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Volume XII, Number 148

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Federal Reserve Examines Pros and Cons of a Central Bank Digital Currency

On January 20, the Federal Reserve (Fed) released a much-anticipated discussion paper examining the pros and cons of a potential U.S. central bank digital currency (“CBDC”). To fully evaluate a potential CBDC, the Fed asks for public comment on more than 20 questions. Comments will be accepted for 120 days and can be submitted here.

The Fed that while CBDC could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries,  there may also be some risk.  The Fed does not intend to proceed with the issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law. A summary of key points from the paper is below.

Benefits

  • CBDC offers the public broad access to digital money that is free from credit and liquidity risk. CBDC could reduce common barriers to financial inclusion and lower transaction costs helping low-income and underbanked individuals.

  • CBDC has the potential to streamline cross-border payments by using new technologies, introducing simplified distribution channels, and creating additional opportunities for cross-jurisdictional collaboration and interoperability. Simultaneously, CBDC could be used to preserve the dominant international role of the U.S. dollar.

Risks

  • CBDC could fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the central bank, altering the supply of reserves in the banking system, and affecting monetary policy implementation.

  • CBDC would need to strike an appropriate balance between safeguarding consumer privacy rights and affording the transparency necessary to deter criminal activity. A new kind of currency would open the door to new kinds of threats. Thus, designing defense mechanisms for CBDC is crucial to its implementation.

Putting It Into Practice: While the Fed takes no position and does not set a timeline for when a CBDC would be implemented, both institutions and individuals should pay special attention to CBDC developments within the Fed. The Fed is also engaged in several experiments related to digital currencies and countries like China, Sweden, and the Bahamas have already launched a CBDC. Individuals interested in those developments should pay attention to changes to CBDC globally. CBDC could potentially improve the U.S. financial system and overhaul money as we know it today.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 21
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About this Author

Moorari Shah Bankruptcy Lawyer Sheppard Mullin Law Firm
Partner

Moorari Shah is a partner in the Finance and Bankruptcy Practice Group in the firm's Los Angeles and San Francisco offices. 

Areas of Practice

Moorari combines deep in-house and law firm experience to deliver practical, business-minded legal advice. He represents banks, fintechs, mortgage companies, auto lenders, and other nonbank institutions in transactional, licensing, regulatory compliance, and government enforcement matters covering mergers and acquisitions, consumer and commercial lending, equipment finance and leasing, and supervisory examinations,...

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A.J. S. Dhaliwal Bankruptcy Attorney Sheppard Mullin Washington DC
Associate

A.J. is an associate in the Finance and Bankruptcy Practice Group in the firm's Washington, D.C. office. 

A.J. has over a decade of experience helping banks, non-bank financial institutions, and other companies providing financial products and services in a wide range of matters including government enforcement actions, civil litigation, regulatory examinations, and internal investigations.

With a diversified regulatory, compliance, and enforcement background, A.J. counsels financial institutions in matters involving...

202-747-2323
Associate

Gabriel is an Associate on the Telecom team and the Co-Lead Associate on the Blockchain and Digital Assets team in the firm’s Washington, D.C. office. He is a Blockchain Law Professional as Certified by the Blockchain Council.

At Sheppard Mullin, Gabriel assists the Telecom team in all aspects of communications law and regulation including, satellites, spectrum, 5G implementation, media companies, and new technologies. He assists the Blockchain and Digital Assets team in legal issues relating to the use of blockchain technology, social media, internet, video games, online gambling,...

202-747-2194
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