The Federal Reserve finally released a much-delayed paper yesterday opining on the pros and cons of developing its own central bank digital currency (CBDC), but without coming to any firm conclusions.
Why it matters: Around the world, there are now 23 CBDCs either in pilot or formally launched. They have morphed from a theoretical concept into real-world digital cash, changing the way governments and millions of people use money — but not in the U.S.
Between the lines: Although the Fed's paper doesn't advocate one way or another on whether the U.S. should begin development, the language used in the paper indicates that it’s very open to the idea, Josh Lipsky, director at the Atlantic Council’s GeoEconomics Center, tells Axios.
- “Part of the reason that they’re [open to it] is they see countries around the world exploring CBDCs," says Jonathan McCollum, chair of federal government relations for Davidoff Hutcher & Citron. "I think they understand that the U.S. has an important role to play in creating some sort of [international] standards.”
The big picture: A digital dollar would be legal tender pegged to the value of the physical dollar and backed by the Fed.
- Central banks are considering CBDCs in order to retain control over monetary policy in the face of growing cryptocurrency adoption, and because they could enable more efficient government payments and financial inclusion.
- It's also a matter of international influence: Fed vice chair nominee Lael Brainard, for one, said last year that she couldn't “wrap [her] head around” the U.S. not having one, given the dollar's current dominance in international payments — and China's head start on developing its own digital yuan.
China is the largest economy with a pilot, and as of November about 140 million people had opened digital wallets, China's central bank said.
- For the upcoming Beijing Winter Olympics, Chinese authorities are encouraging athletes and companies to use the digital yuan, in an effort to showcase it internationally, Bloomberg reported.
How it works: Globally, central banks are so far using existing financial networks — like banks, fintechs, and even telecom companies — to distribute CBDCs to citizens, Jonathan Dharmapalan, CEO of eCurrency, tells Axios.
- That’s notable, because "if you go back a few years, there were these ideas out there that people were going to have Fed apps on their phone. But that's not happening,” adds Lipsky.
Still, consumer adoption has been slow — in part since existing electronic payments systems are pretty convenient, according to reports on China's efforts. Same in Nigeria, the largest economy to formally launch a CBDC.
- In Nigeria, consumers go through a clunky process to set up the digital wallet app and connect it to their bank account, says Naomi Aladekoba, who's based in Nigeria for the Atlantic Council. But once that’s done, using the wallet is simple and efficient, with instantaneous transfers — not unlike using Venmo stateside, she says.
- Nigeria plans to roll out a program in which users won't need smartphones — only a national identification number — to use the digital currency. With a large cash economy, this could help alleviate the crippling challenge that the frequent lack of correct change poses for vendors and consumers, Aladekoba says.
What's next: In the U.S., there's a 120-day comment period on the new paper, after which the Fed may issue a follow-up.
- But the ball is effectively in Congress' court: the Fed said unequivocally that it wouldn't move forward on any CBDC development without legislative action granting it authority.
