On Monday, a new review was posted by the United States Federal Research, which showed that it has begun to broaden its research when it comes to know central digital bank currencies, or CBDCs, as they are known. The report was given the name ‘Central Bank Digital Currency: A Literature Review’. Two Fed economists, Jean Flemming and Francesca Carapella, compiled research in this report for exploring the potential impact of a digital dollar on commercial banking and the monetary policy. Thus, the review itself provides a theoretical underpinning for the purpose of understanding how these digital currencies could potentially influence consumer adoption and financial stability.
The authors elaborated that theoretically speaking, the launch of a CBDC, would give rise to a number of questions about the provision of both public and private money. Another important question to ask is whether a central bank has the ability of leveraging the digital dollar as a means of transmitting monetary policy directly to homes. When it comes to a literature review, it is essentially an environmental scan that focuses on one particular topic. The review is then used for either justifying the need for further research or for alternatively disproving the need for it.
According to the report, the Fed made it clear that CBDCs have ‘intrinsic features’ that are the most important aspect which have to be researched going forward. It was highlighted in the review that there are still a lot of questions to be asked, but the most vital ones that have to be studied is how a CBDC can serve as a means of payment and a store of value. The report states that for every household, the most important choice is about the form of money they would use on a day-to-day basis. An original paper had been released by the Fed back on August 13th, which compared the use of CBDCs against other payment methods.
The authors of this paper, Paul Wong and Jesse Leigh Maniff, came to the conclusion that a CBDC could never fully come close to the real-time gross settlement, along with cash services. Instead, they stated that using CBDCs could actually end up enhancing both of these methods of payments. A lot of people have referred to these central bank digital currencies (CBDCs) as the new feature in the financial arms race. However, it appears that the Fed is not very keen on describing it in the same way.
The Fed Chair, Jerome Powell had famously said that it is not possible for CBDCs to be rolled out any time soon. According to him, there is already a very active, dynamic and safe domestic payment system that exists in the United States. From all appearances, it seems that Powell believes the existing financial system would withstand a complete upgrade, considering how it works. In the meanwhile, other countries are already working on developing their own CBDCs. The race is currently being led by China, which has already run testing programs and has made significant progress.