The Federal Reserve is poised this week to release a paper soliciting public comment about central bank digital currencies (CBDCs), according to a report in The Wall Street Journal. The paper was scheduled to be released earlier in the summer but was delayed. It represents the central bank’s first concrete step forward in exploring the use of digital currencies in the U.S. economy and could pave the way for a Fed-backed digital dollar.

A Fraught Decision

The Federal Reserve joins a growing list of central banks around the world that are discussing the utility of a central bank-issued digital currency in their respective country’s economies. For example, Sweden’s Rijksbank has already issued several papers exploring its use, while China’s central bank is conducting pilot tests for its digital currency DC/EP.

But the Fed’s task is fraught with national and international implications. For example, the absence of a digital equivalent that has fast processing and settlement times for trades across borders could upend the dollar’s dominant status as a reserve currency and make other digital currencies, such as China’s digital yuan, more attractive. The dollar accounted for 59% of global currency reserves in May 2021, according to data from the International Monetary Fund (IMF).

The consequences to domestic economic policy are also complex. A digital dollar would ease monetary policy implementation by removing intermediaries and establishing a direct connection between the Fed and citizens. However, the currency could curtail privacy and enable governing authorities to monitor and manipulate transactions occurring in their network.

A Divided House   

The complicated nature of the Fed’s decision is reflected in the divided opinions among its members. Fed Governor Lael Brainard told the National Association for Business Economics in September that it was “just very hard” for her to imagine that the United States would not release a digital dollar considering the currency’s dominant status in global trade.

But Fed governors Christopher Wallers and Randal Quarles have cautioned that the costs and risks of introducing a digital currency into the U.S. economy outweigh the advantages. Quarles, particularly, said that the dollar was already “highly digitized” and that a CBDC would not do much to bring America’s unbanked population into the fold. He was also skeptical of the central bank’s efforts to issue a digital dollar without appropriate legislative backing.

In his Congressional testimonies and press hearings, Fed Chair Jerome Powell has refused to commit to a firm decision or a timeline for the issue of CBDCs. He told journalists last month that the agency would consider developing CBDCs only if there are “clear and tangible benefits that outweigh any risks and costs.” The Fed chief continued, “It’s more important to do this right than to do it fast.”