Category Archives: CBDC

Readout of the Meeting of the President’s Working Group on Financial Markets to Discuss Stablecoins

Secretary of the Treasury Janet L. Yellen convened the President’s Working Group on Financial Markets (PWG), joined by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, to discuss stablecoins. In the meeting, participants discussed the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security. The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place.

The group also heard a presentation from Treasury staff on the preparation of a report on stablecoins, which would discuss their potential benefits and risks, the current U.S. regulatory framework, and the development of recommendations for addressing any regulatory gaps. The PWG expects to issue recommendations in the coming months.

In attendance were:

  • Janet L. Yellen, Secretary of the Treasury
  • Jerome Powell, Chair, Board of Governors of the Federal Reserve System
  • Gary Gensler, Chair, Securities and Exchange Commission
  • Rostin Behnam, Acting Chairman, Commodity Futures Trading Commission
  • Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation
  • Michael J. Hsu, Acting Comptroller of the Currency
  • Randal Quarles, Vice Chair for Supervision, Board of Governors of the Federal Reserve System
  • J. Nellie Liang, Under Secretary for Domestic Finance, U.S. Department of the Treasury

Governor Lael Brainard: Private Money and Central Bank Money as Payments Go Digital: an Update on CBDCs

Technology is driving dramatic change in the U.S. payments system, which is a vital infrastructure that touches everyone.1 The pandemic accelerated the migration to contactless transactions and highlighted the importance of access to safe, timely, and low-cost payments for all. With technology platforms introducing digital private money into the U.S. payments system, and foreign authorities exploring the potential for central bank digital currencies (CBDCs) in cross-border payments, the Federal Reserve is stepping up its research and public engagement on CBDCs. As Chair Powell discussed last week, an important early step on public engagement is a plan to publish a discussion paper this summer to lay out the Federal Reserve Board’s current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the U.S. context.2

Sharpening the Focus on CBDCs

Four developments—the growing role of digital private money, the migration to digital payments, plans for the use of foreign CBDCs in cross-border payments, and concerns about financial exclusion—are sharpening the focus on CBDCs.

First, some technology platforms are developing stablecoins for use in payments networks.3 A stablecoin is a type of digital asset whose value is tied in some way to traditional stores of value, such as government-issued, or fiat, currencies or gold. Stablecoins vary widely in the assets they are linked to, the ability of users to redeem the stablecoin claims for the reference assets, whether they allow unhosted wallets, and the extent to which a central issuer is liable for making good on redemption rights. Unlike central bank fiat currencies, stablecoins do not have legal tender status. Depending on underlying arrangements, some may expose consumers and businesses to risk. If widely adopted, stablecoins could serve as the basis of an alternative payments system oriented around new private forms of money. Given the network externalities associated with achieving scale in payments, there is a risk that the widespread use of private monies for consumer payments could fragment parts of the U.S. payment system in ways that impose burdens and raise costs for households and businesses. A predominance of private monies may introduce consumer protection and financial stability risks because of their potential volatility and the risk of run-like behavior. Indeed, the period in the nineteenth century when there was active competition among issuers of private paper banknotes in the United States is now notorious for inefficiency, fraud, and instability in the payments system.4 It led to the need for a uniform form of money backed by the national government.

Second, the pandemic accelerated the migration to digital payments. Even before the pandemic, some countries, like Sweden, were seeing a pronounced migration from cash to digital payments.5 To the extent that digital payments crowd out the use of cash, this raises questions about how to ensure that consumers retain access to a form of safe central bank money. In the United States, the pandemic led to an acceleration of the migration to digital payments as well as increased demand for cash. While the use of cash spiked at certain times, there was a pronounced shift by consumers and businesses to contactless transactions facilitated by electronic payments.6 The Federal Reserve remains committed to ensuring that the public has access to safe, reliable, and secure means of payment, including cash. As part of this commitment, we must explore—and try to anticipate—the extent to which households’ and businesses’ needs and preferences may migrate further to digital payments over time.

Third, some foreign countries have chosen to develop and, in some cases, deploy their own CBDC. Although each country will decide whether to issue a CBDC based on its unique domestic conditions, the issuance of a CBDC in one jurisdiction, along with its prominent use in cross-border payments, could have significant effects across the globe. Given the potential for CBDCs to gain prominence in cross-border payments and the reserve currency role of the dollar, it is vital for the United States to be at the table in the development of cross-border standards.

Finally, the pandemic underscored the importance of access to timely, safe, efficient, and affordable payments for all Americans and the high cost associated with being unbanked and underbanked. While the large majority of pandemic relief payments moved quickly via direct deposits to bank accounts, it took weeks to distribute relief payments in the form of prepaid debit cards and checks to households who did not have up-to-date bank account information with the Internal Revenue Service. The challenges of getting relief payments to these households highlighted the benefits of delivering payments more quickly, cheaply, and seamlessly through digital means.

Policy Considerations
In any assessment of a CBDC, it is important to be clear about what benefits a CBDC would offer over and above current and emerging payments options, what costs and risks a CBDC might entail, and how it might affect broader policy objectives. I will briefly discuss several of the most prominent considerations.

Preserve general access to safe central bank money
Central bank money is important for payment systems because it represents a safe settlement asset, allowing users to exchange central bank liabilities without concern about liquidity and credit risk. Consumers and businesses don’t generally consider whether the money they are using is a liability of the central bank, as with cash, or of a commercial bank, as with bank deposits. This is largely because the two are seamlessly interchangeable for most purposes owing to the provision of federal deposit insurance and banking supervision, which provide protection for consumers and businesses alike. It is not obvious that new forms of private money that reference fiat currency, like stablecoins, can carry the same level of protection as bank deposits or fiat currency. Although various federal and state laws establish protections for users, nonbank issuers of private money are not regulated to the same extent as banks, the value stored in these systems is not insured directly by the Federal Deposit Insurance Corporation, and consumers may be at risk that the issuer will not be able to honor its liabilities. New forms of private money may introduce counterparty risk into the payments system in new ways that could lead to consumer protection threats or, at large scale, broader financial stability risks.

