Money and Payments: The US Dollar in the Age of Digital Transformation


Friday, January 21, 2022  / 10:57 AM / by Federal Reserve / Header Image Credit: ZAWYA

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Executive Summary

For a nation's economy to function effectively, its citizens must have confidence in its money and payment services. The Federal Reserve, as the nation's central bank, works to maintain the public's confidence by fostering monetary stability, financial stability, and a safe and efficient payment system.


This paper is the first step in a public discussion between the Federal Reserve and stakeholders about central bank digital currencies (CBDCs). For the purpose of this paper, a CBDC is defined as a digital liability of a central bank that is widely available to the general public. In this respect, it is analogous to a digital form of paper money. The paper has been designed to foster a broad and transparent public dialogue about CBDCs in general, and about the potential benefits and risks of a U.S. CBDC. The paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a U.S. CBDC.



Payment technologies offered by the Federal Reserve have evolved over time. In the Federal Reserve's early years, it established a national check-clearing system and used dedicated telegraph wires to transfer funds between banks. In the 1970s, the Federal Reserve developed an automated clearinghouse (ACH) system that offered an electronic alternative to paper checks. And in 2019, the Federal Reserve committed to building the FedNowSM Service, which will provide real-time, around-the-clock interbank payments, every day of the year.


Recent technological advances have ushered in a wave of new private-sector financial products and services, including digital wallets, mobile payment apps, and new digital assets such as cryptocurrencies and stablecoins. These technological advances have also led central banks around the globe to explore the potential benefits and risks of issuing a CBDC.


Federal Reserve policymakers and staff have studied CBDC closely for several years, guided by an understanding that any U.S. CBDC should, among other things

  • provide benefits to households, businesses, and the overall economy that exceed any costs and risks;
  • yield such benefits more effectively than alternative methods;
  • complement, rather than replace, current forms of money and methods for providing financial services;
  • protect consumer privacy;
  • protect against criminal activity; and
  • have broad support from key stakeholders.


The Federal Reserve is committed to soliciting and reviewing a wide range of views as it continues to study whether a U.S. CBDC would be appropriate. Irrespective of any ultimate conclusion, Federal Reserve staff will continue to play an active role in developing international standards for CBDCs.


Key Topics

This paper begins with a discussion of existing forms of money; the current state of the U.S. payment system and its relative strengths and challenges; and the various digital assets that have emerged in recent years, including stablecoins and other cryptocurrencies. The paper then turns to CBDC, focusing on its uses and functions; potential benefits and risks; and related policy considerations.


The Federal Reserve's initial analysis suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified. As noted above, however, the paper is not intended to advance a specific policy outcome and takes no position on the ultimate desirability of a U.S. CBDC.

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Public Outreach

The Federal Reserve will seek input from a wide range of stakeholders that might use a CBDC or be affected by its introduction. This paper concludes with a request for public comment, the first step in a broad consultation that will also include targeted outreach and public forums.



The Federal Reserve is exploring the implications of, and options for, issuing a CBDC. For the purpose of this paper, a CBDC is defined as a digital liability of the Federal Reserve that is widely available to the general public. While Americans have long held money predominantly in digital form for example in bank accounts recorded as computer entries on commercial bank ledgers a CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank.


A CBDC could potentially offer a range of benefits. For example, it could provide households and businesses a convenient, electronic form of central bank money, with the safety and liquidity that would entail; give entrepreneurs a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments); and expand consumer access to the financial system. A CBDC could also pose certain risks and would raise a variety of important policy questions, including how it might affect the financial-sector market structure, the cost and availability of credit, the safety and stability of the financial system, and the efficacy of monetary policy.


The introduction of a CBDC would represent a highly significant innovation in American money. Accordingly, broad consultation with the general public and key stakeholders is essential. This paper is the first step in such a conversation. It describes the economic context for a CBDC, key policy considerations, and the potential risks and benefits of a U.S. CBDC. It also solicits feedback from all interested parties.


