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A Deep Dive into the Federal Reserve Report “Money and Payments: The U.S. Dollar in the Age of Digital Transformation”

Technological advances in recent years have led to a growing number of payment options and digital currencies. As consumers embrace innovative technologies, policymakers must consider their role, and the possibility of more broad changes. One of the key items that policymakers are considering is the introduction of a central bank digital currency, or CBDC. 

This white paper from Web3 Law Center presents an in depth analysis of the pros and cons of a CBDC based on a 2022 report from the Board of Governors of The Federal Reserve System. 

What is the Federal Reserve?

The Federal Reserve System is the central bank of the United States. It performs five key functions for the operation of the U.S. economy:

  • Conducts national monetary policy
  • Promotes stability of the financial system
  • Promotes safety and soundness of financial institutions 
  • Fosters payment and settlement system safety
  • Promotes consumer protection

The Federal Reserve is the entity that establishes and monitors payment systems in the U.S. As technology has evolved, so have payment options. The Federal Reserve is credited with creating the check-clearing system and the automated clearinghouse (ACH) system, two of the most widely-used technologies. 

In jurisdictions where access to cash is in decline, there is a danger that households and businesses will no longer have access to risk-free central bank money. Some central banks consider it an obligation to provide public access and that this access could be crucial for confidence in a currency. A CBDC could act like a ‘digital banknote’ and could fulfil this obligation.”7

Now, as technology advances even further, the Federal Reserve is considering new options for financial products. With the creation of private-sector assets like digital wallets and cryptocurrencies, central banks around the world are exploring the benefits of such technologies. 

Central Bank Digital Currencies (CBDCs)

Across the world, central banks are exploring the pros and cons of digital assets, including a central bank digital currency. A central bank digital currency, or CBDC, is a “…digital liability of a central bank that is widely available to the general public.” In essence, this is a digital dollar. Currently, the only type of central bank money available is physical currency. 

A CBDC is different from existing digital currencies, however, because it would be held by the Federal Reserve and not a commercial bank. Central bank money is considered the foundation of the financial system and economy in the U.S. 

For several years, central banks have studied CBDCs. The pros and cons are still widely debated, and lawmakers continue to explore the potential use and effectiveness of a CBDC. The Federal Reserve notes that any CBDC in the U.S. should do the following: 

  • Provide benefits to consumers, businesses and the overall economy beyond any costs or risks; 
  • Yield benefits that are more effective than alternative methods;
  • Complement – not replace – current forms of currency and payment methods;
  • Protect consumer privacy;
  • Protect against criminal activities;
  • Have broad support from stakeholders.

A CBDC would be available to the general public in the form of bank money and nonbank money. It would enable the public to make digital payments, but would not require deposit insurance or backing by underlying assets. A CBDC would be “…the safest digital asset available to the general public, with no associated credit or liquidity risk.”

The Federal Reserve notes that in order to serve the needs of the U.S. economy, a CBDC would have to be: 

  • Privacy Protected: There would be a balance between safeguarding consumer rights and providing necessary transparency for transactions. 
  • Intermediated: Management of CBDC holdings and payments would be held by the private sector. Possible options include commercial banks or regulated nonbank servicers.
  • Transferable: In order to meet the needs of the U.S. economy, a CBDC must be readily transferable between intermediaries. Transfers must be seamless, allowing money to flow freely. 
  • Identity-Verified: A CBDC must be designed to comply with rules and laws that combat money laundering and financing of terrorism. Intermediaries would need to comply with identity verification rules, similar to how banks and other financial institutions operate. 

Pros and Cons of a CBDC

Like any innovative technology, before the Federal Reserve decides whether to move forward with a CBDC, they and others will carefully consider the potential pros and cons. For so many years, physical currency has been the only type of central bank money available to U.S. consumers. To introduce a digital currency will certain require a great deal of thought and analysis on the positive and negative aspects thereof. 

Pros of a Digital Dollar

There are many potential benefits to a CBDC. A central digital currency could bridge the gap between payment systems and could serve as a foundation for the future of digital currency transactions. 