In contrast, a digital dollar would be a new type of central bank money issued in digital form for use by the general public. By introducing safe central bank money that is accessible to households and businesses in digital payments systems, a CBDC would reduce counterparty risk and the associated consumer protection and financial stability risks.

Improve efficiency
One expected benefit is that a CBDC would reduce or even eliminate operational and financial inefficiencies, or other frictions, in payments, clearing, and settlement. Today, the speed by which consumers and businesses can access the funds following a payment can vary significantly, up to a few days when relying on certain instruments, such as a check, to a few seconds in a real-time payments system. Advances in technology, including the use of distributed ledgers and smart contracts, may have the potential to fundamentally change the way in which payment activities are conducted and the roles of financial intermediaries and infrastructures. The introduction of a CBDC may provide an important foundation for beneficial innovation and competition in retail payments in the United States.

Most immediately, we are taking a critical step to build a strong foundation with the introduction of the FedNowSM Service, a new instant payments infrastructure that is scheduled to go into production in two years. The FedNow Service will enable banks of every size and in every community across America to provide safe and efficient instant payment services around the clock, every day of the year. Through the banks using the service, consumers and businesses will be able to send and receive payments conveniently, such as on a mobile device, and recipients will have full access to funds immediately.

Promote competition and diversity and lower transactions costs
Today, the costs of certain retail payments transactions are high and not always transparent to end users.7 Competition among a diversity of payment providers and payment types has the potential to increase the choices available to businesses and consumers, reduce transactions costs, and foster innovation in end-user services, although it could also contribute to fragmentation of the current payments system. By providing access to a digital form of safe central bank money, a CBDC could provide an important foundation on which private-sector competition could flourish.

Reduce cross-border frictions
Cross-border payments, such as remittances, represent one of the most compelling use cases for digital currencies. The intermediation chains for cross-border payments are notoriously long, complex, costly, and opaque. Digitalization, along with a reduction in the number of intermediaries, holds considerable promise to reduce the cost, opacity, and time required for cross-border payments. While the introduction of CBDCs may be part of the solution, international collaboration on standard setting and protections against illicit activity will be required in order to achieve material improvements in cost, timeliness, and transparency.8

We are collaborating with international colleagues through the Bank for International Settlements, Committee on Payments and Market Infrastructures, and the G7 to ensure the U.S. stays abreast of developments related to CBDC abroad. We are engaging in several international efforts to improve the transparency, timeliness, and cost-effectiveness of cross-border payments. It will be important to be engaged at the outset on the development of any international standards that may apply to CBDCs, given the dollar’s important role as a reserve currency.

Complement currency and bank deposits
A guiding principle for any payments innovation is that it should improve upon the existing payments system. Consumers have access to reliable money in the forms of private bank accounts and central bank issued currency, which form the underpinnings of the current retail payments system. The design of any CBDC should complement and not replace currency and bank accounts.

Preserve financial stability and monetary policy transmission
The introduction of a CBDC has the potential to have wide-reaching effects, and there are open questions about how CBDC could affect financial stability and monetary policy transmission. Some research indicates that the introduction of a CBDC might raise the risk of a flight out of deposits at weak banks in favor of CBDC holdings at moments of financial stress.9 Other research indicates that the increase in competition could result in more attractive terms on transactions accounts and an overall increase in banking system deposits.10 Banks play a critical role in credit intermediation and monetary policy transmission, as well as in payments. Thus, the design of any CBDC would need to include safeguards to protect against disintermediation of banks and to preserve monetary policy transmission more broadly. While it is critical to consider the ways in which a CBDC could introduce risks relative to the current payments system, it may increase resilience relative to a payments system where private money is prominent.

Protect privacy and safeguard financial integrity
The design of any CBDC would need to both safeguard the privacy of households’ payments transactions and prevent and trace illicit activity to maintain the integrity of the financial system, which will require the digital verification of identities. There are a variety of approaches to safeguarding the privacy of payments transactions while also identifying and preventing illicit activity and verifying digital identities. Addressing these critical objectives will require working across government agencies to assign roles and responsibilities for preventing illicit transactions and clearly establishing how consumer financial data would be protected.

Increase financial inclusion
Today 5.4 percent of American households lack access to bank accounts and the associated payment options they offer, and a further 18.7 percent were underbanked as of 2017.11 The lack of access to bank accounts imposes high burdens on these households, whose financial resilience is often fragile. At the height of the pandemic, the challenges associated with getting relief payments to hard-to-reach households highlighted that it is important for all households to have transactions accounts. The Federal Reserve’s proposals for strengthening the Community Reinvestment Act emphasize the value of banks providing cost-free, low-balance accounts and other banking services targeted to underbanked and unbanked communities.12 And a core goal of FedNow is to provide ubiquitous access to an instant payments system via depository institutions.

