The Fed Bitcoin Part II

  • Intermediated — this is the most imp piece. The Federal Reserve Act of 1913 does not allow the Fed to maintain individual accounts and so the Fed CDBC will need to be issued by commercial banks and non-bank services (with appropriate supervision from Fed).
  • Identify Verified — Unlike bitcoin, the Fed wants commercial banks to verify identify of each CDBC holder. This will mean the commercial banks and non-bank firms who participate in a Fed CDBC will need to adopt their KYC program to a Fed CDBC.
  • Privacy Protected — While aiming to verify the identify of the CDBC holder at the same time, the Fed CDBC will protect the privacy of individual and so this could take form of data masking.
  • Transferable: For a CBDC to serve as a widely accessible means of payment, the Fed wants it to be readily transferable between customers of different intermediaries effectively eliminating need for inter-bank and wire transfer and cross border remittances.
  • maintain centrality of safe and trusted central bank money in a digitized world — Fed wants the Fed CDBC to be the reserve currency of the world as use of cryptocurrencies increases.
  • offer general public access to money that is free from credit risk and liquidity risk — as a liability of the Fed, there will be no credit and liquidity risk
  • could be programmed to deliver benefit payments to individuals directly — this will be very powerful and as an example stimulus payments could be directly sent to individuals without being intermediated through banks.
  • could be used to collect taxes — similar to above this will have a powerful impact in increasing tax collection and making it more efficient
  • optimize cross border payments — currently average cost of remittance is 5.41 of notional value as noted in the Fed paper and this would be eliminated with a Fed CDBC
  • support dollar dominant international role of USD — the Fed CDBC aims to act against movements of other central banks most specifically China who are trying to promote their CDBC to be adopted across the globe.
  • promote use of digital payments that is safe — the stability and absence of credit and liquidity risk of the Fed coin will offer a stark contrast to risks of stablecoins and the extreme volatility of bitcoin.
  • an interest-bearing CBDC would serve as a substitute for commercial bank money and would reduce the amount of deposits held at commercial banks which would increase funding costs for banks and reduce credit availability or raise credit costs. This poses one of the biggest threat to the funding source of commercial banks and would be a risk that Fed is keen to avoid.
  • an interest bearing CDBC would also serve as an attractive alternative to low risk assets such as money market mutual funds, Treasury bills and raise credit costs for businesses and governments.

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