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Abstract

The next technological disruption in the banking and financial services sector involves the introduction of a central bank digital currency - or a CBDC. What is a CBDC? In the U.S., a CDBC is defined as a digital liability of the U.S. Federal Reserve System that is widely available to the general public. In this article, the benefits of instituting a CBDC in the U.S. will be assessed, followed by the public and private sector challenges of such technology adoption identified and discussed along economic, political, privacy, and security parameters. The final section of the article develops the research agenda, i.e., the questions that need to be addressed in the development of a potential policy framework, charged with ensuring that, if a CBDC is adopted by the U.S. Federal Reserve, there will be an effective public regulation regime implemented that effectively addresses the identified economic, political, privacy, and security concerns.

Keywords

Central Bank digital currency money U.S. federal reserve system digital transactions national payment system

1. Introduction

In the twenty-first century, the global banking and financial services sector has fully embraced the electronic digitization of currency and commercial transactions. For example, bank checking deposits in a modern economy, like the United Kingdom (U.K.), make up over 97% of the amount of currency - or “money” - in circulation (McLeary et al., 2014). Money, in general, is a means of payment, a store of value, and a unit of account (The Federal Reserve System, 2022). Furthermore, money takes multiple forms (The Federal Reserve System, 2022):

Central bank money is a liability of the central bank. In the United States (U.S.), central bank money comes in the form of physical currency issued by the U.S. Federal Reserve System (“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 and is held in accounts of 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.

Digital currency is any means of financial payment that exists in a purely electronic form, with several digital currency systems performing digital versions of money transactions. One well known example is the wire transfer systems that enable the movement of money across borders (Grant, 2022). Another example is the consumer use of credit and debit card transactions, which in tandem with the development of electronic banking apps has moved many historically traditional cash-based transactions into the digital space (Mookerjee, 2021). However, such transactions are expensive and time-consuming, as these payments systems networks (consisting of various banks and financial systems, including the SWIFT payment system¹) involve the use of disparate processing systems (Grant, 2022).

Yet the next technological disruption in the banking and financial services sector involves the introduction of central bank digital currency (CBDC). What is a CBDC? In the U.S., a CDBC is defined as “a digital liability of the Federal Reserve that is widely available to the general public (Mookerjee, 2021: 13).” There are two types of CBDCs: the first, retail CBDCs, designed to be used for daily transactions, much like fiat currencies that are widely available to the public and can enable faster, safer, and cheaper payments; and the second, wholesale CBDCs, that are used for transactions conducted between and among banks and financial institutions (Bank for International Settlement, 2018; Grant, 2022; Stephenson, 2022). The retail concept of a CDBC is the primary focus of discussion and analysis in this article. Moreover, while the utility of CBDC is now being explored across many countries globally (as described subsequently), for the sake of limiting the sphere of research, managing the length of this narrative, as well as considering the author's familiarity with the topic domestically, this article will focus primarily on the political economy and public policy of such efforts now undertaken in the U.S. In today's U.S. economy, however, the only type of central bank money available to the general U.S. public are physical currency, found in the form of Federal Reserve notes (i.e., paper dollars or coin) (Mookerjee, 2021). This situation, however, could be changing in the U.S and in other nations in the near future.

The Atlantic Council's² Geoeconomics Center's latest research shows that in 2023, 130 countries are now exploring a CBDC, representing 98 percent of global GDP (Chhangani, 2023). Also, a new high of 64 countries are now in the advanced phase of exploration (i.e., “launch, pilot, or development”) (Chhangani, 2023). This figure compares to only 35 countries who were considering a CBDC in May 2022 (Atlantic Council, 2023). Notably, the European Central Bank (ECB) announced a preparation phase to lay the foundations for a digital euro, and PetroChina, a Chinese oil and gas company, completed the first international crude oil trade using the digital yuan, or e-CNY (Chhangani, 2023). As of December 2022, all G7 countries had moved into the development stage of a CBDC, and 18 of the G20 countries are now in the advanced stage of CBDC development (Atlantic Council, 2023). However, the U.S. and the U.K. are the two G7 countries that have made the slowest progress on CBDC (De, 2021). In 2023, over 20 countries planned to take significant steps toward piloting a CBDC, including Australia, Brazil, India, South Korea, and Russia (Atlantic Council, 2023).

