Even if the Fed decides to move forward with the idea of an American CBDC, the prospect of an American CBDC should worry the crypto industry as it's the first step towards issuing a central bank digital currency.
The report says that the introduction of a CBDC would be a significant innovation in American money, but it remains cautious about the potential problems it might bring on the country's monetary system.
It presents a CBDC as a way to increase financial inclusion, increase access to digital payment services, reduce transaction fees, and speed up remittances and cross-border transactions.
These benefits would come at a cost few seem willing to pay, if you look deeper into the report.
The first step towards an American CBDC is very scary.
Federal Reserve policymakers and staff have been studying CBDCs for several years, but it wasn't until 2020 that they became more vocal about the possibility of a digital dollar. China statewide effort to test and implement the digital yuan has certainly sped up the Fed's research into CBDCs, but it isn't the only factor that has brought us closer to a digital dollar.
There has been more aggressive research into CBDCs due to the increase in adoption of cryptocurrencies in the U.S. and globally. In its report, the Fed notes that cryptocurrencies have not been widely adopted as a means of payment in the U.S. The report fails to realize the scope of adoption of cryptocurrencies as a hedge against fiat currencies.
The adoption of stable coins has seen a lot of the country, according to the President's Working Group on Financial Markets PWG. In a joint report with the Federal Deposit Insurance Corporation FDIC and the Office of the Comptroller of the Currency OCC, the PWG noted that stablecoins could disrupt the current payment system and lead to a concentration of economic power.
The Fed was looking at the potential of CBDCs because of a lack of regulation in the space and the difficulty of implementing such regulation.
If a U.S. CBDC was created, it would have to be privacy-protected, intermediated, widely transferable and identity-verified, according to the report.
Privacy-protected seems to bear little weight with the Federal Reserve, which noted that a CBDC would need to strike an appropriate balance between privacy and transparency to deter criminal activity.
An intermediated and identity-verified digital dollar would require the Fed to expand its role in the financial system and the U.S. economy. The Fed would employ the private sector to handle CBDC holdings and payments, as well as verification, in order to avoid this.
Bringing third-party, private sector companies into CBDCs opens up Pandora's box of potential problems, most notably corruption, centralization and censorship.
The report doesn't recognize any of these issues. It notes that a CBDC would dramatically change the structure of the U.S. financial system, decreasing the dominance of private banks and increasing the possibility of bank runs.
The report also notes that a CBDC could affect interest rate control by altering the supply of reserves in the banking system. A CBDC could be a burden on borrowers, given the fact that the Fed noted that banks currently rely on deposits to fund most of their loans.
The Fed's solution to this problem is very scary.
According to the report, a CBDC could be designed in a way that would allow the Fed to limit the amount of digital dollars an end-user could hold or limit the amount of CBDC an end-user could accumulate over short periods.
This design choice brings the proposed CBDC closer to financial innovation and closer to a dystopian tool for control than a hard cap on the amount of money it can hold.
One of the benefits of a CBDC is that it will give governments the ability to collect taxes from citizens. This functionality would allow it to make benefit payments to citizens, something it touts as a significant improvement to the current payment model.
If further research shows that the potential benefits outweigh the downside risks, the Fed will only take steps toward developing a CBDC. The Fed welcomed the public to comment on questions regarding the functionalities and policy considerations of a CBDC, which can be submitted using this form.
A digital dollar is still a possibility, despite the report noting that a CBDC couldn't be issued without the support of both the executive branch and Congress.
A CBDC outlined above would bring an end to privacy for U.S. citizens. A CBDC is an extremely powerful, endlessly programmable weapon against financial freedom that should never reach the hands of an institution like the Federal Reserve.