Markets Wired

As Prepared for Delivery

Thank you to the organizers of today’s workshop for inviting me to speak about next steps to the future of money and payments.^[1]

Roughly one year ago, President Biden signed an Executive Order (EO) calling for a government-wide approach to the responsible development of digital assets.^[2] The goal of the EO is to promote responsible innovation, while also mitigating risks to users, the financial system, the economy, and national security.  In response, Treasury prepared reports on the future of money and payments; current use cases of crypto-assets and their effects on consumers, investors, and businesses; and an action plan to mitigate the illicit finance risks of these assets.  The Financial Stability Oversight Council published a report on the financial stability risks of digital assets and identified regulatory gaps.

Failures of large crypto firms, runs on stablecoins, and substantial investor losses in the past   year confirmed many of the concerns raised in the reports. Commingling of customer and firm assets, conflicts of interests, and lack of risk management and other standards contributed to these episodes.  These developments reinforce the recommendations that were made for regulators to vigorously enforce existing laws to protect consumers and prevent use of crypto assets for illicit finance, as well as to continuously monitor whether emerging products or services require new regulations.  In addition, the reports recommended for Congress to expand regulators’ authorities where gaps have been identified, including with respect to regulation of stablecoins. 

My remarks today will focus on the future of money and payments and, more specifically, on central bank digital currency (CBDC).  Central banks are at the heart of the global monetary system.  Central bank money anchors the value of commercial bank money, and provides a risk-free asset for settling interbank transactions.  Central bank payment systems serve as the backbone for payment systems more generally.  Given the central bank’s key roles, changes in the design of central bank money and payments are likely to have profound implications for financial health of consumers and the economy.

CBDC is one of several options for upgrading the legacy capabilities of central bank money.  Another is real time payment systems:  The Federal Reserve has indicated that it expects to launch the FedNow Service this year, which will be designed to allow for near-instantaneous retail payments on a 24x7x365 basis, using an existing form of central bank money (i.e., central bank reserves) as an interbank settlement asset.  In contrast, a CBDC would involve both a new form of central bank money and, potentially, a new set of payment rails.  Both real time payment systems and CBDCs present opportunities to build a more efficient, competitive, and inclusive U.S. payment system. 

In the United States, policymakers are continuing to deliberate about whether to have a CBDC, and if so, what form it would take.  The Fed has also emphasized that it would only issue a CBDC with the support of the executive branch and Congress, and more broadly the public.^[3] Even as policy deliberations continue, the Fed is conducting technology research and experimentation to inform design choices so that it is positioned to issue a CBDC if it were determined to be in the national interest. 

With that frame in mind, let me describe the steps we are taking to advance work on policy issues posed by the prospect of a U.S. CBDC, and to engage internationally to support responsible development of global CBDCs.

Advancing Work on Policy Issues for a U.S. CBDC

Treasury’s Report on the Future of Money and Payments^[4] called for a Treasury-led interagency working group (CBDC Working Group) to advance work on CBDC.  One of the central tasks for the CBDC Working Group is to complement the Fed’s work by considering the implications of a U.S. CBDC for policy objectives for which a broader Administration perspective is helpful.  To give you a sense of how we are pursuing this work, I will describe our approach to thinking about CBDC options, the policy questions we are attempting to answer, and the kinds of recommendations we hope to develop. 

CBDC Options

As a digital form of a country’s currency, a CBDC would likely have three core features.  First, it would be legal tender.  Second, it would be convertible one-for-one into other forms of central bank money—reserve balances or cash.  Third, it would clear and settle nearly instantly.^[5]  Beyond these core features, creating a CBDC would involve many design choices.  An especially important decision is whether to have a wholesale CBDC, a retail CBDC or, both.  In characterizing wholesale and retail options, we have found it useful to think about how each would differ from central bank reserves – in particular, whether the core differences relate to “technological features” or “access features,” i.e., the users that would be able to access the CBDC.

For wholesale CBDC, the basic difference from central bank reserves would relate to technology.  For example, a wholesale CBDC could be a tokenized central bank lability, which potentially could support around-the-clock payment activity, atomic settlement of transactions, certain types of programmability, or other benefits.  By contrast, the access-related features of a wholesale CBDC may or may not differ from central bank reserves.  A wholesale CBDC could be accessible to financial institutions that are currently eligible for central bank accounts, or to a wider range of financial intermediaries.  But while policymakers might consider granting access to a wholesale CBDC to institutions not currently eligible for central bank accounts, that decision would be an independent choice, rather than a necessary consequence of having a wholesale CBDC. 

