The Federal Reserve on Thursday released a much-anticipated white paper weighing the pros and cons of central bank digital currencies.
Central bank digital currencies, or CBDCs, are issued by a central bank and designed to provide all the same money functions as physical cash. The main difference is that they are held as a liability on the Fed's balance sheet rather than a commercial bank.
As countries all over the world, including economic rivals such as China, have piloted their own digital currencies, the Fed has faced pressure to provide clarity on whether or not it will jump on the bandwagon.
The 40-page paper was widely seen as the first step in doing just that, but the document provides only partial hints as to if the Fed is supportive of a central bank digital currency.
Right from the jump, the Fed makes clear that the paper "is not intended to advance a specific policy outcome and takes no position on the ultimate desirability of a U.S. CBDC."
It also echoes Fed Chair Jerome Powell's past statements that the central bank can't act on its own and that the central bank will not proceed "without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law."
This may come as a disappointment to proponents of a digital dollar, but it follows Powell's tack in the last six months that the Fed is more interested in getting it right than getting it done fast.
However, if the U.S. does decide a digital dollar is desirable, the Fed has some opinions about how it should work.
The paper argues that a CBDC should benefit individuals, businesses, and the overall economy more than alternative methods; complement rather than replace current financial services; protect consumer privacy; protect against criminal activity; and have broad support from stakeholders.
It also highlights specific benefits, which include making it easier for the central bank to provide liquidity to households and supporting faster and cheaper cross-border payments.
On the con side, the Fed notes that "a CBDC could also pose certain risks and would raise a variety of important policy questions, including how it might affect financial-sector market structure, the cost and availability of credit, the safety and stability of the financial system, and the efficacy of monetary policy."
The paper predictably touches on cryptocurrencies and stablecoins, whose explosive growth is largely responsible for the increased awareness of CBDCs in recent years. But the Fed avoids framing CBDCs as a potential crypto-killer. Instead, it calls on Congress to introduce new regulations to bring the industry under federal regulations.
The Fed is now soliciting feedback with a checklist of 22 different questions, which the public will have 120 days to comment on.
"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 report concluded