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Money and Payments: The Fed Solicits Input On a New Digital Dollar

The Fed Solicits Input On a New Digital Dollar. I provide comments on 22 Fed questions.
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Image from a Fed PDF on a new digital dollar payment system

Image from a Fed PDF on a new digital dollar payment system

Inquiring minds are reading a new Fed White Paper proposal Money and Payments: The U.S. Dollar in the Age of Digital Transformation

These are snips from a 40-page PDF, link above. 

For ease in reading I will skip my usual blockquote format but mark the end. Emphasis in italics is mine.

If you are familiar with the issues and the Fed's goals and just wish to see my comments, please scroll down to "Mish Comments"

Until that subtitle everything is a snip of the Fed publication.

Executive Summary 

This paper is the first step in a public discussion between the Federal Reserve and stakeholders about central bank digital currencies (CBDCs). For the purpose of this paper, a CBDC is defined as a digital liability of a central bank that is widely available to the general public. In this respect, it is analogous to a digital form of paper money. The paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a U.S. CBDC.


The introduction of a CBDC would represent a highly significant innovation in American money. Accordingly, broad consultation with the general public and key stakeholders is essential. This paper is the first step in such a conversation. It describes the economic context for a CBDC, key policy considerations, and the potential risks and benefits of a U.S. CBDC. It also solicits feedback from all interested parties. The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.  

The Existing Forms of Money 

Money serves as a means of payment, a store of value, and a unit of account. In the United States, money takes multiple forms:

• Central bank money is a liability of the central bank. In the United States, central bank money comes in the form of physical currency issued by the 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. Commercial bank money is held in accounts at 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. 

The different types of money carry different amounts of credit and liquidity risk. Commercial bank money has very little credit or liquidity risk due to federal deposit insurance, the supervision and regulation of commercial banks, and commercial banks’ access to central bank liquidity. Nonbank money lacks the full range of protections of commercial bank money and therefore generally carries more credit and liquidity risk. Central bank money carries neither credit nor liquidity risk, and is therefore considered the safest form of money.  

The Payment System 

The U.S. payment system connects a broad range of financial institutions, households, and businesses. Most payments in the United States rely on interbank payment services—such as the ACH network or wire-transfer systems—to move money from a sender’s account at one bank to a recipient’s account at another bank.  

Challenges for the Payment System 

While the existing U.S. payment system is generally effective and efficient, certain challenges remain. In particular, a significant number of Americans currently lack access to digital banking and payment services. Additionally, some payments—especially cross-border payments—remain slow and costly. Digital financial services and commercial bank money have become more accessible over time, and increasing numbers of Americans have opened and maintain bank accounts. Nonetheless, more than 7 million—or over 5 percent of U.S. households—remain unbanked. Nearly 20 percent more have bank accounts, but still rely on more costly financial services such as money orders, check-cashing services, and payday loans.  

Cross-border payments currently face a number of challenges, including slow settlement, high fees, and limited accessibility. The sources of these frictions include the mechanics of currency exchange, variations in different countries’ legal regimes and technological infrastructure, timezone complications, and coordination problems among intermediaries, including correspondent banks and nonbank financial service providers. Regulatory requirements related to money laundering and other illicit activities introduce further complications. Finally, certain destination countries for cross-border payments have limited competition, allowing existing providers to charge high fees. As of the second quarter of 2021, the average cost of sending a remittance from the United States to other countries was 5.41 percent of the notional value of the transaction. These high costs have a significant impact on households that make remittance transactions.

 Digital Assets  

Technological innovation has recently ushered in a wave of digital assets with money-like characteristics. These “cryptocurrencies” arose from a combination of cryptographic and distributed ledger technologies, which together provide a foundation for decentralized, peer-to-peer payments. Cryptocurrencies have not been widely adopted as a means of payment in the United States.

They remain subject to extreme price volatility, are difficult to use without service providers, and have severe limitations on transaction throughput. Many cryptocurrencies also come with a significant energy footprint and make consumers vulnerable to loss, theft, and fraud. Stablecoins are a more recent incarnation of cryptocurrency that peg their value to one or more assets, such as a sovereign currency or commodity. Stablecoins pegged to the U.S. dollar are predominantly used today to facilitate trading of other digital assets, but many firms are exploring ways to promote stablecoins as a widespread means of payment.  

