US Fed economists are exploring the “intrinsic” value drivers of CBDCs

The Federal Reserve has broadened its research on central bank digital currencies, or CBDCs, in a new review that was posted to its website Monday.

In a report titled, “Central Bank Digital Currency: A Literature Review,” Fed economists Francesca Carapella and Jean Flemming compiled research exploring the potential impact of a digital dollar on commercial banking and monetary policy. The review provides a theoretical underpinning for understanding how CBDCs could influence consumer adoption and financial stability.

The authors write:

“From a theoretical standpoint, the introduction of a central bank digital currency (CBDC) raises long-standing questions relating to the provision of public and private money […] and the ability of the central bank to use CBDC as a means for transmitting monetary policy directly to households.”

A literature review is essentially an environmental scan on a particular topic that is used to justify the need for additional research. The Fed’s report identified the “intrinsic features of CBDC” as the most important research question to tackle moving forward: 

“As with any new literature, many questions remain. We believe the most crucial question is which intrinsic features of CBDC as a means of payment and a store of value are important for households’ portfolio choices as to which monies to use.”

On Aug. 13, the Fed released an original research paper comparing CBDCs to other payment methods. Authors Paul Wong and Jesse Leigh Maniff concluded that a CBDC would “never be able to fully replicate” all the features of cash and real-time gross settlement (RTGS) services, but that it could enhance both modes of payment. 

Although CBDCs have been described as the central bank “arms race” of the decade, the Fed is in no rush to adopt the so-called digital dollar. Fed Chair Jerome Powell said last month that a CBDC is unlikely to be rolled out anytime soon because the U.S. already has a “safe and active dynamic domestic payment system.”

Powell emphasized that resolving risks to privacy and security is more important than having a first-mover advantage in this space.

China, meanwhile, is taking a far more active approach in rolling out its digital currency. Last month, the People’s Bank of China concluded its largest pilot project on the digital yuan by distributing online wallets to 50,000 randomly selected consumers.