Convenient Electronic Form of Central Bank Money

CBDC transactions would be real-time and instant. This would allow consumers, businesses and the government to make immediate, risk-free payments directly to one another. A CBDC could potentially allow: 

  • Consumers to make basic purchases of services or goods
  • Consumers and businesses to pay bills
  • Governments could collect taxes
  • Governments could make direct payments to consumers
  • Consumers, businesses or the government could program direct payments for certain times

Meet Future Demands for Payment Services

The U.S. economy is rapidly becoming digitized. The digital economy demands technological speed and efficiency. A CBDC may help generate new capabilities to meet these demands. It could also help complete certain transactions that are not typically processed by traditional payment systems, such as micropayments. 

A CBDC could also help private- and public-sector institutions have better access to digital money and transactions that carry less credit and liquidity risk. This would, in turn, streamline technologies, such as those used to process cross-border payments. 

Expanded Consumer Access to the Financial System

A surprising number of U.S. households do not have established bank accounts. Also surprising is the percentage of households that have bank accounts but choose to use alternative methods. Currently, over seven million U.S. households are unbanked. Around 20 percent of households that do have banks rely on alternative, more costly services, such as money orders and payday loans. 

Financial inclusion and access is a public- and private-sector concern. Vulnerable populations continue to struggle with limited or restricted access to bank accounts and other financial systems. A CBDC could potentially resolve some of these struggles. There are two main arguments in favor of CBDCs to promote financial inclusion: 

  1. A CBDC could reduce complexity and reliance on intermediaries. This could facilitate cost-saving gains and save time for consumers. Lower costs would ensure wider access. 
  2. A CBDC could fill the need for convenient and low-cost deposits, savings and payment services. The private sector has failed to adequately fill these needs, and a CBDC could provide wider access than these pre-existing systems.  

The Bank for International Settlements (BIS) suggests, 

“In jurisdictions where access to cash is in decline, there is a danger that households and businesses will no longer have access to risk-free central bank money. Some central banks consider it an obligation to provide public access and that this access could be crucial for confidence in a currency. A CBDC could act like a ‘digital banknote’ and could fulfil this obligation.”

Support for the U.S. Dollar’s International Role

The U.S. dollar is one of the dominant international currencies. A U.S.-issued CBDC could help preserve the dollar’s international role. Supporting the U.S. dollar is crucial given that it is the world’s reserve currency and is the most widely used currency in the world. The U.S. economy, institutions and rules of law are widely trusted across the world. As more nations consider CBDCs, the Federal Reserve must consider that a more attractive and trusted form of currency could decrease use of the U.S. dollar. A U.S.-issued CBDC could help counteract this and preserve the international role of the dollar. 

Supporting the U.S. dollar also supports the U.S. economy at large because it lowers transaction costs, lowers borrowing costs for U.S. households and businesses and allows the U.S. to influence global money standards.

Cons of a Digital Dollar

While there are clearly potential benefits of creating a digital dollar, or CBDC, there are also potential pitfalls. Creation of a CBDC would create complex policy issues and potential risks. 

Changes to Financial-Sector Market Structure

It is not difficult to imagine how a CBDC could fundamentally change the structure of the U.S. financial system. Changes to this structure would alter the roles and responsibilities of the central bank and private-sector institutions. 

In large part, banks rely on deposits to fund their loan programs. A CBDC could serve as close substitute for commercial bank money. However, it would reduce the number of aggregate deposits, which could increase funding expenses and reduce credit availability. It could also increase credit costs for consumers and businesses. 

Also, interest-bearing CBDCs could cause a shift away from low-risk assets like Treasury bills, money market mutual funds and short-term instruments. A decrease in use of these instruments could raise credit costs and reduce credit availability for consumers and businesses.  

Safety and Stability of the System

Money held in the central bank is the most secure form of currency. A CBDC could become problematic during times of financial stress. Consumers and businesses would have the ability to quickly convert other types of money into CBDC, which could cause financial firms to experience more pressure and stress. Current methods of government deposit insurance and supervision may not be adequate to stave off the effects of large outflows of money from commercial banks into CBDCs. 

