The US Federal Reserve published a paper on central bank digital currencies (CBDC).
The paper's intent is to promote discussion rather than advocate for a policy outcome. Nevertheless, the Fed is the most powerful central bank. Their position on digital currencies provides important insights for anyone interested in cryptocurrency.
Increasing efficiency
The primary motivation for the digital currency is to improve efficiency.
A digital currency is undoubtedly more efficient. It’s easier to pay people and cross-border transactions are cheaper (and faster). It's more traceable than physical money, which means it's easier for the Fed to manage demand and supply. These improvements are a key motivation for the proposal.
Identity verification & intermediaries
Banks will continue to act as intermediaries to verify your identity.
The Fed wants identity verification on transactions to prevent money laundering and other illegal activities. To achieve this, the Fed has to rely on banks because it does not have the infrastructure to verify the identities of every citizen.
Central bank guarantee
The Fed will guarantee the CBDC.
Your $100 bill is guaranteed by the Fed. The Fed also guarantees up to $250,000 for every person who deposits into a bank (as long as the bank is insured). Citizens feel safe due to these guarantees. The Fed plans to do the same for its CBDC.
Closing thoughts
The proposed CBDC may achieve its intended outcome (efficiency) but falls short on other vectors like decentralisation, pseudonymity and removing intermediaries. It will be interesting to see how this develops over 2022.