Of course, technological differences between a wholesale CBDC and reserves could still have significant practical implications.  For example, a wholesale CBDC could support interbank settlement among commercial banks if they were to issue tokenized deposits, or provide a risk-free settlement asset for tokenized securities transactions.  A wholesale CBDC might also be used as a backing asset for stablecoins, which could make it easier to transfer value among stablecoins,  in addition to supporting greater interoperability and choice.   Depending on design, a wholesale CBDC may also enable more efficient cross-border payments by increasing the speed of settlement or through participation in new multilateral platforms for cross-border payments.^[6]  At the same time, some of the potential benefits of a wholesale CBDC might also be possible through upgrades to existing central bank payment systems, including interlinking systems in different jurisdictions or new multilateral platforms based on these systems.^[7] 

With retail CBDC, by contrast, the most important difference from central bank reserves is related to access features, not technology features.  Unlike central bank reserves,  a retail CBDC would be a digital liability of the central bank that is accessible to the general public.   In its CBDC discussion paper, the Fed has stated that a potential U.S. CBDC, if one were created, would best serve the United States by being “intermediated,” meaning that the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments.^[8]  In terms of technology, a retail CBDC might involve a different architecture compared to a CBDC that is intended solely for wholesale use. 

A retail CBDC could contribute to a more competitive and innovative payment system; support financial inclusion; and help preserve the singleness of the currency.^[9]  The extent to which a retail CBDC would promote these objectives would depend on many further design decisions, including decisions about the range of intermediaries that would act as service providers in the CBDC ecosystem, and the requirements to which those intermediaries would be subject.  There are also risks of a retail CBDC, including the potential for runs into a retail CBDC that could destabilize private sector lending during stress periods.

Policy Questions for the CBDC working group

As I mentioned a few moments ago, the CBDC Working Group is intended to complement the Fed’s efforts by considering the implications of a U.S. CBDC for policy objectives for which a broader Administration perspective is helpful.  These objectives fall into a few main areas.

The first set of objectives relate to global financial leadership, including the global role of the U.S. dollar.  This role confers both economic and strategic benefits on the United States.  Economic benefits include lower transaction and borrowing costs for U.S. households, businesses and government, while strategic benefits include influence over the architecture of the international financial system.^[10]  In my view, global demand for the dollar stems from structural factors – such as our respect for the rule of law, the strength of our economy, and the depth, breadth, and openness of U.S. financial markets – that are fundamentally independent of whether the United States has a CBDC.  Nevertheless, we are thinking about whether a U.S. CBDC, to the extent it has functionality that traditional forms of central bank money lack, could help to preserve the dollar’s global role.  We are also thinking about whether a U.S. CBDC could help reduce undesirable frictions in cross-border payments or other activities.

The second set of objectives relate to national security.  The United States uses sanctions and other financial measures to address national security threats and deny criminals and other illicit actors’ access to the U.S. and international financial system.  The effectiveness of these tools rests in part on the strength and centrality of the U.S. financial system and the role of the dollar.  Some have suggested that the development of foreign CBDCs, including multi-CBDC platforms, could diminish the use of the dollar and effectiveness of our tools in this space.  In addition, the U.S. and the global financial system benefit from secure and resilient payment systems that have strong cyber security protections and protect user data.  Yet new payment systems, including foreign CBDCs, may be designed without appropriate consideration of cybersecurity and resilience measures.  We are assessing the magnitude of these and other potential national security risks, and whether a U.S. CBDC or other tools could help to counter these risks.

The third set of objectives relate to privacy, illicit finance, and financial inclusion.  A U.S. CBDC would need to both protect the privacy of users and minimize the risk of illicit financial transactions.  In addition, given that the United States has the largest unbanked population among G-7 countries on a per capita basis and that payments are expensive for some users, a potential U.S. CBDC should be evaluated on whether it can promote inclusion and equity in the delivery of financial services. 

Across these three interests – global financial leadership; national security; and privacy, illicit finance, and inclusion – CBDC design choices are likely to involve trade-offs.  As an example, one way of reconciling privacy with illicit finance concerns in a retail CBDC might be to have a tiered structure in which less data are collected for small dollar transactions or small volume accounts.  But limits on the amount or number of transactions could make a retail CBDC less useful to end-users.^[11]  This suggests a three-way trade-off among privacy, countering illicit finance goals, and inclusion.  The CBDC Working Group will work to identify trade-offs and possible ways of reconciling objectives, including looking ahead to possible technological advances that could reduce the size of any trade-offs.

Next steps for U.S. CBDC

In the coming months, leaders from Treasury, the Federal Reserve, and White House offices, including the Council of Economic Advisors, National Economic Council, National Security Council, and Office of Science and Technology Policy, will begin to meet regularly to discuss a possible CDBC and other payments innovations.  To support these discussions, the CBDC Working Group is developing an initial set of findings and recommendations.  These may relate to whether a U.S. CBDC would help to advance the policy objectives described above; the features that a U.S. CBDC would need to advance these objectives; options for resolving CBDC design trade-offs; and areas where additional technological R&D would be useful.  Full consideration of these issues for a possible CBDC – wholesale, retail, or both – will take some time to complete, but the Working Group plans to provide interim public updates.  Also, as recommended in Treasury’s Report on the Future of Money and Payments, the Federal Reserve is encouraged to provide periodic public updates as it continues its research and technical experimentation on CBDCs.