The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.


The Existing Forms of Money

Money serves as a means of payment, a store of value, and a unit of account. In the United States, money takes multiple forms: 

  • Central bank money is a liability of the central bank. In the United States, central bank money comes in the form of physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve.
  • Commercial bank money is the digital form of money that is most commonly used by the public. Commercial bank money is held in accounts at commercial banks.
  • Nonbank money is digital money held as balances at nonbank financial service providers. These firms typically conduct balance transfers on their own books using a range of technologies, including mobile apps.


The different types of money carry different amounts of credit and liquidity risk. Commercial bank money has very little credit or liquidity risk due to federal deposit insurance, the supervision and regulation of commercial banks, and commercial banks' access to central bank liquidity. Nonbank money lacks the full range of protections of commercial bank money and therefore generally carries more credit and liquidity risk.


Central bank money carries neither credit nor liquidity risk, and is therefore considered the safest form of money. Central bank money serves as the foundation of the financial system and the overall economy. Commercial bank money and nonbank money are denominated in the same units as central bank money (i.e., U.S. dollars) and are intended to be convertible into central bank money


The Payment System

The U.S. payment system connects a broad range of financial institutions, households, and businesses. Most payments in the United States rely on interbank payment services such as the ACH network or wire-transfer systems to move money from a sender's account at one bank to a recipient's account at another bank.4 Accordingly, interbank payment services are critical to the functioning and stability of the financial system and the economy more broadly. The firms that operate interbank payment services are subject to federal supervision, and systemically important payment firms are subject to heightened supervision and regulation.


Interbank payment systems may initially settle in commercial bank money, or in central bank money, depending on their design. However, because central bank money has no credit or liquidity risk, central bank payment systems tend to underpin interbank payments and serve as the backbone of the broader payment system. The use of central bank money to settle interbank payments promotes financial stability because it eliminates credit and liquidity risk in systemically important payment systems.


Recent Improvements to the Payment System

Recent improvements to the U.S. payment system have focused on making payments faster, cheaper, more convenient, and more accessible. “Instant” payments have been a particularly active field of private- and public-sector innovation. For example, The Clearing House has developed the RTP network, which is a real-time interbank payment system for lower-value payments. The Federal Reserve is also building a new interbank settlement service for instant payments, the FedNow Service, scheduled to debut in 2023. These instant payment services will enable commercial banks to provide payment services to households and businesses around the clock, every day of the year, with recipients gaining immediate access to transferred funds. The growth of these instant payment services also could reduce the costs and fees associated with certain types of payments.


In addition, a host of consumer-focused services that are accessible through mobile devices have made digital payments faster and more convenient. Some of these new payment services, however, could pose financial stability, payment system integrity, and other risks. For example, if the growth of nonbank payment services were to cause a large-scale shift of money from commercial banks to nonbanks, the resulting lack of equivalent protections that come with commercial bank money could introduce run risk or other instabilities to the financial system.


Remaining Challenges for the Payment System

While the existing U.S. payment system is generally effective and efficient, certain challenges remain. In particular, a significant number of Americans currently lack access to digital banking and payment services. Additionally, some payments especially cross-border payments remain slow and costly.

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Digital financial services and commercial bank money have become more accessible over time, and increasing numbers of Americans have opened and maintain bank accounts.6 Nonetheless, more than 7 million or over 5 percent of U.S. households remain unbanked. Nearly 20 percent more have bank accounts, but still rely on more costly financial services such as money orders, check-cashing services, and payday loans.


A variety of public- and private-sector efforts are underway to support financial inclusion. For example, the private-sector Bank On initiative promotes low-cost, low-risk consumer checking accounts.The Federal Reserve Bank of Atlanta has also formed a Special Committee on Payments Inclusion, a public-private sector collaboration that is working to promote access to digital payments for vulnerable populations.