A full discussion of stablecoin arrangements is outside the scope of this paper. However, the President’s Working Group on Financial Markets (PWG), along with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), recently published a report on payment stablecoins.  

To address the risks of payment stablecoins, the PWG report recommends that Congress act promptly to enact legislation that would ensure payment stablecoins and payment stablecoin arrangements are subject to a consistent and comprehensive federal regulatory framework. Such legislation would complement existing authorities regarding market integrity, investor protection, and illicit finance  

Central Bank Digital Currency

The Federal Reserve will continue to explore a wide range of design options for a CBDC. While no decisions have been made on whether to pursue a CBDC, analysis to date suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified

Privacy-protected: Protecting consumer privacy is critical. Any CBDC would need to strike an appropriate balance, however, between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity.  

Transferable: For a CBDC to serve as a widely accessible means of payment, it would need to be readily transferable between customers of different intermediaries. The ability to transfer value seamlessly between different intermediaries makes the payment system more efficient by allowing money to move freely throughout the economy. 

Identity-verified: Financial institutions in the United States are subject to robust rules that are designed to combat money laundering and the financing of terrorism. A CBDC would need to be designed to comply with these rules. In practice, this would mean that a CBDC intermediary would need to verify the identity of a person accessing CBDC, just as banks and other financial institutions currently verify the identities of their customers. 

Potential Benefits of a CBDC 

A CBDC could potentially serve as a new foundation for the payment system and a bridge between different payment services, both legacy and new. It could also maintain the centrality of safe and trusted central bank money in a rapidly digitizing economy.  

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. According to a 2020 survey, U.S. consumers used cash for 19 percent of total transactions (6 percent by value). The Federal Reserve is committed to ensuring the continued safety and availability of cash and is considering a CBDC as a means to expand safe payment options, not to reduce or replace them.  

Potential Risks and Policy Considerations for a CBDC

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. 

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. 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. A shift away from these other low-risk assets could reduce credit availability or raise credit costs for businesses and governments. These concerns could potentially be mitigated by CBDC design choices. A non-interest-bearing CBDC, for example, would be less attractive as a substitute for commercial bank money. In addition, a central bank might limit the amount of CBDC an end user could hold.  

Safety and Stability of the Financial System 

Because central bank money is the safest form of money, a widely accessible CBDC would be particularly attractive to risk-averse users, especially during times of stress in the financial system. The ability to quickly convert other forms of money—including deposits at commercial banks—into CBDC could make runs on financial firms more likely or more severe. Traditional measures such as prudential supervision, government deposit insurance, and access to central bank liquidity may be insufficient to stave off large outflows of commercial bank deposits into CBDC in the event of financial panic.  

Efficacy of Monetary Policy Implementation

Over the long term, the Federal Reserve might have to increase the size of its balance sheet to accommodate CBDC growth, similar to the balance-sheet impact of issuing increasing amounts of physical currency. This need would be mitigated to the extent that demand for the CBDC represented a shift, directly or indirectly, away from the Federal Reserve’s nonreserve liabilities, including physical currency. Additionally, the Federal Reserve would likely need to increase the level of reserves on average, in order to provide an adequate buffer against unanticipated increases in CBDC. Such surges could otherwise push the aggregate quantity of reserves in the banking system below the “ample” level and put upward pressure on the federal funds rate.  

The interactions between CBDC and 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. In this case, the level and volatility of the public’s demand for CBDC could be quite substantial. Consumers, businesses, and potentially others could decide to pare their holdings of bank deposits, Treasury bills, and money market mutual fund investments and increase holdings of CBDC.  

Seeking Comment and Next Steps  

As noted above, the introduction of a CBDC would represent a highly significant innovation in American money. This paper is the first step in a public discussion between the Federal Reserve and stakeholders about CBDC. The Federal Reserve will only take further steps toward developing a CBDC if research points to benefits for households, businesses, and the economy overall that exceed the downside risks, and indicates that CBDC is superior to alternative methods. Furthermore, the Federal Reserve would only pursue a CBDC in the context of broad public and cross-governmental support. The Federal Reserve welcomes comments from all stakeholders on the questions listed below. The Federal Reserve will also conduct targeted outreach and convene public forums to foster a broad dialogue about CBDC.  