Efficacy of Monetary Policy

Studies and literature suggest that CBDC has the potential to be a new tool for monetary policy. It could also affect the central bank’s policy objectives. The U.S. Federal Reserve exercises control over federal funds rates and short-term interest rates. They do this by setting the Federal Reserve’s administered rates. This is all part of the “ample reserves” monetary policy regime. Under this regime, money held in the reserves is not actively managed. Daily fluctuations are generally small and do not affect federal rates. 

A CBDC could affect monetary policies and implementation. If the supply of reserves is altered, federal rates could change. A small increase or decrease in demand for CBDC may not have much impact on the federal funds rate. More significant changes in demand, however, could require the Federal Reserve to increase the size of the federal balance sheet. It may also be required to increase the level of reserves on average to provide a buffer for sharp increases in CBDC demand. 

A surge in CBDCs could push the aggregate quantity of reserve funds below the “ample” level, which would put pressure on the federal funds rate. This could be problematic as consumers and businesses weigh their options for holding CBDC and other investments. Consequently, commercial banks and investment funds would be affected. 

Privacy and Data Protection

One of the most significant potential pitfalls of a CBDC is inadequate privacy and data protection. A CBDC would have to have balance between the transparency needed to deter criminal activity and safeguarding consumer information and privacy rights. 

  • Preventing Financial Crimes: Financial institutions are required to comply with laws and rules to prevent financial crimes. Customer due diligence, reporting requirements and recordkeeping are all important elements of preventing money laundering and fraud. Developing a CBDC would require a design that is compliant with these rules. 
  • Consumer Privacy: A CBDC would use methods similar to those used today to generate data about bank and nonbank financial transactions. The Federal Reserve notes that intermediaries would leverage existing tools to address privacy concerns. 

Another concern is cybersecurity. Existing payment systems are already vulnerable to cybersecurity attacks. The risk of disruptions and attacks would also apply to a CBDC. To combat these risks, the CBDC infrastructure would require adequate defenses to protect data. The digital nature of CBDCs could mean more entry points for cyber attacks. 

Future Research Considerations

In addition to analyzing the pros and cons of a digital currency, The Federal Reserve and policymakers are also analyzing research considerations addressed in literature. Research considerations frequently discussed alongside the topic of CBDCs include consumer payment choice, inclusion, and financial security. Current ongoing research includes the following: 

  • Economists and policy analysts continue to study a wide range of potential issues with digital currency. Key topics include monetary policy implications, privacy, and private digital assets. 
  • Economists do not have much conviction on the impact of a CBDC on monetary policy. Policy complexities and limitations continue to stifle opinion. This is a continued area of interest, however. 
  • The Federal Reserve Bank of Cleveland is currently creating an academic collaboration to examine how a CBDC can be designed to promote financial inclusion. 
  • The Federal Reserve Bank of Atlanta is considering if cash-based populations and vulnerable populations would benefit from, and could safely access, digital payment methods.  
  • Literature reviews support researching consumer payment choices to ascertain whether consumers will adopt a CBDC over current payment methods. 
  • Surveys show differences in attitudes regarding a CBDC in among consumers in different nations. Current surveys show that consumers in more developed and emerging markets are more likely to embrace a CBDC than consumers in other markets. 

As part of their ongoing research, The Federal Reserve is also engaging with the public to further the discussion about a CBDC. To evaluate the opinions of consumers, lawmakers, representatives, and other stakeholders, The Federal Reserve Board has released a feedback form. This form will be open for 120 days, then will be carefully reviewed. 

Federal Reserve Chair, Jerome H. Powell, says, 

“We look forward to engaging with the public, elected representatives, and a broad range of stakeholders as we examine the positives and negatives of a central bank digital currency in the United States.”


The Federal Reserve, policymakers, and numerous other interested parties continue to analyze the potential pros and cons of a CBDC. If research suggests that the benefits outweigh the potential pitfalls for consumers, businesses, and the economy as a whole, then The Federal Reserve will take further steps toward designing a CBDC. 

Creation of a CBDC would be a significant innovation for U.S. currency and the financial system. It is essential that The Federal Reserve and policymakers carefully consider how a digital dollar could impact the public and stakeholders. Analysis and white papers such as this one will continue to assess current discussion and provide analysis on current and ongoing research and opinions.