CBDC may be one part of a broader solution to the challenge of achieving ubiquitous account access.13 Depending on the design, CBDC may have the ability to lower transaction costs and increase access to digital payments. In emergencies, CBDC may offer a mechanism for the swift and direct transfer of funds, providing rapid relief to those most in need. A broader solution to financial inclusion would also need to address any perceived barriers to maintaining a transaction account, along with the need to maintain up-to-date records on active accounts to reach a large segment of the population.14

To explore these broader issues, the Federal Reserve is undertaking research on financial inclusion. The Federal Reserve Bank of Atlanta is launching a public–private sector collaboration as a Special Committee on Payments Inclusion to ensure that cash-based and vulnerable populations can safely access and benefit from digital payments.15 This work is complemented by a new Federal Reserve Bank of Cleveland initiative to explore the prospects for CBDC to increase financial inclusion. The initiative will identify CBDC design features and delivery approaches focused on expanding access to individuals who do not currently use traditional financial services.

Technology Considerations
Multidisciplinary teams at the Federal Reserve are investigating the technological and policy issues associated with digital innovations in payments, clearing, and settlement, including the benefits and risks associated with a potential U.S. CBDC. For example, the TechLab group at the Federal Reserve Board is performing hands-on research and experimentation on potential future states of money, payments, and digital currencies. A second group, the Digital Innovations Policy program, is considering a broad range of policy issues associated with the rise of digital payments, including the potential benefits and risks associated with CBDC.

To deepen our research on the technological design of a CBDC, the Federal Reserve Bank of Boston is partnering with Massachusetts Institute of Technology’s (MIT) Digital Currency Initiative on Project Hamilton to build and test a hypothetical digital currency platform using leading edge technology design options.16 This work aims to research the feasibility of the core processing of a CBDC, while remaining agnostic about a range of policy decisions. MIT and the Boston Fed plan to release a white paper next quarter that will document the ability to meet goals on throughput of geographically dispersed transactions with core processing and create an open source license for the code. Subsequent work will explore how addressing additional requirements, including resiliency, privacy, and anti-money-laundering features, will impact core processing performance and design.

Banking Activities
Research and experimentation are also occurring at supervised banking institutions to explore new technology to enhance their own operations and in response to demands from their clients for services such as custody of digital assets. While distributed ledger technology may have the potential to improve efficiencies, increase competition, and lower costs, digital assets pose heightened risks such as those related to Bank Secrecy Act/anti-money laundering, cybersecurity, price volatility, privacy, and consumer compliance. The Federal Reserve is actively monitoring developments in this area, engaging with the industry and other regulators, and working to identify any regulatory, supervisory, and oversight framework gaps. Given that decisions at one banking agency can have implications for the other agencies, it is important that regulators work together to develop common approaches to ensure that banks are appropriately identifying, monitoring, and managing risks associated with digital assets.

Public Engagement
In light of the growing role of digital private money in the broader migration to digital payments, the potential use of foreign CBDCs in cross-border payments, and the importance of financial inclusion, the Federal Reserve is stepping up its research and public engagement on a digital version of the U.S. dollar. Members of Congress and executive agencies are similarly exploring this important issue. As noted above, to help inform these efforts, the Federal Reserve plans to issue a discussion paper to solicit public comment on a range of questions related to payments, financial inclusion, data privacy, and information security, with regard to a CBDC in the U.S. context.17 The Federal Reserve remains committed to ensuring a safe, inclusive, efficient, and innovative payments system that works for all Americans.


1. I am grateful to Alexandra Fernandez, Sonja Danburg, David Mills, and David Pope of the Federal Reserve Board for their assistance in preparing this text. These are my own views and do not necessarily reflect those of the Federal Reserve Board or the Federal Open Market Committee. Return to text

2. See Jerome Powell, “Federal Reserve Chair Jerome H. Powell Outlines the Federal Reserve’s Response to Technological Advances Driving Rapid Change in the Global Payments Landscape,” Board of Governors of the Federal Reserve System news release, May 20, 2021. Return to text

3. See Lael Brainard, “The Digitalization of Payments and Currency: Some Issues for Consideration,” remarks at the Symposium on the Future of Payments, Stanford University, California, February 5, 2021. Return to text

4. See, for instance, Joshua R. Greenberg, Bank Notes and Shinplasters: The Rage for Paper Money in the Early Republic (Philadelphia: University of Pennsylvania Press, 2020). Return to text

5. Codruta Boar and Róbert Szemere, “Payments go (even more) digital” (Basel: Bank for International Settlements, January 2021). Return to text

6. Kelsey Coyle, Laura Kim, and Shaun O’Brien, Consumer Payments and the COVID-19 Pandemic: The Second Supplement to the 2020 Findings from the Diary of Consumer Payment Choice (San Francisco: Federal Reserve Bank of San Francisco, February 2021). Return to text

7. Marie-Hélène Felt, Fumiko Hayashi, Joanna Stavins, and Angelika Welte, Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada (PDF), Federal Reserve Bank of Boston Research Department Working Papers No. 20-13 (Boston: FRB Boston, 2020). Return to text

8. See Bank for International Settlements, Committee on Payments and Market Infrastructures, Enhancing cross-border payments: building blocks of a global roadmap Stage 2 report to the G20 (PDF) (Basel: BIS, July 2020); and Financial Stability Board, Enhancing Cross-border Payments: Stage 3 Roadmap (PDF) (Washington: FSB, October 13, 2020). Return to text

9. Christian Pfister, Monetary Policy and Digital Currencies: Much Ado about Nothing? (PDF) Banque de France Working Paper 642 (Paris: Banque de France, 2017). Return to text

10. John Barrdear and Michael Kumhof, The Macroeconomics of Central Bank Issued Digital Currencies, Bank of England Working Paper No. 605 (London: BOE, July 18, 2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2811208. Return to text

11. Federal Deposit Insurance Corporation, How America Banks: Household Use of Banking and Financial Services (Washington: FDIC, October 19, 2020); and Federal Deposit Insurance Corporation, FDIC National Survey of Unbanked and Underbanked Households (Washington: FDIC, 2017). Return to text