The seminal 40-page policy paper outlining the existing position of the U.S. government is “Money and Payments: The U.S. Dollar in the Age of Digital Transformation”, published by the U.S. Federal Reserve System (“Federal Reserve’) (2022). “Money and Payments” examined the potential effects of a CBDC on the U.S. financial system, and solicited public comments on various aspects of CBDCs, reflecting the Federal Reserve's active research agenda concerning the implications of issuing a CBDC. In “Money and Payments”, the Federal Reserve identified several policy considerations for a U.S. CBDC, including issues related to user privacy, financial stability, currency security, and the ability for CBDC to function in the international financial system alongside existing currencies and payment systems (U.S. Federal Reserve System, 2022). The Federal Reserve found potential benefits for a CBDC to improve the efficiency of the digital payments system, provide a safe and trusted digital currency, and possibly expand financial inclusion (U.S. Federal Reserve System, 2022). However, there were also concerns about the potential disruption to the private banking system, the security risks inherent in a digital currency, and the management of monetary policy (U.S. Federal Reserve System, 2022).

The U.S. Department of the Treasury (“Treasury Department”), along with other financial regulators, would likely play a significant role in shaping the government's position on a CBDC, as it would involve considerations of financial regulation, anti-money laundering (AML) standards, and measures to combat the financing of terrorism (CFT). The Treasury Department is leading an inter-agency working group - the “CBDC Working Group” - to support the Federal Reserves’ efforts and to advance further work on the development of a CBDC instrument (U.S. Department of the Treasury, 2022).

In the 117^th Congress, a bipartisan sponsored bill was introduced in May 2021 requiring the U.S. Treasury Secretary to publish a report on how efforts by the Federal Reserve to develop a CBDC were proceeding (De, 2021). In March 2022, President Biden signed an executive order ensuring responsible development of a CBDC, stating that his administration would “[place] the highest urgency on research and development efforts into the potential design and development options of a United States CBDC (The White House, 2022b; Orcutt, 2023).” However, the U.S. Federal Reserve Chairman, Jerome Powell, has stated that the Federal Reserve would not make a decision on a CDBC without the support of the Administration and explicit authorizing legislation from the U.S. Congress (U.S. Federal Reserve System, 2022; Schroeder, 2023).

Unsurprisingly, the proposed introduction of CBDC in the U.S. has been met with questions addressing its necessity. There is a limited constituency supporting U.S. CBDCs in Washington, DC, and the U.S. financial services sector would strongly lobby Congress against its authorization ((Irwin and Brown, 2023). Congress has also shown interest in the topic, with various members posing questions or proposing legislation related to digital currencies. In the current 118^th Congress, there were several so-called “CBDC” bills introduced in both chambers aimed at assuring the U.S. public that there would not be a congressional authorization of a U.S. CBDC (Orcutt, 2023). A limited sampling of such proposed legislation will illustrate explanations for resistance to embracing a U.S. CBDC.

For example, in the U.S. Senate, Senator Ted Cruz (R-TX) introduced Senate Bill 887 prohibiting the Federal Reserve from offering a retail CDBC, maintaining “FedAccounts” for individuals, and offering any products or services for individuals (Anthony, 2023). This bill is focused on blocking any attempts to the Federal Reserve entering into the commercial banking sector (Anthony, 2023). In the U.S. House of Representatives, Representative Alex X. Mooney (R-WV) introduced the “Digital Dollar Pilot Prevention Act” which prohibits the Federal Reserve (both the board and regional banks) from establishing pilot programs to test CBDCs without approval from Congress (Anthony, 2023). This legislation attempts to address concerns about CBDC cronyism, and explicitly states that the Federal Reserve cannot circumvent this prohibition by partnering with the private sector to contract out CBDC development (Anthony, 2023). There are several other bills introduced in both chambers in the 118^th Congress, many including restrictions on retail, intermediated, and wholesale CDBC creation (Anthony, 2023). Some lawmakers have been encouraging the Federal Reserve to explore a CBDC more aggressively in response to similar efforts by other countries, while others have expressed caution or opposition based on concerns over privacy and the potential impact on the banking industry. The issue of authorization of a U.S. CBDC is not likely to be brought up for a vote in the 118^th Congress in a Presidential election year.

