened a debate on the possible creation of a US central bank digital currency (CBDC) with the release of a long-awaited discussion paper that examines the pros and cons of such a currency.
Stressing that it did not "favour any policy outcome", the central bank said the paper is the first step in a discussion of whether and how a CBDC could improve the safe and effective domestic payments system.
It invited comments from the public over the next 120 days on a potential CBDC.
"We look forward to engaging with the public, elected representatives, and a broad range of stakeholders as we examine the positives and negatives of a central bank digital currency in the United States," said Federal Reserve chair Jerome H Powell.
Unlike existing digital transactions, which are a liability of private entities such as commercial banks, a CBDC would be a liability of a central bank.
The Fed said that while a CBDC could provide a safe, digital payment option for households and businesses, as well as faster payments between countries, there are potential downsides to consider.
"They include how to ensure a CBDC would preserve monetary and financial stability as well as complement existing means of payment.
"Other key policy considerations include how to preserve the privacy of citizens and maintain the ability to combat illicit finance," it said.
The Fed has lagged other countries in supporting a CBDC. About 90 countries are exploring or launching their own CBDCs, according to the Atlantic Council. China, for example, is piloting a digital renminbi.
The Fed said it would not proceed without “clear support from the executive branch and from Congress, ideally in the form of a specific authorising law”.
“The Fed is finally wading into a topic that is unavoidable for central banks as they contemplate how to secure monetary and financial stability amid various innovations in financial technologies, including an accelerating shift to digital forms of payment, that are reshaping financial markets and institutions,” Eswar Prasad, a professor at Cornell University with expertise in currencies, told the Financial Times.
Jan Hatzius, chief economist at Goldman Sachs (NYSE:GS), told the FT that the Fed was unlikely to be “very aggressive” in its plans to proceed if it chose to do so.
“There is room for introducing that cautiously, but you’re not going to anytime soon, I think, replace the core bank-centred system of financial intermediation,” he said.