Where the Fed’s digital currency proposal goes wrong.

The Fed’s long-awaited report on central bank digital currencies is finally out. Although the report makes it clear that the Fed has no immediate plans to issue a digital currency, it does point to the approach the Fed would be inclined to take were it to do so.

That approach would have the Fed supply a retail digital currency to the general public indirectly, using private-sector financial intermediaries, including but not limited to commercial banks, as its agents. Those private intermediaries would then be responsible for managing customers’ central bank digital currency (CBDC) holdings and payments.

Intermediated versus ‘synthetic’ central bank digital currency

Superficially, the Fed’s preferred approach seems identical to the ‘synthetic’ central bank digital currency (sCBDC) approach first recommended by Tobias Adrian back in 2019. In that approach, both bank and nonbank private-sector payment service providers can have accounts with their central banks and hold those central banks’ digital liabilities. Retail digital currency (‘e-money’) is supplied exclusively by these private-sector payment service providers, but is fully backed by central bank reserves that are ring-fenced from those providers’ other creditors. The result, Adrian says, is one in which the public may be said to hold and transact in central bank money ‘by proxy’.

Adrian refers to his sCBDC plan as “a public-private partnership”. It remains the case, nonetheless, that the central bank itself only supplies ‘wholesale’ digital currency. Another article summarising the sCBDC plan makes this especially clear. In a sCBDC arrangement, it says,

…the central bank is not offering accounts to the general public but instead to private EMIs, who then use the sCBDC as a 100% backup for their e-money. This is an important difference between CBDC and sCBDC. …Similar to current e-money, [sCBDC] constitutes a claim against one specific e-money institute.