12. See, for instance the Bank On National Account Standards, https://2wvkof1mfraz2etgea1p8kiy-wpengine.netdna-ssl.com/wp-content/uploads/2020/10/Bank-On-National-Account-Standards-2021-2022.pdf. Return to text

13. See Jesse Leigh Maniff, Inclusion by Design: Crafting a Central Bank Digital Currency to Reach All Americans, (PDF) Payments System Research Briefing, Federal Reserve Bank of Kansas City (Kansas City: FRB Kansas, December 2, 2020); and John Crawford, Lev Menand, and Morgan Ricks, “FedAccounts: Digital Dollars,” (PDF) George Washington Law Review, Vol. 89, p. 113, January 28, 2021. Return to text

14. For more information, see the Federal Reserve Community Reinvestment Act Proposed Rulemaking at https://www.federalreserve.gov/consumerscommunities/community-reinvestment-act-proposed-rulemaking.htmReturn to text

15. Federal Reserve Bank of Atlanta, “New Committee to Advance Safe, Efficient, Inclusive Payments,” news release, May 12, 2021. Return to text

16. See Eric Rosengren, “Central Bank Perspectives on Central Bank Digital Currencies,” remarks at the panel discussion of the Program on International Financial Systems, Harvard Law School, May 12, 2021, ; Jim S. Cunha, “Boston Fed’s Digital Dollar Research Project Honors 2 Hamiltons, Alexander and Margaret,” Federal Reserve Bank of Boston, February 25, 2021; and Lael Brainard, “An Update on Digital Currencies,” remarks at the Federal Reserve Bank of San Francisco Innovation Office Hours, August 13, 2020. Return to text

17. See Jerome Powell, “Federal Reserve Chair Jerome H. Powell Outlines the Federal Reserve’s Response to Technological Advances Driving Rapid Change in the Global Payments Landscape,” Board of Governors of the Federal Reserve System news release, May 20, 2021.

Bank of England statement on Central Bank Digital Currency

The Bank of England and HM Treasury have today announced the joint creation of a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential UK CBDC.

The Bank of England and HM Treasury have today announced the joint creation of a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential UK CBDC. A CBDC would be a new form of digital money issued by the Bank of England and for use by households and businesses. It would exist alongside cash and bank deposits, rather than replacing them.

The Government and the Bank of England have not yet made a decision on whether to introduce a CBDC in the UK, and will engage widely with stakeholders on the benefits, risks and practicalities of doing so.

The Taskforce aims to ensure a strategic approach is adopted between the UK authorities as they explore CBDC, in line with their statutory objectives, and to promote close coordination between them. The Taskforce will:

  • Coordinate exploration of the objectives, use cases, opportunities and risks of a potential UK CBDC.
  • Guide evaluation of the design features a CBDC must display to achieve our goals.
  • Support a rigorous, coherent and comprehensive assessment of the overall case for a UK CBDC.
  • Monitor international CBDC developments to ensure the UK remains at the forefront of global innovation.

The Taskforce will be co-chaired by Deputy Governor for Financial Stability at the Bank of England, Jon Cunliffe, and HM Treasury’s Director General of Financial Services, Katharine Braddick. As appropriate other UK authorities will be involved in the Taskforce.

The Bank of England has also today announced the creation of the following:

  • CBDC Engagement Forum to engage senior stakeholders and gather strategic input on all non-technology aspects of CBDC. The Forum will have an important role in helping the Bank and HM Treasury understand the practical challenges of designing, implementing and operating a CBDC. It will consider issues such as – but not limited to – ‘use cases’ for CBDC, functional needs of CBDC users, roles of public and private sectors in a CBDC system, financial & digital inclusion considerations, and data & privacy implications. Members will be drawn from financial institutions, civil society groups, merchants, business users and consumers.
  • CBDC Technology Forum to engage stakeholders and gather input on all technology aspects of CBDC from a diverse cross-section of expertise and perspectives. The Forum will have an important role in helping the Bank to understand the technological challenges of designing, implementing and operating a CBDC. Members will be invited by the Bank and drawn from a range of financial institutions, academia, fintechs, infrastructure providers and technology firms.

The Bank of England has also announced it will establish a CBDC Unit. This new division of the Bank of England will lead its internal exploration around CBDC. It will also lead the Bank’s external engagement on CBDC, including with other UK and international authorities. The Deputy Governor for Financial Stability, Jon Cunliffe, will oversee the work of the CBDC Unit.

Central banks of China and United Arab Emirates join digital currency project for cross-border payments

  • The Digital Currency Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates join the Multiple CBDC (m-CBDC) Bridge, a cross-border payments project.
  • The m-CBDC Bridge is a co-creation initiative run in partnership with the BIS Innovation Hub, the Hong Kong Monetary Authority and the Bank of Thailand.
  • The project aims to develop a proof-of-concept prototype to facilitate real-time cross-border foreign exchange payments on distributed ledger technology.

The Digital Currency Institute (DCI) of the People’s Bank of China (PBC) and the Central Bank of the United Arab Emirates (CBUAE) have joined a central bank digital currency project for cross-border foreign currency payments.

The m-CBDC Bridge initiative is run in partnership with the BIS Innovation Hub (BISIH), the Hong Kong Monetary Authority (HKMA) and the Bank of Thailand (BoT). It will further explore the capabilities of distributed ledger technologies (DLT) by developing a proof-of-concept (PoC) prototype to support real-time cross-border foreign exchange payment-versus-payment transactions in multiple jurisdictions, operating 24/7. It will analyse business use cases in a cross-border context with both domestic and foreign currencies.