Mish Comments 

First, the Fed produced a generally well-balanced synopsis, especially of the benefits.

Its concerns on the risks are due primarily to its interest rate manipulation schemes, inflation bias, and fractional reserve lending in general. 

It failed to mention three big risks, expiring money, negative interest rates, and genuine helicopter drop digital currency handouts. 

Huge White Paper Error 

The white paper also made a huge error in its assertion "Banks currently rely (in large part) on deposits to fund their loans."

No, No, No!

The Bank of International Settlements publication The Bank Lending Channel Revisited gets the horse in front of the cart. 

  • If anything, the process actually works in reverse, with loans driving deposits
  • In particular, it is argued that the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. 
  • Under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements
  • An adequately capitalized banking system can always fulfill the demand for loans if it wishes to.  


Banks lend when they perceive they have good credit risks, provided they are not capital impaired. 

It is very disconcerting that the Fed seems to have no idea how lending works.

Fed Also Gets Inflation Wrong 

I have commented on this many times before but the Fed's fear of deflation is also ass backward. 

Scroll to Continue


How Damaging is CPI Deflation?

A BIS Study show routine price deflation is a benefit. Central banks have not caught on.

For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?

From the BIS Study 

We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression. But we find a stronger link between output growth and asset price deflations, particularly during postwar property price deflations. We fail to uncover evidence that high debt has so far raised the cost of goods and services price deflations, in so-called debt deflations. The most damaging interaction appears to be between property price deflations and private debt.

Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.

The Fed has been hell bent for years on preventing deflation and in the process blew the third major economic bubble in 20 years.

Ironically, the bubble-blowing Fed efforts will eventually cause the deflationary crash the Fed wants to prevent. 

Fed Feedback Form 

The Fed provides this link to a Central Bank Digital Currency (CBDC) Feedback Form

There are 22 questions and my answers are below. 

1. What additional potential benefits, policy considerations, or risks of a CBDC may exist that have not been raised in this paper?

1A: The biggest risks are the Fed might be tempted to try expiring money, force negative rates to spur lending, or give money away as opposed to lending.  Fundamentally, the Fed appears not to understand neither bank lending nor the risk of deflation. "Banks do NOT currently rely (in large part) on deposits to fund their loans."  The BIS paper "The bank lending channel revisited" gets things correct. The paper accurately states "If anything, the process actually works in reverse, with loans driving deposits."  Similarly, the BIS paper "The costs of deflations: a historical perspective", addresses the Fed's seriously misguided notion that routine CPI deflation is somehow damaging. Finally, Saule Omarova, President's Biden's Marxist nominee for Comptroller of the Currency supports a people's QE and a genuine "helicopter drop". That is an enormous risk

2. Could some or all of the potential benefits of a CBDC be better achieved in a different way?

2A: No comment

3. Could a CBDC affect financial inclusion? Would the net effect be positive or negative for inclusion?

3A: The net effect would be positive. But the risk is the Fed goes overboard. The White Paper mentioned "payday loans". The Fed should not be in the business of thinking its responsibility is to be a subprime consumer lender. Nor should CBDCs be considered a substitute for Payday loans. Add this to the list of risks. 

4. How might a U.S. CBDC affect the Federal Reserve’s ability to effectively implement monetary policy in the pursuit of its maximum-employment and price-stability goals?

4A: The Fed would be wise to reconsider its monetary policy goals. The Fed has clearly blown the third major bubble in about 20 years. Fed Dot Plots prove its ineptitude at forecasting recessions and inflation. The Fed's goal of achieving 2% inflation has been to the sole benefit of banks, the wealthy, the asset holders, and those with first access to money. Exponential functions are not stable. How about a sound dollar instead of blowing asset bubbles. Astrologers Would Likely Beat the Fed at Inflation Forecasting. Why? Because the results would be random. The Fed has persistent built-in bias that has been wrong for a decade. See

5. How could a CBDC affect financial stability? Would the net effect be positive or negative for stability?

5A: If the Fed would stop blowing bubbles, take its head out of the sand and admit it cannot steer the economy like a truck, we would all be better off. Much of the problems of financial stability stem from the fractional reserve nature of the banking system. Fed Operations Look More Like a Ponzi Scheme Than Bitcoin or Ethereum.

