US Fed Economists are Hoping to Identify “Intrinsic Features of CBDC”

• Nitish Srivastava
• November 10, 2020

CBDC(Central Bank Digital Currency) that is controlled directly by the country’s central bank and backed by national credit and government power has started gaining a lot of attention. According to the latest news report, US Fed economists are examining the “intrinsic” value drivers of CBDCs. Authors, Fed economists Francesca Carapella and Jean Flemming, in a report named ‘Central Bank Digital Currency: A Literature Review,’ compiled research exploring ‘CBDC’s effect on commercial banks and monetary policy.’ 

The authors pointed out that the implementation of a CBDC poses long-standing concerns regarding the provision of public and private capital and the central bank’s capacity to use CBDC directly to households to distribute monetary policy.

CBDC’s Effect on Commercial Banks, Monetary Policy and Financial Stability

The writers mentioned that the theoretical literature on CBDC relates to various questions and focuses on the effect of introducing a CBDC for various applications such as commercial banks, monetary policy, and financial stability.

The report highlighted that with the introduction of CBDC, the number of bank deposits and the volume of bank-intermediated lending might change. Also, it was mentioned that digital currency has the potential to affect central banks’ wider policy goals, either by acting as a new monetary policy tool or through its effects on the portfolio choices of households and the probability of bank runs.

Dilemma Surrounding CBDC

Although CBDCs have been described as the “global arms race,” the US Fed Chair, Jerome Powell, seems to be in no rush. He believes that it’s better to get it right instead to be first with CBDC.’ Last month he also stated that digital currency is unlikely to be rolled out anytime as the country already has an “active dynamic domestic payment system.”

On August 13, Paul Wong and Jesse Leigh Maniff released a research paper that compares CBDCs with other payment methods. Authors concluded that a CBDC would never fully replicate all the features of cash and real-time gross settlement services. 

As China continues to take a far active approach towards CBDC adoption, recently, last month, it was announced that Shenzhen City would distribute DCEP worth $1.5 million to Shenzhen residents to test the digital Yuan. This giveaway’s primary idea was to stimulate consumption and perform a regular test of digital currency.

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