The m-CBDC Bridge project will foster a conducive environment for more central banks in Asia as well as other regions to jointly study the potential of DLT in enhancing the financial infrastructure for cross-border payments.

The aim of the project, which was initiated by the HKMA and the BoT under the name Inthanon-LionRock and renamed upon the accession of the BIS Innovation Hub Centre in Hong Kong SAR, the DCI of the PBC and the CBUAE, is to propose solutions and concepts to alleviate the current pain points in making cross-border fund transfers. These include inefficiencies, high cost and complex regulatory compliance.

The participating central banks will take into account the results of the PoC work to evaluate the feasibility of the m-CBDC Bridge project for cross-border fund transfers, international trade settlement and capital market transactions in their own jurisdictions.


About the BIS Innovation Hub 

The BIS Innovation Hub (BISIH) was established in 2019 to identify and develop in-depth insights into critical trends in financial technology of relevance to central banks, to explore the development of public goods to enhance the functioning of the global financial system, and to serve as a focal point for a network of central bank experts on innovation. It complements the already well established cooperation within the BIS-hosted committees. At present, there are Hub centres in Switzerland, Singapore and Hong Kong SAR. In the coming months, new centres will open in Toronto, London, Frankfurt/Paris and Stockholm. The BIS has also formed a strategic partnership with the Federal Reserve System in New York.

Can digital central bank currencies function as cash?

Many central banks are currently researching the possibility of issuing digital money (central bank digital currency – CBDC) as a complement to the central bank money we use today, namely cash. However, digital central bank currencies would not function offline and anonymously in the same way as cash. This is the conclusion drawn by the authors of the Staff Memo “On the possibility of a cash-like CBDC”.

Digital central bank currencies are money that can either be held in an account with the central bank (account-based) or as digital units of value (token-based). Both types of digital central bank currency require, however, that there are one or more registers behind them, keeping track of who owns the money. The link to these registers means that neither the token-based nor the account-based money can offer the same anonymity as cash, as the transactions will be traceable. Nor will offline payments, where there is no communication with the register, be possible to any great extent. A token-based CBDC does not appear to have a greater capacity to fully replicate cash than an account-based one in this respect.

This Staff Memo was written by Hanna Armelius, Carl-Andreas Claussen and Isaiah Hull at the Riksbank’s Payments Department and Research Division.

A Staff Memo is a publication in which Riksbank staff can publish advanced analyses of relevant issues. It is a staff publication free of policy conclusions and personal standpoints in current policy issues.

Burkhard Balz: Central bank digital currencies – the future of money?

Speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, at the American Council on Germany, virtual event, 10 February 2021.

1 Introduction – Central Bank Money

Dear Steve,
Ladies and gentlemen,

I am delighted to have the opportunity to talk to you about one of the most exciting topics facing central banks today:

The future of money. Do we need other forms of money beside the ones we already have? And do we need other forms of central bank money? Should banks’ deposits with the central bank be tokenised? Should banknotes become digital?

There are many questions surrounding “central bank digital currencies” (CBDC). And we still have to find the right answers. But one thing is certain:  central banks around the world have undertaken tremendous efforts to assess the potential and investigate the opportunities of CBDC.

Just recently, the Bank for International Settlement (BIS) published its third survey amongst central banks worldwide. The survey shows a shift from mainly analytical work towards technical experimentation. More than 60% of central banks are engaged in practical experimental work.1

It is clear, then, that even more headway has been made in exploring central bank digital currencies over the past year. On the one hand, the BIS predicts that central banks representing a fifth of the world’s population will issue a general purpose CBDC in the next three years. On the other, a widespread roll out of CBDCs seems some way off. And there are good reasons for this. Because CBDC is a game changer – with potential benefits, but also with a number of challenges.

Central bank digital currencies promise to combine the improved efficiency of their digital form with the safety provided by a central bank in a single means of payment.

However, central bank digital currency would be a third form of central bank money, alongside cash and bank reserves. Introducing a new form of central bank money such as this could have profound impact on the financial system, especially if it is not only available to banks, but instead, like cash today, to the general public. If not properly thought through, such an intervention may lead to unintended consequences.

Today, I would like to outline to you the areas that I believe we need to tackle in order to create a safe, efficient and future-proof currency. But let me start with three trends we are currently observing: digitalisation, declining cash usage and the emergence of new forms of money.

2 Trends in payments

Trend 1: Digitalisation

Our economy is growing more digital by the day. Business processes are becoming increasingly automated and interdependent. Complex value chains arise. The “Internet of Things” enables machine-to-machine communication. E-commerce and online services of all kinds are about to experience an enormous uptake due to the pandemic. The pace of digitalisation has probably never been faster than today. These developments are increasingly calling for a safe and efficient settlement asset which can be seamlessly integrated into almost any kind of business process. 

Trend 2: Declining use of cash

Parallel to this, we can see that the use of cash is waning, even in Germany. The current pandemic has boosted not only the use of credit and debit cards, but contactless payments, in particular. 

In a recently conducted survey on payment behaviour in Germany during the coronavirus pandemic, we found out that the share of cash transactions has fallen from 74% to 60% over the last three years.2 Admittedly, it remains to be seen whether the current behaviour also persists in the post-coronavirus period. But what we are currently seeing is quite a considerable change for a country which is strongly accustomed to paying in cash.

Trend 3: Emerging means of payments other than €

Another trend is the emergence of new forms of digital means of payments. These can be central bank digital currencies issued by foreign central banks as well as privately issued means of payment such as stablecoins. At the moment, these alternative means of payment are still in the development or testing phase. However, given the speed at which technology is developing, their widespread adoption might be far less off than we think. Should these forms of money become widely used as a medium of exchange or store of value in the euro area, significant implications could arise: for the role of the euro or the payment industry, and consequently also for financial stability. 