Advancing Work on International Engagement

In addition to advancing work on the policy implications of a U.S. CBDC, another purpose of the CBDC Working Group is to engage with allies and partners to promote shared learning and responsible development of CBDCs. 

As others have observed, jurisdictions around the world are exploring CBDCs.  According to the Atlantic Council’s tracker, 114 countries, representing over 95 percent of global GDP, are exploring CBDC.  11 countries have fully launched CBDCs, while central banks in other major jurisdictions are researching and experimenting with CBDCs, with some at a fairly advanced stage.  The Bank of England (BOE) and HM Treasury (HMT) recently published a consultation paper assessing the case for a retail CBDC and outlining a proposed technological model.^[12]  BOE and HMT now are entering the design phase of their work, estimated to take two to three years, after which the BOE and the UK government will decide whether to build a “digital pound.”  In addition, there are multiple cross-border CBDC pilots, which involve central banks, international organizations such as the Bank for International Settlements, and private financial institutions. 

Regardless of whether the United States decides to adopt a CBDC, the United States has an important set of interests in this work.   We have an interest in ensuring that CBDCs interact safely and efficiently with the existing financial infrastructure; that they support financial stability and the integrity of the international financial system; that global payment systems are efficient, innovative, competitive, secure, and resilient; and that global payments systems continue to reflect broader shared democratic values, like openness, privacy, accessibility, and accountability to the communities that rely upon them.

To inform global efforts to explore CBDCs, we plan to make contributions in two critical areas: international standard-setting, and technical expertise.

Engagement on standards

International standards help promote efficient and sound domestic financial systems and global financial stability.  They are both regulatory, like those standards developed by the Committee on Payments and Market Infrastructure, and technical, like those created at the International Organization for Standardization.  With respect to payments, these standards support technical, business practice, and legal and regulatory interoperability and alignment.  While CBDC-related technical standards such as digital identifiers and messaging formats may sound esoteric, they have important policy implications such as for privacy.  Governance standards, including those linked to participation in cross-border CBDC arrangements, are also critically important.   

Treasury is working closely with our colleagues at the Fed and in other parts of the U.S. government to ensure that U.S. interests are being effectively represented in standard-setting processes.  Fortunately, we are not starting from a blank slate.  While CBDCs are themselves new, there are longstanding standards for financial activity, many of which can apply to CBDC no less than they do to legacy systems.  Global anti-money laundering and counter-terrorist financing standards, as set by the Financial Action Task Force, would apply to CBDCs, and the U.S. government is working bilaterally and multilaterally to encourage countries to apply and enforce the standards.  We are also actively working with allies and partners to identify where new standards may be needed.  Our efforts to shape international standards are a key part of the framework for international engagement on digital assets that Treasury delivered to the President in July pursuant to the Digital Assets EO. 

As we develop standards for CBDCs, we recognize that countries may make different design choices based on their policy goals, legacy payment systems, and other differences in national facts and circumstances.^[13]  Especially in the context of a new technology, there are opportunities to learn from a diverse set of approaches.  At the same time, there are significant benefits to supporting the interoperability of new payment systems, including CBDCs.^[14]  We will continue to work with our allies and partners during our exploration and development of CBDCs with these considerations in mind.

Sharing technology and technical expertise

In terms of sharing technology and technical expertise with other countries that are developing CBDCs, the Federal Reserve plays a key role.  This reflects the Federal Reserve’s expertise in developing and running payment systems, as well as the Fed’s existing relationships with central banks around the world.  Others also have important roles.  The National Science Foundation and the White House Office of Science and Technology Policy (OSTP) are leading an interagency process to develop a national R&D agenda for digital assets, including CBDCs.  As part of this process, OSTP recently published a request for information that, among other things, sought feedback on technologies that could protect the privacy of CBDC users while also preventing the CBDC from being used by bad actors.  As with other new technological innovations, beneficial innovations with respect to CBDC are more likely if we harness the expertise that exists across governments, universities, and the private sector.

Conclusion

In summary, U.S. policymakers are evaluating whether a U.S. CBDC is in the national interest.  As part of this effort, Treasury is leading an interagency CBDC Working Group to support the Fed and develop recommendations related to policy objectives for which a broader Administration perspective is helpful: global financial leadership; national security; and privacy, illicit finance, and inclusion.  Even as these deliberations continue, we recognize the importance of helping to shape global CBDC outcomes by actively participating in global standard-setting initiatives and by sharing technology and technical expertise with other jurisdictions that are developing CBDCs.

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