Focus
U.S. Treasury provides a deep dive into policy considerations for a digital dollar
(Kitco News) - The creation of a central bank digital currency (CBDC) for the United States continues to be discussed among the various branches of the U.S. government, and the Treasury Department is the latest to weigh in on the matter.
While speaking in front of an audience at the Atlantic Council on Wednesday, Nellie Liang, Under Secretary for Domestic Finance, provided insight into the technical and policy issues that the Treasury-led CBDC working group are exploring.
“Central bank money anchors the value of commercial bank money, and provides a risk-free asset for settling interbank transactions,” Liang said. “Given the central bank’s key roles, changes in the design of central bank money and payments are likely to have profound implications for financial health of consumers and the economy.”
The Treasury Department is currently exploring two different options for upgrading the capabilities of central bank money: A CBDC and a real-time payment system.
“The Federal Reserve has indicated that it expects to launch the FedNow Service this year, which will be designed to allow for near-instantaneous retail payments on a 24x7x365 basis, using an existing form of central bank money (i.e., central bank reserves) as an interbank settlement asset,” Liang said. “In contrast, a CBDC would involve both a new form of central bank money and, potentially, a new set of payment rails.”
Both options present an opportunity to build a more efficient, competitive, and inclusive U.S. payment system, she said.
On the CBDC side, the working group has determined that a digital dollar would need to have three core features: It must be considered legal tender; it would be convertible one-for-one into other forms of central bank money, such as reserve balances or cash; and it would clear and settle nearly instantly.
Retail vs. Wholesale CBDC
Beyond those features, one of the main decisions that the Treasury is exploring is whether to create a wholesale CBDC (wCBDC), a retail CBDC (rCBDC), or both.
“In characterizing wholesale and retail options, we have found it useful to think about how each would differ from central bank reserves – in particular, whether the core differences relate to ‘technological features’ or ‘access features,’ i.e., the users that would be able to access the CBDC,” Liang said.
A wCBDC could be used to support interbank settlement among commercial banks that issue tokenized deposits, facilitate more efficient cross-border payments by increasing the speed of settlement, or provide a risk-free settlement asset for tokenized securities transactions.
“At the same time, some of the potential benefits of a wholesale CBDC might also be possible through upgrades to existing central bank payment systems, including interlinking systems in different jurisdictions or new multilateral platforms based on these systems,” Liang noted.
When it comes to an rCBDC, “the most important difference from central bank reserves is related to access features, not technology features,” Liang said. “Unlike central bank reserves, a retail CBDC would be a digital liability of the central bank that is accessible to the general public.”
Benefits of an rCBDC highlighted by the Under Secretary include its ability to contribute to a more competitive and innovative payment system, support financial inclusion, and help “preserve the singleness of the currency.”
Ideally, a CBDC for use by the general public would be facilitated by the private sector, which would offer accounts and digital wallets to customers to help manage CBDC holdings and facilitate payments. “In terms of technology, a retail CBDC might involve a different architecture compared to a CBDC that is intended solely for wholesale use,” Liang said, adding that the biggest risk she sees “is the potential for runs into a retail CBDC that could destabilize private sector lending during stress periods.”
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Policy issues
From a policy perspective, the working group is exploring whether a digital dollar could help to preserve the U.S. dollar’s role on the global stage and whether it could help reduce “undesirable frictions” in cross-border payments.
They are also looking into how a CBDC might impact national security, as a major tool wielded by the U.S. on the global stage is the ability to use sanctions and other financial measures to limit access to the U.S. and international financial system.
“The effectiveness of these tools rests in part on the strength and centrality of the U.S. financial system and the role of the dollar,” Liang said. “Some have suggested that the development of foreign CBDCs, including multi-CBDC platforms, could diminish the use of the dollar and effectiveness of our tools in this space.”
New payment systems, including foreign CBDCs, also open the potential for cybersecurity threats that need to be properly evaluated and addressed. “We are assessing the magnitude of these and other potential national security risks, and whether a U.S. CBDC or other tools could help to counter these risks,” Liang stated.
The matter of privacy is also an important policy objective, according to Liang, as a digital dollar “would need to both protect the privacy of users and minimize the risk of illicit financial transactions.” The ability for it to promote inclusion and equity in the delivery of financial services is also an important consideration.
“Across these three interests – global financial leadership; national security; and privacy, illicit finance, and inclusion – CBDC design choices are likely to involve trade-offs,” she said. “The CBDC Working Group will work to identify trade-offs and possible ways of reconciling objectives, including looking ahead to possible technological advances that could reduce the size of any trade-offs.”
The next step in the evaluation process will be for leaders from Treasury, the Federal Reserve, and White House offices to begin to hold regular meetings to discuss a possible CDBC and other payments innovations.
The CBDC working group is currently developing an initial set of findings and recommendations to present at these meetings related to whether a U.S. CBDC would help to advance the policy objectives, the features that a U.S. CBDC would need to advance these objectives, options for resolving CBDC design trade-offs, and areas where additional technological R&D would be useful.
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