The financial service sector has made its position known concerning the possibility of creating a CBDC in public comments filed with the Federal Reserve (2022) concerning its “Money and Payments” white paper it issued. Marek (2022) presents “some highlights from … commentary provided by J.P. Morgan Chase, State Street, the Independent Community Bankers of America, the American Bankers Association, Credit Union National Association …” concerning the “Money and Payments” white paper.

The largest U.S. bank, New York-based J.P. Morgan Chase, acknowledged in its comments that the “CBDC could introduce significant risks to the U.S. financial systems”, and cast doubt on a possibility of gaining any benefit from a CBDC as presented in the Fed's “Money and Payments” white paper (Marek, 2022). State Street, a Boston-based bank, commented that “the implications of a CBDC … include the potential disruption of existing bank funding models, the disintermediation of key components of the short-term funding markets, such as money market funds and commercial paper, and the potential for greater susceptibility of the system to financial stability risk (Marek, 2022).”

The American Bankers Association concluded that “it has become clear that the purported benefits of a CBDC are uncertain and unlikely to be realized, while the costs are real and acute”, and that a CBDC should be pursued if the goals of a CBDC cannot be met through other payments system innovations (Marek, 2022). The Independent Community Bankers of America continued that “a CBDC will introduce significant privacy and cybersecurity risks into the nation's monetary system and disrupt the stability of America's banking system (Marek, 2022)” Lastly, the Credit Union National Association argues that “most, if not all [provision of financial services], can be addressed by innovations in the current financial services framework and through continued public-private partnerships, without the introduction of a novel digital currency that could destabilize the system (Marek, 2022).”

In the following section of this article, the benefits of instituting a CBDC in the U.S. will be discussed. Subsequently, the public and private sector challenges of such adoption in the U.S. are identified and discussed along economic, political, privacy, and security parameters. The final section of this article focuses on developing a comprehensive research agenda needed to address the development of a potential conceptual policy framework charged with ensuring that, if a CBDC is adopted in the U.S. by the Federal Reserve, there will be an effective public regulation regime implemented that effectively addresses these recognized economic, political, privacy, and security concerns.

2. Benefits of the U.S. Federal Reserve Adopting Central Bank Digital Currency

The potential benefits of adopting a U.S. CBDC could potentially serve as a new foundation for a national payment system bridging both legacy and new payments services. It could also maintain the centrality of a safe and trusted U.S. Federal Reserve System in a rapidly digitizing economy. Specifically, these benefits could include:

Safely meeting the future consumer, business, and government demands for payment services

A CBDC - like paper currency, a direct liability of the Federal Reserve - would offer widespread public access to digital money that is insulated from credit and liquidity risk, as it is backed by reserves and equity capital, and includes an elimination of “bank runs” through insurance plans (Mookerjee, 2021; The Federal Reserve System, 2022). Moreover, a CBDC could also provide a safe foundation for private sector innovations to meet current and future needs and demands for payment services (The Federal Reserve System, 2022). For example, a CBDC might help “level the playing field” in payment innovation for private sector businesses, focusing on new access services, distribution methods, and related service offerings (The Federal Reserve System, 2022). Likewise, consumers will no longer need outlets for cash, as well as fewer places to deposit cash or other valuables (Mookerjee, 2021). In addition, a CBDC might generate new capabilities to meet the speed and efficiency requirements of the digital economy, for example, be programmed to deliver payments at certain times, or be used to carry out micropayments which traditional payment systems are not presently designed to facilitate efficiently (The Federal Reserve System, 2022).

