How to Make the Digital Dollar Less Disruptive

The Federal Reserve is considering ways to blunt any impact on commercial bank deposits if the U.S. government decides to issue a digital dollar, according to the central bank’s vice chair.

While some decline is unavoidable, the Fed is looking at ways to avoid a significant decrease in deposits, Lael Brainard said Thursday. Industry lobbying groups including the American Bankers Association (ABA) and the Bank Policy Institute (BPI) have asked the government to hold off on launching a central bank digital currency, or CBDC, on concerns that it’d sap money from the banking system and make credit less available to businesses and households.

“There’s certainly a lot of consideration that we’ve been doing in terms of thinking about potential implications for deposits,” Brainard told lawmakers on the House Financial Services Committee. “Any future evolution of the financial system with digitalization is going to lead to some diminished use of cash and some diminution of bank deposits.”

That shift is already occurring, even absent a U.S. CBDC, as people increasingly migrate to mobile payment apps, she pointed out. Still there are ways the U.S. government could design a CBDC to limit the impact, Brainard said. For instance, the government could set limits on the amount of CBDC holdings a person could have in an account. The ABA and BPI have said that’s unlikely to help much.

The government could also avoid paying interest on CBDC accounts, which would give bank deposits a competitive edge, Brainard said. “There are a variety of ways people have been thinking about designing these so that they wouldn’t diminish deposits in the banking system,” she added.

The Fed is currently reviewing comments it received on a discussion paper it released in January, laying out the pros and cons of a potential CBDC. The White House said in a March executive order on cryptocurrency policy that it was placing “highest urgency” on research and possible development of a U.S. digital dollar.

The central bank hasn’t decided whether to issue a U.S. CBDC and has said it doesn’t intend to move forward without clear support from the executive branch and from Congress.

See also:

• Why Business Transactions Are Trudging Toward Digital Denomination
• China Is Leading the Digital Currency Race
• Would a U.S. CBDC Impact MMFs?
• Trendspotting: FX
• Research and Development, and Developing a Point of View

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