3 Central banks need to be prepared

The three trends I have just outlined highlight that, if the payments ecosystem is going to expand, central banks need to be prepared.

As highlighted in the report by the BIS and seven central banks, central banks need to be in a position to make an informed judgment when it comes to the decision on a central bank digital currency.3

Any dedicated central bank digital currency should be designed carefully. Possible advantages such as safety and efficiency improvements in everyday payments, productivity gains by promoting money which could be used in programmable environments, or the availability of new services must clearly outweigh the potential risks with regard to monetary policy or financial stability. In any case, it must be properly designed so as to mitigate all of those risks.

The Eurosystem is taking a comprehensive approach to addressing these challenges. As part of a high-level Eurosystem task force, my colleagues and I identified possible scenarios that would require the issuance of a digital euro and published them last October in the ECB’s “Report on a digital euro”4 The Governing Council of the ECB has not yet reached a decision on whether to introduce a digital euro. We must first be sure that there is a need to issue CBDC and, if so, that we are able to manage the accompanying risks. In the digital age, time is of essence. But we also have to take the time to do our homework.

Therefore, the Eurosystem has started to engage widely with citizens, academia, the financial sector and public authorities to assess in detail their needs, as well as the benefits and challenges they expect from the issuance of a digital euro. In mid-January, a public consultation on the digital euro came to an end with record levels of participation from European citizens.

Experimental work supports the analysis of possible technical designs and their implications. Further outreach to the market and exchange with other international central banks leading the work on central bank digital currencies will follow. And this brings me to my last point.

4 International dimension will be key 

International cooperation will be key in shaping the future ecosystem for central bank digital currencies.

As the BIS and other central banks have rightly emphasised in their report5 regardless of the final design, there are certain core features and common standards that are valuable in guiding a central bank when deciding to issue a digital currency for the public.

The features I consider most relevant in this context are convertibility, interoperability and international standards.

Convertibility is essential to ensure trust in a currency. People must be sure they can exchange the form of the money they hold at par at any point in time.

Interoperability is required to ensure a smooth exchange of money between different kinds of payment systems. In a digitalised world, this is an absolute prerequisite to ensure an efficient financial system.

Finally, appropriate international standards are the focal point in ensuring an efficient cross-border payments flow.

In my view, these three features are the key determinants of a stable and broadly accepted digital currency that fits into the international financial system.

Against this backdrop, safe and efficient payment markets must be brought to the next level, in particular for cross-border and cross-currency payments. This topic has been on the agenda for several years. While we have seen significant progress in improving payments at the domestic or regional level, cross-border payments are, putting it bluntly, still in the medieval age.

The G20 roadmap on enhancing cross-border payments is an important step in this direction. The Committee on Payments and Market Infrastructures, together with the Financial Stability Board and the BIS, has set up a comprehensive working programme encompassing 19 building blocks across five focus areas, including new payment infrastructures and arrangements, which covers central bank digital currencies, amongst other things.

This work can only serve the long-term goal of achieving a fair and sustainable payments landscape, as long as international cooperation thrives.

I am optimistic that this fruitful work initiated by the G20, but also in the form of other international formats, will continue. CBDC might not be the panacea for all challenges that payments are facing. But it might be an option, including for cross-border payments.

In a nutshell, payments are – and always will – be a backbone of the economy. The digital economy has already changed the payment landscape quite significantly and will continue to do so in future. It is the responsibility of the central bank to create trust in its currency and to ensure that payments remain competitive, innovative and safe. We also have to ensure that central bank money will be offered in a way that is compatible with the digital economy.

Let me finish with the words of Abraham Lincoln: “The best way to predict the future is to create it.”


1 BIS Papers No 114, Ready, steady, go? – Results of the third BIS survey on central bank digital currencies (January 2021).

2 https://www.bundesbank.de/en/tasks/topics/making-payments-in-2020-the-year-of-covid-19-card-based-and-contactless-payments-trending-823592

3 https://www.bis.org/publ/othp33.pdf

4 https://www.ecb.europa.eu/pub/pdf/other/Report_on_a_digital_euro~4d7268b458.en.pdf

5 https://www.bis.org/publ/othp33.pdf

Banque de France conducted a successful experiment with IZNES on the use of central bank digital money for interbank settlement purposes.

On 17 December 2020, the Banque de France successfully carried out an experiment on central bank digital currency (CBDC) with IZNES as part of the experimental programme launched in March 1.

The experiment consisted in the subscription and redemption by investors of money market fund units on a private Blockchain, provided by SETL, for a global amount exceeded 2 million euros. Cash settlements were simulated by central bank digital money issued on the blockchain. From a technological point of view, the experiment required the development and
deployment of smart contracts so that the Banque de France could issue and control the circulation of CBDC tokens and ensure that their transfer takes place simultaneously with the delivery of the fund unit tokens into the investors’ portfolio.
The experiment was carried out in collaboration with IZNES, SETL, CACEIS, CITIGROUP, GROUPAMA AM, OFI AM and DXC.
This experiment represents a significant step forward in assessing the levers that a central bank digital currency provides for enhancing the efficiency and resilience of the settlement of financial asset in a blockchain environment, thereby contributing to the smooth functioning of
the real economy. The programme’s other experiments are ongoing until mid-2021 and all the lessons learned will be an important part of the Banque de France’s contribution to the Eurosystem’s more global reflection on the benefits of CBDC.

