By: Cooper D’Anton
The prospect of a U.S. central bank digital currency (“CBDC”) – a digital version of the paper money kept in your wallet – just received its first big push by the Federal Reserve (“Fed”), the U.S. central bank, in the form of a highly anticipated working paper. The Fed’s working paper on CBDC provides insight into the current regulatory posture of the U.S., as do statements by Fed Board (“Board”) Member and Vice Chair nominee Lael Brainard, and Fed Vice Chair for Supervision nominee Sarah Bloom Raskin in their respective Senate Banking Committee nomination hearings and by the Chairs of the relevant Congressional committees. The paper also highlights the legal implications and business impact of a potential CBDC.
The paper titled, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” started the public conversation between the Fed and stakeholders about CBDCs. It was preceded by multiple Congressional hearings on the implications of CBDC and followed by tangentially related hearings on the reserve asset-pegged cryptocurrencies, stablecoins, and statements by the House Financial Services Committee Chair on the majority’s priorities for a CBDC and the Senate Banking Committee Chair encouraging the Fed to “lead the way” on CBDC. So, under a reasonable interpretation, Congress – at least the relevant Committee Chairmanships under Democratic control – has demonstrated a cautious interest in making forward progress on a CBDC.
The 2022 paper asserted that the Fed would only pursue a digital currency with broad public and cross-governmental support, including from the executive branch and Congress. The Fed Chair does not plan to go it alone. And in Lael Brainard’s nomination hearing, she reiterated the Fed’s intention to wait for the go-ahead from the Administration and Congress before moving forward with a CBDC. Sarah Bloom Raskin, the nominee for Vice Chair for Supervision of the Fed and a progressive favorite, indicated during her confirmation hearing that she intends to defer to Fed Chair Jerome Powell on the Board’s agenda. That deference is not always a given, as Senator Hagerty noted in his question to Raskin. The Chair and the Board intend to wait for broad support and tread lightly before making any aggressive moves toward a CBDC, and that could take a while. The Fed is in no rush.
The legal authority for the Federal Reserve to issue a CBDC would come from the Federal Reserve Act (“FRA”), which governs the central bank’s powers and functions. The Act authorizes the Fed to issue notes and offer payment services to banks and other institutions, but according to a Fed staff analysis, “[c]onsideration would need to be given as to whether additional amendments to the FRA would be required” to issue a general-purpose CBDC. This aligns with Chair Powell’s hesitation to move forward on a CBDC without authorizing legislation from Congress. Aside from what statutory law authorizes the Fed to do, the central bank, in undertaking the responsibilities of managing a CBDC, may expose itself to considerable legal liability with respect to anti-money-laundering, economic sanctions, privacy, data security, and risk of loss occurring from operational failures like error or delay, fraud, theft, or bankruptcy and insolvency. These are all important considerations when establishing the legal framework for a CBDC.
While still keeping cash in circulation, a well-designed CBDC could provide businesses with a convenient, electronic form of digital currency. It could also give entrepreneurs a platform for creating new financial products and services, support faster and cheaper payments, including cross-border payments, and expand consumer access to the financial system. An improved cross-border payments system would help alleviate a significant challenge faced by U.S. firms doing business internationally.
However, a CBDC could also negatively impact financial-sector market structure, credit availability, and financial stability. For instance, an abundance of easily accessible central bank money, designed a certain way, may lead to a reduction in commercial bank deposits, which could “increase bank funding expenses, and reduce credit availability or raise credit costs for . . . businesses.” In another example, financial stress could cause more likely or more severe runs on financial firms if consumers flock to convert their money held at commercial banks into CBDC during times of stress. These potential costs and benefits will heavily influence how the Fed designs its CBDC.
 Fed. Rsrv., Money and Payments: The U.S. Dollar in the Age of Digital Transformation (Jan. 2022), https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf.
 Nomination Hearing: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 117th Cong. (2022) (statement of Lael Brainard) (“Well, this question about digital currency it’s a big question and we really are looking to Congress in the first instance and the administration to give us guidance in this area.”) https://www.bgov.com/core/news/#!/articles/R5O11S8JMDC0.
 Nomination Hearing: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 117th Cong. (2022) (statement of Sarah Bloom Raskin) (responding “Yes, I do, Senator” to Sen. Bill Hagerty’s question on whether Raskin was “committed to deferring to the Fed Chairman to set the agenda at the Federal Reserve Board.”) https://www.bgov.com/core/news/#!/articles/R6R21S8JMDC0.
