A Wide Range of Outcomes: US Federal Reserve Paper Researches Impact of CBDCs on Financial System

The US Federal Reserve recently published a paper on the potential impact of a Central Bank Digital Currency (CBDC) on the financial system.

Currently, many jurisdictions around the world are investigating the possibility of issuing a digital currency – including the US. China is already testing a digital yuan live and in the wild. A digital dollar could be used for both wholesale transactions as well as retail payments and transfers. However, pressing issues such as privacy concerns have caused some insiders to push against a CBDC, preferring, perhaps, a privately issued digital dollar (stablecoin) that is highly regulated.

This specific paper, authored by Christopher Gust, Kyungmin Kim, and Romina Ruprecht, posits that a CBDC could place “substantial upward pressure on the spread of the federal funds rate and other wholesale funding rates over the interest rate on reserves unless the Fed expanded its balance sheet.”

As a new liability for the Fed, a CBDC could have “far-reaching consequences for monetary policy” as well as the overall economy.

One often-mentioned risk of a retail CBDC is “bank disintermediation.” Why hold your money at a bank when you can park it directly on the Fed’s balance sheet? Of course, this could dramatically impact the entire commercial banking sector as its operational model is flipped upside down. The impact would be driven by how the CBDC was regulated – which is still to be determined.

The paper points to the question of CBDC policy and, importantly, how the Fed would manage its balance sheet in the event of a digital dollar issued by the government.

“…it is important that policymakers take into account balance sheet management considerations when contemplating the introduction of a CBDC.”

One question that is not answered by the paper is what is the value of a CBDC, and does technology already exist that can capture the desired benefits now?

Most observers see some sort of digital dollar as lowering cost, providing instantaneous transfers, and global ubiquity as beneficial for both central governments as well as individuals – not to mention furtherance of the dollar dominance.

If you are interested, you may read the paper here.

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