ECB digital euro consultation ends with a record level of public feedback

Over 8,000 responses received in online survey on digital euro

● Privacy, security and pan-European reach ranked highest in European citizens’ preferences
● Detailed analysis to be published in spring, ahead of decision on project launch
The European Central Bank (ECB) concluded its public consultation on the digital euro yesterday and will now analyse in detail the large number of responses. 8,221 citizens, firms and industry associations submitted responses to an online questionnaire, a record for ECB public consultations.
The public consultation was launched on 12 October 2020, following the publication of the Eurosystem report on a digital EUR. The ECB will publish a comprehensive analysis of the public consultation in the spring, which will serve as an important input for the ECB’s Governing Council when deciding whether to launch a digital euro project.

An initial analysis of raw data shows that privacy of payments ranked highest among the requested features of a potential digital euro (41% of replies), followed by security (17%) and pan-European reach (10%).
“The high number of responses to our survey shows the great interest of Europe’s citizens and firms in shaping the vision of a digital EUR,” said Fabio Panetta, Member of the ECB’s Executive Board and Chair of the task force on a digital euro. “The opinions of citizens, businesses and all stakeholders are of utmost importance for us as we assess which use cases a digital euro might best serve.”

The Eurosystem task force, bringing together experts from the ECB and 19 national central banks of the euro area, identified possible scenarios that would require the issuance of a digital euro. These scenarios include an increased demand for electronic payments in the euro area that would require a European risk-free digital means of payment, a significant decline in the use of cash as a means of payment in the euro area, the launch of global private means of payment that might raise regulatory concerns and pose risks for financial stability and consumer protection, and a broad take-up of central bank digital currencies issued by other central banks.
A digital euro would be an electronic form of central bank money accessible to all citizens and firms – like banknotes, but in a digital form – to make their daily payments in a fast, easy and secure way. It would complement cash, not replace it. The Eurosystem will continue to issue cash in any case.

A digital common currency would combine the efficiency of a digital payment instrument with the safety of central bank money. The protection of privacy would be a key priority, so that the digital euro can help maintain trust in payments in the digital age.

Ukrainian Ministry of Digital Transformation to develop virtual assets and to facilitate CBDC infrastructure with the Stellar Development Foundation

On December 28, the Ministry of Digital Transformation of Ukraine and the Stellar Development Foundation (SDF) signed a Memorandum of Understanding and Cooperation, within which they will work on the development of a strategy for virtual assets in Ukraine.

Under the Memorandum, the Ministry of Digital Transformation and SDF will work to develop a modern virtual asset market infrastructure and enhance Ukraine’s status as an innovative digital country in the financial market in Eastern Europe.

“The Ministry of Digital Transformation is working on creating the legal environment for the development of virtual assets in Ukraine. We believe our cooperation with the Stellar Development Foundation will contribute to development of the virtual asset industry and its integration into the global financial ecosystem,” said Oleksandr Bornyakov, Deputy Minister of Digital Transformation for IT Development. “Another important aspect of this cooperation is contributing to the development of the infrastructure for a Ukrainian national digital currency. Most of the world’s leading countries are developing their own national digital currencies. The National Bank of Ukraine has been researching the possibility of CBDC implementation since 2017. It demonstrates Ukraine’s movement towards one of major financial trends. At the Ministry, we aspire to ensure our country’s adaptation to technological innovations and competitiveness in the financial market in Eastern Europe.”

The memorandum outlines the core focus of the partnership as follows:

  • cooperation on the development of the virtual assets market in Ukraine;
  • provision of support to projects related to virtual assets;
  • implementation and regulation of stablecoin circulation in Ukraine; and,
  • facilitation of the development of the digital currency of the Central Bank in Ukraine.

“We believe digital assets and national digital currencies are one of the most important innovations of our lifetimes and we are excited to play a role in the creation of Ukraine’s digital asset infrastructure,” said Denelle Dixon, CEO and Executive Director, Stellar Development Foundation. “Through the leadership of the Ministry, Ukraine has demonstrated its commitment to fostering an environment of innovation for the digital economy. We look forward to working with the Ministry and other stakeholders to digitize the hryvnia, to bring Stellar-based tools and services to the people and businesses of Ukraine, and to introduce new partnership opportunities in Ukraine to businesses in the Stellar ecosystem.”

Stellar Development Foundation will officially launch its activity with Ukraine in January 2021.

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About Stellar

Stellar is a decentralized, fast, scalable, and uniquely sustainable network for financial products and services. It is both a cross-currency transaction system and a platform for digital asset issuance, designed to connect the world’s financial infrastructure. Dozens of financial institutions worldwide issue assets and settle payments on the Stellar network, which has grown to over 4.7 million accounts. 

About the Stellar Development Foundation

The Stellar Development Foundation (SDF) is a non-profit organization that supports the development and growth of Stellar, an open-source network that connects the world’s financial infrastructure. Founded in 2014, the Foundation helps maintain Stellar’s codebase, supports the technical and business communities building on the network, and serves as a voice to regulators and institutions. The Foundation seeks to create equitable access to the global financial system, using the Stellar network to unlock the world’s economic potential through blockchain technology.

Tlaib, García and Lynch Introduce Legislation Protecting Consumers from Cryptocurrency-Related Financial Threats

This week, Congresswoman Rashida Tlaib (MI-13), along with Congressmen Jesús “Chuy” García (IL-04) and Chairman of Task Force on Financial Technology Rep. Stephen Lynch (MA-08), introduced the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, which would protect consumers from the risks posed by emerging digital payment instruments, such as Facebook’s Libra and other Stablecoins currently offered in the market, by regulating their issuance and related commercial activities. Digital currencies, whose value is permanently pegged to or stabilized against a conventional currency like the dollar, pose new regulatory challenges while also represent a growing source of the market, liquidity, and credit risk.