Improve operational cost-saving

A goal of digital money is to eliminate the time lag and operating costs (including for accounting and record-keeping for transactions, as well as for physical storage and safekeeping) for such existing digital transactions (found in the SWIFT system, for example) by using distributed ledger (“blockchain”) technology (DLT) (Grant, 2022). The existing digital payment system takes an average of one-to-three days to complete a transaction, and card processing fees make up half of retail profit margins (Mookerjee, 2021). In a DLT system, nodes or shared ledgers connect to form a common network to process transactions (Grant, 2022). This network can also extend to other jurisdictions and minimize the processing time for transactions (Grant, 2022). It can also provide transparency to authorities and stakeholders, improving the resiliency of a financial network by eliminating the need for a centralized database of records (Grant, 2022). Digital money also solves the double-spending problem by using an algorithmic consensus system, i.e., ensuring that a “note” of digital money is not spent twice by the same person (Grant, 2022). Lastly, a CBDC can reduce the cost of printing physical money (Kerr, 2023). Switching to a CBDC-based banking system could save the U.S. economy a total $750 billion a year – approximately what U.S. households spend on food in the same period (Mookerjee, 2021).

Structural changes increasing financial sector competition

With the Federal Reserve effectively becoming the sole intermediary for financial transactions, the banking system would no longer compete for retail or business cash depositors, the measurement of success which currently underlies much of their market value (Mookerjee, 2021). Instead, under a CBDC-based banking system, financial institutions borrow wholesale from the Federal Reserve to finance their lending activities with the Federal Reserve, thereby becoming the lender of first rather than last resort (Mookerjee, 2021). With funding secured, inter-bank competition will be based entirely on the ability to recognize and price competitive loans and to bridge short-term and long-term interest rates efficiently, which will - in turn - reduce the margins in that specific business to the benefit of good borrowers, thereby engaging in value-creating projects (Mookerjee, 2021). Competition for customer deposits will be replaced with competition for distributing their electronic wallets with the most innovative and user-friendly solutions (Mookerjee, 2021).The CBDC will also facilitate the entry of new players from fintech, because the brand reputation of established banks as safe custodians of people's money will no longer be a barrier to entry – nor will their networks of branches and paper cash outlets (Mookerjee, 2021). The repository of all cash and the “clearer” of all transactions will now be the Federal Reserve and there will be no need for paper money for digital money to be convertible into, since a CBDC unit is itself a direct Federal Reserve liability, and exactly equivalent to paper money rather than merely convertible into it, thereby making the paper cash redundant (Mookerjee, 2021).

More effective regulatory and monetary policy execution

In a CBDC world, all transactions could theoretically be monitored with the help of data analytics and artificial intelligence technologies in order to more quickly identify banks that are struggling or are engaging in questionable transactions (Mookerjee, 2021). At present, financial regulators must rely on the reports provided by banks, which means that remedial action lags and often at a greater cost (Mookerjee, 2021). In addition, in a CBDC world in which digital bank codes are visible to the clearing institution, it becomes much easier for the authorities to identify the parties to a transaction, which greatly simplifies the detection of criminal activity and eliminates the black markets characteristic of countries that deal largely in physical money (Mookerjee, 2021). This is not an insignificant policy change, as the cost of fraud to U.S. financial services companies is estimated at 1.5 percent of revenues, or around $15 billion annually (LexisNexis Risk Solutions, 2018). The switch to a CBDC also simplifies the execution of monetary policy, as the Federal Reserve can immediately change supply by issuing or canceling codes in its own accounts (Mookerjee, 2021). Furthermore, by paying interest on CBDC holdings, the Federal Reserve can directly transmit monetary policy to households, instead of influencing commercial deposit rates through the rates it offers banks on their reserve accounts with the Federal Reserve (Mookerjee, 2021). Today, with money held in commercial banks, the policymaker can only influence consumer and business behaviors indirectly (Mookerjee, 2021).

Innovative improvements to cross-border payments

The CBDC has the potential to streamline cross-border payments by employing new technologies, introducing simplified distribution channels, and creating additional opportunities for cross-jurisdictional collaboration and interoperability (The Federal Reserve System, 2022). Adopting 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 (through improved transparency in money flows), and the cost and timing of implementation (The Federal Reserve System, 2022).

