The news: Through a newly issued paper, the Federal Reserve is seeking to start a conversation about creating a US central bank digital currency (CBDC).
The central bank is also seeking public comment to continue the dialogue, with a May 20, 2022 submission deadline. It hopes to gather feedback from stakeholders ranging from elected officials to the general public.
What would a CBDC mean for banks?: While the Fed states that a US CBDC would be a liability on its own balance sheet instead of on the banks’, it envisions banks playing an intermediary role:
Conversely, the Fed cautions that banks may face new risks with a CBDC—and notes that they could be mitigated:
The big takeaway: If a digital dollar becomes a reality, banks will likely remain important players in the US financial system due to their technical expertise in account management. If curbs are imposed on CBDC holdings and interest, banks would also become important players within the stablecoin space.
Because both the digital dollar and stablecoins can be used as a store of value and for payments, a digital dollar’s lack of credit and liquidity risks gives it a big advantage over stablecoins. However, if the Fed sets limits, bank-backed stablecoins like USDF could become the preferred complementary choice because members can leverage their status as FDIC-backed institutions.
The Fed’s credibility, plus a digital dollar’s simpler distribution and storage models, means account holders are more likely to prefer CBDCs to stablecoins. This would pose a threat to stablecoins like Tether that are issued by standalone players like Bitfinex, which was fined by the Commodity Futures Trading Commission (CFTC) after the regulator learned that it wasn’t fully backed by US dollars.
To learn about a US CBDC’s impact on payments, read our Payments & Commerce team’s overview.