The STABLE Act would remedy some of those challenges at a time when the COVID-19 Pandemic has exposed numerous barriers to accessing and utilizing mainstream financial institutions, leaving many to look to the financial technology sector to meet the financial servicing needs of low- and moderate-income (LMI) consumers for everything from faster direct payments, access to loans, and even access to bank accounts. LMI consumer vulnerabilities could be exploited and obscured by bad actors looking to issue stablecoins, like other shadow money issuers in the past. For Tlaib, García, and Lynch, that threat coupled with the financial strains posed by the ongoing pandemic requires urgent action, including passage of the STABLE Act that would:

  • Require any prospective issuer of a stablecoin to obtain a banking charter;
  • Require that any company offering stablecoin services must follow the appropriate banking regulations under the existing regulatory jurisdictions;
  • Require that any company or bank issuing a stablecoin to notify and obtain approval from the Fed, the FDIC, and the appropriate banking agency 6 months prior to its issuance and maintain an ongoing analysis of potential systemic impacts and risks;
  • And require that any stablecoin issuers obtain FDIC insurance or otherwise maintain reserves at the Federal Reserve to ensure that all stablecoins can be readily converted into United States dollars, on demand.

“Getting ahead of the curve on preventing cryptocurrency providers from repeating the crimes against low- and moderate-income residents of color that traditional big banks have is—and has been—critically important,” Congresswoman Tlaib said. “From the OCC to the Federal Reserve to those peddling stablecoins, the protections the STABLE Act would make possible are more needed than ever amid a pandemic that will breed riskier financial decisions out of necessity because our federal government continues to fail us all by not providing adequate relief legislation. I thank Congressman García and Chairman Lynch for co-leading this important effort to see these protections made a reality.”

“Working class communities like mine in Chicago already face tremendous barriers to accessing financial services and credit. The Trump administration’s deregulation of our financial system has opened the door for tech companies to consolidate their power by preying on people of color with products that promise inclusion but only undermine our banking system,” said Congressman Jesús “Chuy” García. “That’s why I’m proud to introduce the STABLE Act with Reps. Tlaib and Lynch to ensure that new financial tools like stablecoins have proper oversight and protections. Congress must ensure that new financial technologies and payment tools do not prey on vulnerable users. The STABLE Act does just that–it embraces innovation while also protecting consumers.”

“The STABLE Act is a concrete step toward protecting Americans’ finances and ensuring safety and soundness in financial institutions,” Rep. Lynch said. “Stablecoins present a new and innovative way for consumers to use their money and I believe this technology can be used to make financial transactions more efficient while potentially increasing financial inclusion. However, adopting new technology has its risks and I give great credit to my colleague, Rep. Rashida Tlaib, for recognizing and addressing the need for appropriate consumer protections. In the STABLE Act Rep. Tlaib ensures that our financial regulators have the necessary tools to protect consumers. We cannot outsource the issuance of American currency to private entities and the STABLE Act guarantees that our regulators will be able to effectively oversee the application of this new technology.”

Facebook has attempted to take advantage of the financial exclusion and gap in the market—just one of the actors that have pursued issuing stablecoins by pegging them to a basket of major conventional currencies. JP Morgan, Apple, and Paypal/Venmo have also considered issue their own stablecoin variants that also have the potential to take advantage of unbanked and underbanked communities. Many of these stablecoins inherently represent a promise that, without regulations, there is potential for disparate impact, “predatory inclusion,” “digital redlining,” and the “color of surveillance,” as consumer advocates have warned.  

Some of the foremost consumer advocacy organizations, including The Public Money Action, The Law and Political Economy (LPE) Project, Consumer Reports and Americans for Financial Reform, have endorsed the STABLE Act.

“The STABLE Act is a forward-looking bill that embraces digital payments innovation, while simultaneously ensuring that the our money remains safe, secure, and properly regulated,” Willamette University College of Law Assistant Professor Rohan Grey said.

“By extending federal banking regulation and consumer protections to cover new forms of ‘deposits’, the STABLE Act addresses the growth of ‘shadow payments’ and ‘shadow banking’—forms of financial activity that merit robust, preventative, and comprehensive regulation regardless of their specific legal and technological design,” Public Money Action Director and Yale Law School Associate Research Scholar Raúl Carrillo said. “Even more importantly, the STABLE Act shuts the door on Big Tech companies like Facebook that are trying to enter the banking space without following the appropriate rules or conducting business on a level playing field.”

“The STABLE Act establishes appropriate oversight of issuers of stable coins,” said Consumer Reports Manager of Financial Policy Christina Tetreault said.  “It’s an important step in establishing coherent federal oversight, supervision and regulation of digital financial instruments.”  

“Tech companies are promoting unregulated ‘stablecoins’ that compete with the U.S. dollar and regulated banks by promising customers they can’t lose money on their investments,” Americans for Financial Reform Policy Director Marcus Stanley said. “These stablecoins are insured deposits in all but name. The STABLE Act would bring an end to this evasion by ensuring that companies that guarantee customer deposits are properly regulated as insured depository banks.”

“This is the first comprehensive attempt to offer regulatory clarity for the defense of the U.S. dollar in digital form, and places America among other world countries as a leader in digital assets.” said Value Technology Foundation President and CEO Jason Brett.

Tlaib and Lynch previously led a letter cosigned by García to the Acting Comptroller of the Currency (OCC) Brian Brooks blasting the bureau’s unilateral actions in the digital financial activities space, including interpretive letters on cryptocurrency custody, stablecoins, and its announced plans to start offering special purpose ‘payments’ charters, without protecting the financial system and consumers from the related increase in systemic risk.