Support of the U.S. dollar's international role

Another potential benefit of a U.S.CBDC could be to preserve the existing dominant international role of the U.S. dollar (The Federal Reserve System, 2022). The U.S. dollar is the globally utilized currency for payments and investments, and also serves as the world's reserve currency due to 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 (The Federal Reserve System, 2022). The dollar's international role benefits the U.S. by lowering transaction and borrowing costs for U.S. households, businesses, and government, and allows America to influence standards for the global monetary system (The Federal Reserve System, 2022). It is important to consider the implications of a potential future state in which many foreign countries and currency unions may have introduced CBDCs, and if these new CBDCs were more attractive than existing forms of the U.S. dollar, global use of the dollar could decrease; thus, a U.S. CBDC might help preserve the international role of the dollar (The Federal Reserve System, 2022; Warsh, 2022).

Increased financial inclusion

Promoting financial inclusion for economically vulnerable households and community is a high priority for the Federal Reserve. Private-sector electronic transactions accounts facilitate access to digital payments; enable rapid and cost-effective payment of taxes; enable rapid and cost-effective delivery of wages, tax refunds, and other federal payments; provide a secure way for people to save; and promote access to credit (The Federal Reserve System, 2022). Likewise, a CBDC could reduce common barriers to financial inclusion and could lower transaction costs, which could be particularly helpful for lower-income households in the U.S., as an estimated 4.5 percent of U.S. households (approximately 5.9 million people), are unbanked, i.e., those without a checking or savings at a bank or credit union, in 2021, and many of whom may have access to the mobile internet (Federal Deposit Insurance Corporation, 2022; Federal Reserve Bank of Cleveland, 2022).

Extend public access to safe central bank money

Cash is currently the only central bank money that is available to the general public, and it remains an important and popular means of payment (The Federal Reserve System, 2022). According to a 2022 survey, U.S. consumers used cash for 18 percent of total transactions (The Federal Reserve System, 2022). The Federal Reserve reports that it is considering a CBDC as a means to expand safe payment options, not to reduce or replace them (The Federal Reserve System, 2022). While cash use in the U.S. dropped from 40 percent of transactions in 2012 (12 percent by value) to 20 percent in 2021, in Sweden, the proportion of cash payments fell from 33 percent to less than 10 percent over the same period (Cubides & O’Brien, 2023; Greene et al., 2018). In China, 50 percent of point-of-sale (POS) payments are made with a mobile wallet or app, while cash accounts for just 13 percent of POS payments (Riksbank, 2020). If these trends were to emerge in the United States, consumers might want the option of digitized central bank money that, like cash, would have no credit or liquidity risk attached to it.

As noted above, the arguments for the Federal Reserve instituting a CBDC contain a range of potential tangible benefits for consumers, business, and government. Nevertheless, there are serious challenges, i.e., potential costs/risks, which remain to be mitigated or resolved before the Federal Reserve could move forward with introducing a CBDC instrument in the American economy.

3. Challenges to the U.S. Federal Reserve Adopting Central Bank Digital Currency

There are four major categories of “challenges” (or risks to be managed) to the Federal Reserve adopting a retail CBDC: economic, political, privacy, and security. Each of these categories are discussed below.

Economic Challenges to Federal Reserve CBDC Adoption

Digital money has its own set of costs. For example, “digital wallets” are required to store digital money (Grant, 2022). Systems that use blockchain technology that acts as a “failsafe” against hackers also have to pay transaction fees, i.e., the costs associated with processing the transaction, to so-called digital “miners” (Grant, 2022). In addition, American citizens could extract too much money out of banks at once by purchasing CBDCs, thus triggering a “run on banks” and affecting their ability to lend, and consequently rapidly increasing interest rates (Atlantic Council, 2023).

