FRB Keeps Central Bank Digital Currency on the Agenda

In a section of its May 2022 Financial Stability Report, the Federal Reserve Board ("FRB") examined the potential ability of a U.S. central bank digital currency ("CBDC") to support financial stability in light of a "rapid[ly] digitizing economy[.]"

The section "Central Bank Digital Currency and Financial Stability" cites an earlier FRB report titled "Money and Payments: The U.S. Dollar in the Agent of Digital Transformation." In that report, the FRB reviewed risks associated with existing stablecoins and cryptocurrencies, highlighting that they are "subject to extreme price volatility," "difficult to use without service providers" and suffer from "severe limitations on transaction throughput." The FRB said that such assets have a "significant energy footprint" and "make consumers vulnerable to loss, theft, and fraud."

The FRB raised concerns about CBDCs, stating that "although the introduction of a CBDC could benefit consumers and the broader financial system, such a potential step also raises complex policy issues and risks... [and] could fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the central bank."

The FRB asserted that a U.S. CBDC "could provide the public with broad access to digital money that is free from credit risk and liquidity risk[,]" but emphasized that "a shift away from these assets could reduce credit availability or raise credit costs for households, businesses, and governments," and "in times of stress, the ability to convert other forms of money into CBDC could make runs on financial firms more likely or more severe."

The FRB said that it has not "advanced any specific policy outcome and will not be making any imminent decisions," and that it "does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from the Congress, ideally in the form of a specific authorizing law."