Federal Reserve: CBDC Could “Increase Welfare”

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  • The Federal Reserve has released a report that looks into the studies already undertaken with regard to the potential impact of a CBDC
  • The review suggests that a digital dollar could help increase welfare in the country in a number of ways
  • The U.S. is behind other countries when it comes to developing a CBDC

The Federal Reserve has released a report that looks at the potential impact of a Central Bank Digital Currency (CBDC) in which it states that, under the right conditions, the introduction of a digital dollar could “increase welfare”. This is down to the potential for improved interest rates and loan terms from banks seeking to keep customers, as well as the potential for the CBDC to bank the unbanked.

CBDC Would Raise “Financial Inclusion”

The Federal Reserve report, entitled Central Bank Digital Currency: A Literature Review, looks at the existing models put forward by researchers into the concept and potential impact of a U.S. CBDC. The report is generally bullish on the potential of CBDCs to benefit society, stating that a digital dollar could “lead to greater financial inclusion” due to the fact that users will have a bank account with the Federal Reserve rather than with a commercial bank.

Banks, the report says, will likely fight back by incentivizing customer retention through more favorable terms on deposit interest and loans:

Faced with such a substitute, commercial banks may respond by changing the deposit rates they offer to savers and, because of the resulting impact on banks’ funding cost, the terms of the loans they offer to borrowers.

While this may be welcome initially, the Federal Reserve echoes the concerns of some policymakers that “the introduction of CBDC may replace banks’ main source of funding”, which in turn might lead to them tightening up on lending.

U.S. Remains Behind in Development

Development of a CBDC in the United States has been slow, especially when compared to other countries like South Korea and China, but at least reports like this one suggest that the country is finally taking the necessary steps to consider the ramifications of a digital dollar.