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Fed researchers survey past literature on central bank digital currencies and highlight current issues

Fed researchers survey past literature on central bank digital currencies and highlight current issues

Researchers from the U.S. Federal Reserve published a deep-dive into the past literature on central bank digital currencies on Monday — while also laying out critical considerations for the future of such initiatives. 

With a wholly digital dollar — whether from a private entity, the Fed itself or a mix of the two — potentially on the horizon, the Fed’s researchers say the most important consideration is whether a central bank digital currency (CBDC) would substitute fiat for currency, deposits or both. 

In sum, the report leans on the work of a variety of works that offer theories on the impact of CBDCs, including productions from individual researchers and other central banks like the Bank of England. The Fed says it’s looking to past theoretical CBDC research to answer questions about the possible effects on commercial banks and monetary policy. Indeed, the Fed is far from alone in pursuing research in this area, as The Block outlined in its past report on CBDC initiatives.

While the Fed said some research points to the value of CBDCs in creating greater financial inclusion by lowering the number of unbanked citizens, it could also mean a change in deposits and volume at commercial banks. 

“In this respect, this strand of the literature can speak to the concern of some policymakers that the introduction of CBDC may replace banks’ main source of funding and cause disintermediation of commercial banks, which in turn may lead to a decrease in their lending,” the report’s authors said.

However, the U.S. central bank is exploring a variety of thinking on the topic. The report recognized a digital dollar as an opportunity to serve as a monetary policy tool. The bank said it’s taking a closer look at possible implications on household portfolio choices and the interplay with bank runs.

“Crucial to these mechanisms is the flexibility provided by CBDC in responding to macroeconomic shocks,” said the report’s authors, who went on to write:

“We believe the most crucial question is which intrinsic features of CBDC as a means of payment and a store of value are important for households’ portfolio choices as to which monies to use.”

You can read the Fed’s full literature review here

© 2020 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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Author: Aislinn Keely