In addition, the introduction of a CBDC could fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the Federal Reserve (The Federal Reserve System, 2022). Banks currently rely (in large part) on deposits to fund their loans. A widely available CBDC would serve as a close—or, in the case of an interest-bearing CBDC, near-perfect—substitute for commercial bank money (The Federal Reserve System, 2022). This substitution effect could reduce the aggregate amount of deposits in the banking system, which could in turn increase bank funding expenses, and reduce credit availability or raise credit costs for households and businesses (The Federal Reserve System, 2022). Similarly, an interest-bearing CBDC could result in a shift away from other low-risk assets, such as shares in money market mutual funds, Treasury bills, and other short-term instruments (The Federal Reserve System, 2022). A shift away from these other low-risk assets could reduce credit availability or raise credit costs for businesses and governments (The Federal Reserve System, 2022).

The interactions between CBDC and Federal Reserve monetary policy implementation would be more pronounced and more complicated if the CBDC were interest-bearing at levels that are comparable to rates of return on other safe assets (The Federal Reserve System, 2022). In this case, the level and volatility of the public's demand for CBDC could be quite substantial (The Federal Reserve System, 2022). Consumers and businesses could decide to pare their holdings of bank deposits, Treasury bills, and money market mutual fund investments and increase holdings of CBDC (The Federal Reserve System, 2022). The potential for significant foreign demand for CBDCs in this scenario would further complicate monetary policy implementation (The Federal Reserve System, 2022). Changes in interest rates and other market factors could also significantly affect public demand for CBDC over time (The Federal Reserve System, 2022).

Political Challenges to Federal Reserve CBDC Adoption

Other concerns revolve around the role of the Federal Reserve as a wholesale lender of first resort. State-controlled credit could potentially be susceptible to political pressure for industrial sector-focused lending (Mookerjee, 2021). For example, the Biden administration has targeted “clean” manufacturing industries and the semiconductor industry for preferential policy treatment (at the expense of the oil and natural gas industries) - both policy initiatives found in their national industrial strategy (The White House, 2022a, 2022c). Also, organizations or governments could blacklist or freeze accounts without the permission of users (Grant, 2022). They could also instigate double-accounting in bank accounts, inflating expenses and reducing the overall total to the detriment of specific industries or sectors (Grant, 2022).

Digital money - including retail CBDCs - presents several challenges on the governance and policy framework front (Grant, 2022). This form of money is uncharted territory for policymakers, and problems have already begun emerging in its ecosystem (Grant, 2022). For example, the recent financial collapse of the cryptocurrency brand FTX has sent shock waves through the cryptocurrency marketplace and has initiated public calls for increased public regulatory oversight by the U.S. Securities and Exchange Commission in the cryptocurrency arena (Reif, 2023). Also, in the long term, the absence of US leadership and standards-setting can have geopolitical consequences, especially if China and other countries maintain their first-mover advantage in the development of CBDCs (Atlantic Council, 2023).

Privacy Challenges to Federal Reserve CBDC Adoption

Digital money - such as a CBDC - use can compromise consumer privacy (Grant, 2022). While digital money can be traced, cash is anonymous, and it is nearly impossible to track and trace its users (Grant, 2022). The introduction of CBDC will also likely reduce the volume of paper currency, thus further reducing anonymity for consumers (Grant, 2022). “Central banks increase control over money issuance and gain insight into how people spend their money but deprive users of their privacy,” notes Congressman Tom Emmer (R-MN), adding, “CBDCs would only be beneficial if they are open, permissionless and private (Mookerjee, 2021).”

Security Challenges to Federal Reserve CBDC Adoption

Another major concern with the adoption of a CBDC is with security, particularly cyber security, as the existing financial services system, with multiple banks responsible for their own security, is exposed to more frequent but possibly more localized breaches of security (Mookerjee, 2021). In the case of a CBDC, if the Federal Reserve is hacked, then the whole system could be fatally compromised (although, granted, the risk of a breach actually occurring is perhaps reduced, given that it would have the cyber security expertise of the U.S. government at its disposal) (Mookerjee, 2021). Essentially, the trade-off would be between recurring - but manageable - breaches and highly infrequent - but catastrophic - ones (although the Federal Reserve would definitely be “too big to fail”) (Mookerjee, 2021). Hacks of digital money on a large scale have the potential to disrupt the operations of a country's financial infrastructure and become a national security threat (Grant, 2022).

