Hours after U.S. Federal Reserve Chair Jerome Powell declared 2021 to be a pivotal year in consulting the public on the digital dollar, his underlings issued a paper describing what that consultation might look like.
In a Wednesday FEDS Notes, Fed Reserve Senior Counsel Jess Cheng, Payments Specialist Angela N. Lawson and Technology Lab Manager Paul Wong said the onus would be on broadly engaging the public regarding the pros and cons of a U.S. central bank digital currency (CBDC).
Privacy issues, ease of use, security access and delivery mechanisms should all be on the table as Fed officials work to “sharpen” a digital dollar with the public’s help, the paper said.
And any consultation should likewise include as broad a cross-section of the U.S. population as possible.
“Engaging with individuals and businesses and consulting with consumer groups, community organizations, and business associations to understand the use case for a CBDC will help in the decision whether to issue a CBDC and its potential design,” the authors wrote.
Think tanks and academia could also play a supporting role, they said.
The authors also outlined the basic “preconditions” essential to the Fed’s deliberations on how to proceed.
Digital dollar clarity
The Fed would need to clearly understand what a possible CBDC would be used for, the notes said. The technology used would also have to support the CBDC across different conditions while providing 24/7 instant settlement, secure transfer of assets and resilience.
Feedback should be drawn from “end users of various ages, geographic locations, payment habits, and financial literacy in the design and testing of a CBDC could help sharpen the basic features of a viable CBDC arrangement,” the note stated.
Its authors admitted a CBDC could grant the central bank “unprecedented” access into the financial goings-on of its users if designed to allow the most “granular transaction information” to shine through.
“This close linkage between money and data contrasts with physical banknotes, which do not carry with them transaction data that can be connected to a specific person and their history of financial dealings,” the note said.
Congressional oversight
Congress would have to authorize the Federal Reserve to issue a general-purpose CBDC, the note said. Powell echoed this view in testimony before the House Financial Services Committee Wednesday, telling lawmakers the Fed would need “legislative authorization.”
Any digital dollar would be controlled as a centralized project by the Federal Reserve, though the actual nodes would be distributed, said James Cunha, a senior vice president at the Boston branch of the U.S. central bank.
The Boston Fed has been evaluating different technology platforms, including blockchain tools, with the MIT Digital Currency Initiative to determine what platform would be best suited to supporting a digital dollar.
However, support for the idea of a digital dollar, whether blockchain-based or not, seems to be growing. Treasury Secretary Janet Yellen said earlier this week “it makes sense” for central banks to consider issuing their own digital currencies.
“Too many Americans don’t have access to easy payments systems and banking accounts, and I think this is something that a digital dollar, a central bank digital currency, could help with,” she said at a New York Times conference on Monday (while also dismissing Bitcoin as being an inefficient system for payments).
Wednesday’s paper dropped just after a Fedwire outage blocking banks from transferring funds. Some crypto exchanges were unable to process ACH transactions during the outage.
Nathan DiCamillo contributed reporting.