Fed moves ahead with CBDC research

The issuance of a U.S. central bank digital currency could affect the nation’s financial stability in multiple ways, ranging from increasing the risk of a run on banks to cutting into banks’ ability to respond to financial stress in the market, according to research issued by Federal Reserve Board researchers. 

On the flip side, it could improve the stability of the financial sector by providing additional assets that could be used as a means of liquidity management, the April 10 research paper said. 

The ways in which CBDC destabilizing factors might be alleviated were also explored in the paper, though it noted the challenges of implementing some of those risk mitigation tools.  

In January 2022, the Federal Reserve Board kicked off the central bank’s review of CBDCs with a lengthy report on a CBDC’s potential pros and cons. The 40-page report, delivered after months of delay, suggested the central bank was in no rush to issue such a digital currency. 

The research issued this month makes clear that the board still isn’t backing any particular move. The preliminary materials are aimed at stimulating “discussion and critical comment,” the paper said. “The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors,” it added. 

The emergence of cryptocurrencies and stablecoins has prompted national interest in the possibility of a digital currency. While current digital forms of money circulating in the private sector are typically a liability for commercial banks, a U.S. CBDC would shift that liability to the Federal Reserve, a government entity that aims to operate in the public interest. 

Some members of Congress have been vocal about their opposition to the notion of a CBDC. The House Financial Services Committee advanced a bill last September that would block the creation of a central bank digital currency. And a group of Republican senators proposed a bill this year that would do the same, suggesting that a CBDC would infringe on citizens’ privacy. 

At the same time, other countries are racing ahead with CBDCs, with pilots testing the possibility of such sovereign digital currencies. Nigeria, the Bahamas and Jamaica have launched CBDCs, and 66 countries have CBDCs in various stages of development, according to the Atlantic Council, a research organization tracking CBDCs.