Even as it removes the need for physical safekeeping, digital money's origins in technology ensure that this form of money becomes a target for hackers, who can steal from digital wallets (Grant, 2022). A seamless financial infrastructure consisting of digitally connected entities can be brought down by hackers (Grant, 2022). The 2018 SWIFT hacks, which affected multiple countries, are an example of such incursions (Grant, 2022). Threats to existing payment services—including operational disruptions and cybersecurity risks would apply to a CBDC as well (Grant, 2022). Designing appropriate defenses for CBDC could be particularly difficult because a CBDC network could potentially have more entry points than existing payment services (Grant, 2022).

While the challenges and risks for the U.S economy are formidable, the final section of this article will develop a proposed research agenda that, if the public policy benefits outweigh the costs and a CBDC is adopted by the Federal Reserve, there will be effective U.S. government oversight and regulatory policies implemented that address these economic, political, privacy, and security concerns.

4. A Research Agenda: Adopting a U.S. Central Bank Digital Currency?

Major benefits and challenges of the Federal Reserve adopting a CBDC have been identified. Yet, the challenges - or obstacles - to adoption by the Federal Reserve need to be comprehensively identified to be able to accurately measure the key trade-offs, i.e., benefits and costs, that will need to be evaluated before an effective policy framework can be developed and implemented to support a U.S. CBDC. As a departure point for considering U.S. CBDC adoption, the following list of research questions - including accompanying explications - is offered for future technology policy assessment consideration.

What potential economic impact will adoption of a CDBC by the Federal Reserve have on the competitive future of the U.S. banking and financial services sector?With the Federal Reserve becoming the lender of first resort, interbank competition will allegedly be based entirely on the ability for banks to recognize and price good loans and to bridge short-term and long-term interest rates efficiently, reducing the margins in that business and benefiting good borrowers (Mookerjee, 2021). Thus, competition for new customer deposits should be replaced with competition for distributing their electronic wallets with innovative, user-friendly solutions and encouraging the entry of new competitors from the fintech sector (Mookerjee, 2021).

As a result of the Federal Reserve adopting a CBDC, and a subsequent increase in digital access points available for potential security breaches, how does the Federal Reserve ensure cybersecurity integrity for the nation's security?Unquestionability, designing appropriate cybersecurity measures would be a major challenge because a Federal Reserve CBDC network could have potentially more retail entry points than existing payment services (The Federal Reserve System, 2022). To allow for resiliency in the CBDC system, especially to major cybersecurity issues, including threats from hackers, impacts from natural disasters, and other types of network disruptions, it has been suggested that offline CBDC options - such as in-person cash transactions - be considered as a feasible option (The Federal Reserve System, 2022).

How does the Federal Reserve ensure the right to information privacy for American citizens from government and non-governmental actors?In the intermediated - or wholesale - CBDC model that the Federal Reserve is considering, the intermediaries would address privacy concerns by leveraging existing privacy protection tools (The Federal Reserve System, 2022). Yet, as critics point out, this wholesale CBDC system cannot necessarily protect the U.S. consumers’ data from the U.S. government. In January 2023, it was revealed that the U.S. Secret Service, the Department of Homeland Security, and the Federal Bureau of Investigation have been engaged in an almost decade-long, warrantless financial surveillance of Americans who send or receive money through private payment systems, such as Western Union and MoneyGram (Fieler, 2023). Also, other critics question how long a wholesale-only U.S. CBDC would remain wholesale-only, and how long would it take for CBDC use to become mandatory (Salter, 2023).