Cross-border payments currently face a number of challenges, including slow settlement, high fees, and limited accessibility. The sources of these frictions include the mechanics of currency exchange, variations in different countries' legal regimes and technological infrastructure, timezone complications, and coordination problems among intermediaries, including correspondent banks and nonbank financial service providers. Regulatory requirements related to money laundering and other illicit activities introduce further complications. Finally, certain destination countries for cross-border payments have limited competition, allowing existing providers to charge high fees.


As of the second quarter of 2021, the average cost of sending a remittance from the United States to other countries was 5.41 percent of the notional value of the transaction.11 These high costs have a significant impact on households that make remittance transactions. High costs for cross-border payments also affect smaller businesses that make infrequent global payments to suppliers. Reducing these costs could benefit economic growth, enhance global commerce, improve international remittances, and reduce inequality.


Digital Assets

Technological innovation has recently ushered in a wave of digital assets with money-like characteristics. These “cryptocurrencies” arose from a combination of cryptographic and distributedledger technologies, which together provide a foundation for decentralized, peer-to-peer payments.


Cryptocurrencies have not been widely adopted as a means of payment in the United States. They remain subject to extreme price volatility, are difficult to use without service providers, and have severe limitations on transaction throughput.13 Many cryptocurrencies also come with a significant energy footprint14 and make consumers vulnerable to loss, theft, and fraud.


Stablecoins are a more recent incarnation of cryptocurrency that peg their value to one or more assets, such as a sovereign currency or commodity. Stablecoins pegged to the U.S. dollar are predominantly used today to facilitate trading of other digital assets, but many firms are exploring ways to promote stablecoins as a widespread means of payment.


A full discussion of stablecoin arrangements is outside the scope of this paper. However, the President's Working Group on Financial Markets (PWG),along with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), recently published a report on payment stablecoins.18 The PWG report notes that well-designed and appropriately regulated stablecoins could potentially support faster, more efficient, and more inclusive payment options. The PWG report also notes, however, that the potential for the increased use of stablecoins as a means of payment raises a range of concerns related to the potential for destabilizing runs, disruptions in the payment system, and concentration of economic power. The PWG report highlights gaps in the authority of regulators to reduce these risks.

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To address the risks of payment stablecoins, the PWG report recommends that Congress act promptly to enact legislation that would ensure payment stablecoins and payment stablecoin arrangements are subject to a consistent and comprehensive federal regulatory framework. Such legislation would complement existing authorities regarding market integrity, investor protection, and illicit finance.


Central Bank Digital Currency

The Federal Reserve is considering how a CBDC might fit into the U.S. money and payments landscape. A crucial test for a potential CBDC is whether it would prove superior to other methods that might address issues of concern outlined in this paper.


As noted above, for the purposes of this discussion paper, CBDC is defined as a digital liability of the Federal Reserve that is widely available to the general public.19 Today, Federal Reserve notes (i.e., physical currency) are the only type of central bank money available to the general public. Like existing forms of commercial bank money and nonbank money, a CBDC would enable the general public to make digital payments. As a liability of the Federal Reserve, however, a CBDC would not require mechanisms like deposit insurance to maintain public confidence, nor would a CBDC depend on backing by an underlying asset pool to maintain its value. A CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk.


The Federal Reserve will continue to explore a wide range of design options for a CBDC. While no decisions have been made on whether to pursue a CBDC, analysis to date suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified.


Privacy-protected: Protecting consumer privacy is critical. Any CBDC would need to strike an appropriate balance, however, between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity.


Intermediated: The Federal Reserve Act does not authorize direct Federal Reserve accounts for individuals, and such accounts would represent a significant expansion of the Federal Reserve's role in the financial system and the economy. Under an intermediated model, the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments. Potential intermediaries could include commercial banks and regulated nonbank financial service providers, and would operate in an open market for CBDC services. Although commercial banks and nonbanks would offer services to individuals to manage their CBDC holdings and payments, the CBDC itself would be a liability of the Federal Reserve. An intermediated model would facilitate the use of the private sector's existing privacy and identity-management frameworks; leverage the private sector's ability to innovate; and reduce the prospects for destabilizing disruptions to the well-functioning U.S. financial system.


