Treasury Lends Tacit Support to Digital Dollar

One striking aspect of the Treasury Department’s Friday (Sept. 16) report, “The Future of Money and Payments” is how little space it dedicated to address banks’ fears about being disintermediated by a central bank digital currency (CBDC).

On the one hand, it didn’t really break more new ground than the Federal Reserve’s January report, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.” And it certainly didn’t suggest that Treasury officials were even close to deciding about whether they’d throw their full backing into the launch of a digital dollar — or what a U.S. CBDC would look like.

Read more: Fed’s Digital Dollar Report Finally Drops, With More Questions Than Answers

But a great deal of the future of money whitepaper the Treasury Department delivered to the President Joe Biden administration was nonetheless dedicated the topic, and National Economic Council Director Brian Deese and National Security Advisor Jake Sullivan did make clear that the Fed’s policy of working to build a CBDC before the decision whether to launch one is a top priority.

See also: Digital Dollar Debate Shifts as Central Banks Embrace CBDCs

That isn’t to say that the Friday (Sept. 16) report downplays banks’ concerns that a CBDC risks cutting off banks’ access to retail customers, who would have a strong incentive to keep funds in a currency that doesn’t risk being lost of a bank fails, particularly in times of financial crisis.

Read also: Treasury Crypto Reports Long on Detail, Short on Urgency

“Banks are major providers of credit to households and businesses,” the report stated. “If [a] CBDC reduces bank deposits, banks may have a more limited ability to make loans, in addition to potential increases in bank liquidity risk.”

That strikes a distinctly different tone than the Bank Policy Institute’s May response to the Fed, which said that a CBDC would “undermine the commercial banking system in the United States and severely constrict the availability of credit to the economy.”

See more: Regulators, Banks at Odds Over CBDCs

One solution, according to the future of money report, would be to limit the project to a wholesale CBDC usable only for back-end transactions — and then only to “institutions that currently have access to reserve balances.”

It added, however, that “the eventual effects on banking intermediation are uncertain.”

Four Goals, Four Recommendations

But broadly, the report broke the question of launching a CBDC down into four policy considerations and four recommendations. On the policy side, they cover:

• Payment efficiency and innovation. This includes issues like the speed and cost of the system, which should provide instant settlement finality, and whether it would be possible to add what amount to self-executing smart contracts to allow preprogrammed transactions. The payments system’s resilience, ranging from cybersecurity to offline capability during a disaster, would be another factor, as would cross-border capabilities. Read more: Instant Payments, Stablecoins Sit Atop Treasury Dept’s Innovation Agenda
• U.S. global financial leadership. This came down to supporting the dollar’s position as the world’s reserve currency, something that the report said would only be a long-term issue due the U.S. economic strength, strong institutions and legal system, deep and liquid financial markets, and other factors. The ability to support sanctions came under this heading, as did the need for a digital dollar to “prioritize privacy and minimize the amount of transaction and personally identifiable information collected by the central bank.”
• Advancing financial inclusion. An issue that the Biden administration and Treasury Department came back to over and over in the three reports released Friday, it covers issues like greater access of the unbanked and underbanked to financial services and inclusion, and dealing with the way lack of technology — mainly meaning smartphones — could be dealt with.
• Minimizing risks. This was the broadest topic, covering the singleness of U.S. currency, how a CBDC would act in times of financial stress, and whether a race to a digital dollar that could undermine credit creation could be avoided — banks’ biggest fear.

To accomplish that, the report made four broad policy recommendations:

• Keep working of the design of a CBDC while the decision of whether to launch one is being made.
• Encourage the use and growth of existing and new instant payments systems.
• Develop a framework for regulating a broader payments market while supporting innovation.
• Prioritize improvement in the speed, cost and efficiency of cross-border payments.

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