Is the recent Fed paper on wholesale CBDC about Congressional approval? – Ledger Insights
The U.S. Federal Reserve has released a paper exploring the concept of wholesale central bank digital currency (CBDC) and whether it could potentially tokenize existing central bank reserves. The paper also discusses whether a wholesale CBDC would require Congressional approval.
The traditional payment system simply transmits messages, while in a decentralized ledger technology (DLT) world, the payment network moves actual money. The paper distinguishes between the DLT payment platform and the settlement asset, questioning whether DLT is just a different transfer mechanism for the same type of money. If it is, the Federal Reserve would consider it tokenized reserves. However, if there is a new DLT payment platform using a different type of settlement asset, it would be considered a wholesale CBDC.
From a risk perspective, decentralization increases operational risk, making it harder to act quickly. Bringing programming logic onto the payment system also increases risk for the central bank, as buggy smart contracts can introduce payment system risks. Additionally, there might be credit and liquidity risks associated with lending between institutions that would not have occurred without the programmability feature.
The paper suggests that if the Federal Reserve operates the platform and does not allow access to the technology stack, it can control the risk associated with tokenized reserves and there would be no need for a wholesale CBDC. However, if institutions are allowed to build on top of the Federal Reserve’s DLT infrastructure, it could create more risk, potentially impacting existing platforms. This scenario would make a wholesale CBDC more desirable.
The paper also raises the question of whether Congressional approval would be required to issue a wholesale CBDC. The Federal Reserve has previously acknowledged the need for approval for a retail CBDC but argued that the same did not apply to a wholesale CBDC, as it would be similar to a bank reserve. However, there is still debate and uncertainty regarding this issue.
It is worth noting that U.S. draft legislation has sometimes conflated retail and wholesale CBDC, further complicating the matter. Additionally, while the argument that a wholesale CBDC is just another form of bank reserve may be accepted by the Federal Reserve, commercial banks making the same argument for tokenized deposits are often required to obtain a no action letter from regulators to participate in DLT-related projects.
In conclusion, the U.S. Federal Reserve’s paper on wholesale CBDC explores the potential benefits and risks associated with tokenizing existing central bank reserves. It also raises the question of whether Congressional approval would be required for a wholesale CBDC. The paper acknowledges the risk and operational challenges of implementing a wholesale CBDC, but also highlights its potential advantages from a risk management perspective. The debate around wholesale CBDCs and their legal and regulatory implications is ongoing and requires further examination and discussion.