When it comes to public accountability and regulatory oversight of a CBDC, would the introduction of this digital currency further the power of the Federal Reserve, or would the existing accountability structures be sufficient for a Federal Reserve in regulatory control of a CBDC?The Board of Governors of the Federal Reserve prepares an annual report summarizing activities of the Board and all Reserve Banks; the annual report is delivered to the U.S. Congress (Board of Governors of the Federal System, 2019). Moreover, to ensure financial accountability, the financial statements of the Federal Reserve Banks and the Board of Governors are audited annually by an independent, outside auditor and published to its website (Board of Governors of the Federal System, 2019). In addition, the Government Accountability Office, as well as the Board's Office of Inspector General, frequently audit many Federal Reserve activities (Board of Governors of the Federal System, 2019). Yet, as some critics point out, the U.S. Congress has been incapable of auditing the Federal Reserve, as is a semi-private bank supervised by seven governors serving 14-year terms with a budget not appropriated by the U.S. Congress (Fieler, 2023). Should there be further regulatory and accountability legislation enacted by the U.S. Congress to ensure adequate oversight of a retail CBDC?

How will the Federal Reserve address potential public policy preferences to benefit “favored” or negatively impact “unfavored” industries?As an example, the Biden administration is a strong proponent of what it terms a “comprehensive manufacturing and innovation strategy” which includes $300 billion in federal spending on basic research and breakthrough technologies, including federal “seed funding” for industrial commercialization of emerging technologies such as electric vehicles, lightweight materials, 5G, and artificial intelligence (Hemphill, 2021). After adopting a CDBC, could the Federal Reserve find itself more susceptible to political pressure to offer preferential financing arrangements for Administration-backed industries?

Does the adoption of a CBDC by the Federal Reserve offer an effective pathway to increasing financial inclusion to unbanked Americans?A 2021 survey conducted by the Federal Deposit Insurance Corporation (FDIC) shows that between 2011 — when the unbanked rate was at its highest level since the survey began (at 8.2 percent) — and 2021 (at 4.5 percent), the unbanked rate fell 3.7 percentage points, corresponding to an increase of approximately 5.0 million banked households (Federal Deposit Insurance Corporation, 2022). According to these 2021 FDIC survey results, “Don’t trust banks” was the second-most cited main reason for not having an account in 2021, and “Avoiding a bank gives more privacy” was the third-most cited main reason among respondents (Federal Deposit Insurance Corporation, 2022). Given this recent trend significantly reducing the unbanked in the U.S, and widespread reported concerns with trust and privacy with banks by those unbanked, a legitimate question is whether a CBDC will offer an effective pathway to continue this trend, given that many of these unbanked individuals presently use alternative instruments to manage their money, including prepaid cards, nonbank online payment services, i.e., PayPal and Venmo, nonbank money orders or check cashing, and cash (Bennett, 2023).

Does establishing an allegedly more transaction efficient CBDC ensure future U.S. hegemony as the world's reserve currency?Advocates of a U.S. CBDC argue that adopting this digital currency will make U.S. currency transactions more efficient, thus contributing to maintaining the U.S. dollar's preeminence as the world's reserve currency status. However, the primary strategy of maintaining the U.S. dollar's global position is not in the form of the currency, but how the Federal Reserve manages the way dollars are being used in the U.S. economy (Fieler, 2023). Therefore, how significant is the adoption of a more efficient CBDC by the Federal Reserve to maintaining its position as the global reserve currency?

The issue of a U.S. CBDC - whether wholesale or retail - remains in a discussion and evaluative stage of development in the U.S. Yet, if a CBDC is to be adopted by the Federal Reserve - and that decision is far from certain at this time - all stakeholders can agree on one outcome: that there be an effective public regulation regime developed that sufficiently addresses the known economic, political, privacy, and security concerns of consumers, business, and government before a U.S. CBDC is implemented.

Footnotes

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Thomas A. Hemphill

Notes

Author Biography

Thomas A. Hemphill, David M. French Distinguished Professor of Strategy, Innovation and Public Policy, School of Management, University of Michigan-Flint, received his Ph.D. in Business Administration: Primary Field in Strategic Management and Public Policy from the George Washington University. His technology and innovation management publications are found in the Bulletin of Science, Technology & Society, Innovation: Management, Policy & Practice, International Journal of Innovation Management, International Journal of Innovation and Technology Management, Journal of Responsible Innovation, Knowledge, Technology & Policy; Research-Technology Management; Science and Public Policy, Technology Analysis & Strategic Management, Technology In Society: An International Journal and Technological Sustainability.

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