6. Could a CBDC adversely affect the financial sector? How might a CBDC affect the financial sector differently from stablecoins or other nonbank money?

6A: The Fed is thinking about this backwards. How about a genuine 100% gold backed dollar. That would be stable. 

7. What tools could be considered to mitigate any adverse impact of CBDC on the financial sector? Would some of these tools diminish the potential benefits of a CBDC?

7A: The Fed should abandon its tools. For a decade the Fed tried to produce 2% inflation and failed. The Bank of Japan still fails. Now the Fed finally "succeeded" and wants the stability it used to have. The Fed considers "forward guidance" a "tool". The result is banks and hedge funds front-running policy until it all blows up. The market has now priced in 7 rate hikes in two years largely because of Fed yapping. I bet the Fed does not hike 7 times. Again, Fed Dot Plots are laughable.

8. If cash usage declines, is it important to preserve the general public’s access to a form of central bank money that can be used widely for payments?

8A: If cash usage decline further it will be associated with CBDCs.

9. How might domestic and cross-border digital payments evolve in the absence of a U.S. CBDC?

9A: The ECB and Bank of China are well ahead of the Fed. Digital payments are coming with or without the Fed. Europe is far more advanced and will likely set the rules. These questions show the Fed is in catch up mode. 

10. How should decisions by other large economy nations to issue CBDCs influence the decision whether the United States should do so?

10A: The Fed can be a leader and set rules or a follower. That is the choice, assuming the Fed is not too late already.

11. Are there additional ways to manage potential risks associated with CBDC that were not raised in this paper?

11A. Yes. Let the free market work and stop trying to steer the economy like a group of Russia central bank planners in the 1960s.

12. How could a CBDC provide privacy to consumers without providing complete anonymity and facilitating illicit financial activity?

12A. There is not privacy now. Banks report all suspicious transactions, repeat cash transitions etc. Everyone who is thinking expects more snooping. 

13. How could a CBDC be designed to foster operational and cyber resiliency? What operational or cyber risks might be unavoidable?

13A. No comment

14. Should a CBDC be legal tender?

14A. Seriously, what's the point if it's not? Then again, the risk mentioned above applies. Saule Omarova, President's Biden's Marxist nominee for Comptroller of the Currency supports a people's QE and a genuine "helicopter drop". Replacing dollars with a CBDC is one thing, handing digital dollars out for free is another.

15. Should a CBDC pay interest? If so, why and how? If not, why not?

15A. Yes. It should be positive and not less than the rate of inflation.  Let CBDCs pay the same amount as Treasury Direct I-Bonds. Yes, this will impact Fed policy, stopping it in its tracks, a huge benefit.

16. Should the amount of CBDC held by a single end-user be subject to quantity limits?

16A. No, unlike I-Bonds.

17. What types of firms should serve as intermediaries for CBDC? What should be the role and regulatory structure for these intermediaries?

17A. The existing banking structure likely needs input. 

18. Should a CBDC have "offline" capabilities? If so, how might that be achieved?

18A: No Comment

19. Should a CBDC be designed to maximize ease of use and acceptance at the point of sale? If so, how?

19A: Yes. Phone App with Eye or fingerprint activation. 

20. How could a CBDC be designed to achieve transferability across multiple payment platforms? Would new technology or technical standards be needed?

20A: Standards for Eye or fingerprint activation and some theft reporting procedures.

21. How might future technological innovations affect design and policy choices related to CBDC?

21A. My crystal ball stopped functioning.

22. Are there additional design principles that should be considered? Are there tradeoffs around any of the identified design principles, especially in trying to achieve the potential benefits of a CBDC?

22A: The Fed seriously needs to rethink fractional reserve lending, the meaning of "stable" while promoting exponential inflation, its tail-chasing inflation policies, and bubble blowing episodes. Instead of seeing racial diversity, the Fed seriously needs thought diversity. Janet Yellen was nothing but a good ole boy with the same groupthink 2% inflation mentality. Ideally there should not be a Fed, but the least you can do is read and embrace the BIS papers mentioned above. Mish.

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