 Press Release, Maxine Waters, Chairwoman, Hous. Fin. Serv. Comm., We Must Continue to Explore a CBDC and Be Laser-Focused on Financial Inclusion (Jan. 21, 2022) (noting the Committee’s laser focus on financial inclusion) https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=408969; Letter from Sherrod Brown, Chair, S. Comm. on Banking Hous. and Urb. Aff. (Mar. 1, 2021) https://www.banking.senate.gov/imo/media/doc/Federal%20Reserve_%20Letter%2003012021.pdf.
 Fed. Rsrv., supra note 1, at 3, 17.
 Id. at 1.
 Building A Stronger Financial System: Opportunities of a Central Bank Digital Currency: Before S. Comm. on Banking, Hous., and Urb. Aff., 117th Cong. (2021) https://www.banking.senate.gov/hearings/building-a-stronger-financial-system-opportunities-of-a-central-bank-digital-currency; The Digitization of Money and Payments: Before S. Comm. on Banking, Housing, and Urban Affairs, 116th Cong. (2020) https://www.banking.senate.gov/hearings/the-digitization-of-money-and-payments; Digitizing the Dollar: Investigating the Technological Infrastructure, Privacy, and Financial Inclusion Implications of Central Bank Digital Currencies: Before H. Comm. on Fin. Servs. Task Force on Fin. Tech., 117th Cong. (2021) https://financialservices.house.gov/events/eventsingle.aspx?EventID=407953; The Promises and Perils of Central Bank Digital Currencies: Before H. Comm. on Fin. Servs. Subcomm. on Nat’l Sec., Int’l Dev. and Monetary Pol’y, 117th Cong. (2021) https://financialservices.house.gov/events/eventsingle.aspx?EventID=408111.
 Digital Assets and the Future of Finance: The President’s Working Group on Financial Markets’ Report on Stablecoins: Before H. Comm. on Fin. Servs., 117th Cong. (2021) https://financialservices.house.gov/events/eventsingle.aspx?EventID=409026; Examining the President’s Working Group on Financial Markets Report on Stablecoins: Before S. Comm. on Banking, Hous., and Urb. Aff., 117th Cong. (2022) https://www.banking.senate.gov/hearings/examining-the-presidents-working-group-on-financial-markets-report-on-stablecoins.
 Press Release, supra note 5.
 Brown, supra note 5.
 Fed. Rsrv, supra note 1, at 3, 21.
 See id.
 Supra note 3.
 Supra note 4.
 Id. (noting conflict on the FDIC Board preceding former-Chair Jelena McWilliams’ departure).
 David Gura, The U.S. is considering a radical rethinking of the dollar for today’s digital world, NPR (Feb. 6, 2022, 7:00 AM), https://www.npr.org/2022/02/06/1072406109/digital-dollar-federal-reserve-apple-pay-venmo-cbdc.
 See id.
 Jess Cheng, Angela N. Lawson & Paul Wong, Preconditions for a general-purpose central bank digital currency, FEDS Notes (Fed. Rsrv.), Feb. 24, 2021,
 Fed. Rsrv., supra note 1, at 3.
 Cheng, supra note 25.
 Fed. Rsrv., supra note 1, at 3.
 See generally Visa and PYMTS, Innovating Cross-Border Payments (Mar. 2021) https://securecdn.pymnts.com/wp-content/uploads/2021/03/PYMNTS-Innovating-Cross-Border-Payments-What-US-And-UK-Businesses-Need-To-Know-March-2021.pdf.
 Fed. Rsrv., supra note 1, at 3.
 Id. at 17; see generally, Christopher J. Waller, Governor, Fed. Rsrv. Bd. of Governors, Speech at the American Enterprise Institute, CBDC: A Solution in Search of a Problem? (Aug. 5, 2021) (“It is useful to note that in our daily lives we use both central bank money and commercial bank money for transactions. Central bank money (i.e., money that is a liability of the Federal Reserve) includes physical currency held by the general public and digital account balances held by banks at the Federal Reserve. The funds banks put into these accounts are called reserve balances, which are used to clear and settle payments between banks. In contrast, checking and savings accounts at commercial banks are liabilities of the banks, not the Federal Reserve. The bulk of transactions, by value, that U.S. households and firms make each day use commercial bank money as the payment instrument.”) https://www.federalreserve.gov/newsevents/speech/waller20210805a.htm.
 Fed. Rsrv., supra note 1, at 17.
 See id. at 13, 17.