Central Bank Digital Currency

Federal Reserve Style
By Steven J. Grisafi, PhD.

There is increasing talk about the creation of a central bank digital currency (CBDC) within the United States. Any such creation by the United States would differ substantially from that created by the central bank of any other nation, or entity such as the European Central Bank, not only because of the status of the USA Dollar as the world’s reserve currency, but also because of the structure of the Federal Reserve Bank of the United states. The most fundamental question to be answered when pondering the creation of a digital currency is: Who is to maintain the blockchain?

When considering that question for any other nation besides the United States, such as China or the Bahamas, the quick answer would be the nation’s central bank. But in the case of the United States the unique structure of the Federal Reserve System requires a more thoughtful answer. As explained recently by a former Dutch finance ministry official the twelve regional banks of the United States Federal Reserve System must balance annually their accounts with one another. Such a process does not occur, for example, among the nineteen nations comprising the Eurozone. At first glance one might conjecture that it would be the twelve regional banks of the Federal Reserve System that would maintain the block chain for a digital USA Dollar. However, even that suggestion requires more thought.

A CBDC cannot be decentralized among all subscribers to the currency. Politicians will be keen to hear the opinions of the leaders in the banking and finance industry to learn of their concerns regarding any disintermediation they may fear regarding the creation of a CBDC. On the contrary, banks primarily, but also other financial institutions, are likely to see increased demand for their services accompanying the creation of the CBDC. The reason for this is because they are in the business of extending credit to their customers and this is something a central bank will never do. Since it is through the process of creating and extending credit to their customers that banks create the money stock of a nation, one ought to expect that the banks would likewise play a fundamental role in maintaining the blockchain of a CBDC. Thus it would be the commercial banks themselves within each of the twelve regions of the Federal Reserve System that would build the blockchain from recordings of their transactions. Each of the twelve regional Federal Reserve Banks would monitor the creation of each new block upon the chain so as to protect against the creation of extraneous branches or forks.

A block is added to the blockchain as a result of the action of a commercial bank extending credit to its clients. In addition to this role, banks would also serve as the interface between the digital currency and the physical currency comprising the money stock. People would have the option to convert digital cash to physical cash and they would do so within their accounts at the commercial banks. Congress would have the option to regulate the fees banks could charge for doing so. But even if banks were prohibited from charging for such conversions it would be expected that clients would need to have an account with the bank in order to convert from physical to digital cash and vice versa. While all persons would have associated with their social security number a digital currency account with the central bank it would be through the intermediation of the commercial banks that such persons would interchange their digital and physical cash. Consequently, the banking and finance industry would see an expansion of their services to the general public and no diminution of the public’s need for banking and financial institutions.

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