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Financial Services Law Insights and Observations

Fed examines ramifications of U.S. central bank digital currency

Bank Regulatory Federal Issues Digital Assets Fintech Cryptocurrency Agency Rule-Making & Guidance Of Interest to Non-US Persons Privacy/Cyber Risk & Data Security Federal Reserve Central Bank Digital Currency

On January 20, the Federal Reserve Board published a discussion paper, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, which calls for public comments on questions related to the possibility of a U.S. central bank digital currency, or CBDC. “The introduction of a CBDC would represent a highly significant innovation in American money,” the Fed said, although the agency noted that it “does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.” The paper examines the pros and cons of a potential CBDC and outlines a series of potential benefits, including faster payment options between countries. Among the various CBDC structures the Fed is considering is an intermediated model through which the private sector would facilitate the management of CBDC holdings and payments through accounts or digital wallets. Potential intermediaries could include commercial banks and regulated nonbank financial service providers. Such a model “would facilitate the use of the private sector’s existing privacy and identity-management frameworks; leverage the private sector’s ability to innovate; and reduce the prospects for destabilizing disruptions to the well-functioning U.S. financial system,” the Fed said. Additionally, a potential CBDC would also need to be readily transferable between customers of different intermediaries and must be designed to comply with rules regulating money laundering and the financing of terrorism (including the identification of persons accessing CBDC).

While a CBDC could improve cross-border payments and increase financial inclusion, the Fed warned that a CBDC may also yield potential negative effects, including affecting monetary policy implementation and interest rate control, as well as illicit finance controls and operational resilience. Consumer privacy could also be a concern, the Fed stated, noting that “any CBDC would need to strike an appropriate balance between safeguarding consumer privacy rights and affording the transparency necessary to deter criminal activity,” as the infrastructure of a CBDC could create opportunities for hackers since it would “potentially have more entry points than existing payment services.” The CBDC model under consideration would have intermediaries leverage exiting tools to address privacy concerns.

Feedback on the paper will be received through May 20.

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