Transferable: For a CBDC to serve as a widely accessible means of payment, it would need to be readily transferable between customers of different intermediaries. The ability to transfer value seamlessly between different intermediaries makes the payment system more efficient by allowing money to move freely throughout the economy.


Identity-verified: Financial institutions in the United States are subject to robust rules that are designed to combat money laundering and the financing of terrorism. A CBDC would need to be designed to comply with these rules. In practice, this would mean that a CBDC intermediary would need to verify the identity of a person accessing CBDC, just as banks and other financial institutions currently verify the identities of their customers.


Uses and Functions of a CBDC

CBDC transactions would need to be final and completed in real time, allowing users to make payments to one another using a risk-free asset. Individuals, businesses, and governments could potentially use a CBDC to make basic purchases of goods and services or pay bills, and governments could use a CBDC to collect taxes or make benefit payments directly to citizens. Additionally, a CBDC could potentially be programmed to, for example, deliver payments at certain times.


Potential Benefits of a CBDC

A CBDC could potentially serve as a new foundation for the payment system and a bridge between different payment services, both legacy and new. It could also maintain the centrality of safe and trusted central bank money in a rapidly digitizing economy.


Safely Meet Future Needs and Demands for Payment Services

A U.S. CBDC would offer the general public broad access to digital money that is free from credit risk and liquidity risk. As such, it could provide a safe foundation for private-sector innovations to meet current and future needs and demands for payment services. All options for private digital money, including stablecoins and other cryptocurrencies, require mechanisms to reduce liquidity risk and credit risk. But all these mechanisms are imperfect. In our rapidly digitizing economy, the proliferation of private digital money could present risks to both individual users and the financial system as a whole. A U.S. CBDC could mitigate some of these risks while supporting privatesector innovation.


A CBDC might also help to level the playing field in payment innovation for private-sector firms of all sizes. For some smaller firms, the costs and risks of issuing a safe and robust form of private money may be prohibitive. A CBDC could overcome this barrier and allow private-sector innovators to focus on new access services, distribution methods, and related service offerings.


Finally, a CBDC might generate new capabilities to meet the evolving speed and efficiency requirements of the digital economy. As noted above, for example, a CBDC could potentially be programmed to deliver payments at certain times. Additionally, a CBDC could potentially be used to carry out micropayments financial transactions that usually occur online and involve very small sums of money which traditional payment systems are not necessarily designed to facilitate.


Improvements to Cross-Border Payments

CBDC has the potential to streamline cross-border payments by using new technologies, introducing simplified distribution channels, and creating additional opportunities for cross-jurisdictional collaboration and interoperability. Realizing these potential improvements would require significant international coordination to address issues such as common standards and infrastructure, the types of intermediaries that would be able to access any new infrastructure, legal frameworks, preventing illicit transactions, and the cost and timing of implementation.


Support the Dollar's International Role

Another potential benefit of a U.S.-issued CBDC could be to preserve the dominant international role of the U.S. dollar. The dollar is the world's most widely used currency for payments and investments; it also serves as the world's reserve currency. The dollar's international role benefits the United States by, among other things, lowering transaction and borrowing costs for U.S. households, businesses, and government. The dollar's international role also allows the United States to influence standards for the global monetary system.


Today, the dollar is widely used across the globe because of the depth and liquidity of U.S. financial markets, the size and openness of the U.S. economy, and international trust in U.S. institutions and rule of law. It is important, however, to consider the implications of a potential future state in which many foreign countries and currency unions may have introduced CBDCs. Some have suggested that, if these new CBDCs were more attractive than existing forms of the U.S. dollar, global use of the dollar could decrease and a U.S. CBDC might help preserve the international role of the dollar.


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