Federal Reserve Opens Door for Crypto Firms to Shape Digital Currency Policy

The report examined the current payment system, identified the characteristics that a CBDC must adhere, and outlined the benefits and downsides of a CBDC. The goal of this study may not have intended to have policy outcomes, and the Fed stated that it will not proceed without a clear mandate from Congress, preferably in a form of a specific authorizing law. However, this report sets the stage for the central bank to collect public feedback on the potential benefits and drawbacks of a CBDC, which could ultimately lead to and / or shape legislation to create a US digital currency.[i]

The study concluded that a CBDC would not require mechanisms such as deposit insurance to maintain public confidence nor would a CBDC depend on backing by an underlying asset pool to maintain its value. A CBDC would be a liability of the central bank and in the Fed’s view, considered the safest digital asset available to the general public, with no associated credit or liquidity risk.[ii]

A framework for a potential CBDC

The Fed did not provide a preference for a CBDC design option but did outline four critical characteristics that would need to be met in order for a CBDC to be approved. A CBDC must:

• Prioritize consumer privacy: Any CBDC would need to strike an appropriate balance between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity.
• Use an intermediated model: The private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments.
• Seamlessly 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.
• Identity-verifiable: A CBDC would need to be designed to comply with existing anti-money laundering and terrorism financing rules that financial institutions already adhere.[iii]

CBDC benefits and drawbacks

The Fed opined on several key benefits of a CBDC – from its potential to streamline cross-border payments to its role in promoting financial inclusion by reducing barriers and lowering transaction costs for lower-income households, which is a high priority for the central bank.[iv]

The Fed then contrasted a CBDC with the use of private digital money, including stablecoins and other cryptocurrencies, which require mechanisms to reduce liquidity and credit risk.[v] The Fed argued that private digital money could present risks to individual users and the financial system as a whole. The central bank reiterated its preference for a CBDC over private digital money and listed further policy risks of a CBDC, including its attractiveness to risk-averse users, especially during times of stress in the financial system that could make runs on financial firms more likely or more severe.[vi]

The crypto and digital asset industry is fond of voicing support for regulatory clarity, but vague on detailing what that clarity should be. Proactively engaging with the Fed and being specific in recommendations allows digital asset firms to position themselves as leaders not just in innovation, but also in investor protection and responsible regulatory standards.

The CBDC report and comment period should be viewed as an engagement opportunity for the industry. While crypto thrives on disruptive innovation, industry participants need to engage regulators in traditional policy manners, such as submitting comment letters. Though comment letters may be perceived as “old-fashioned,” they play an essential role in Washington. Crypto firms need to learn the “Beltway” style of engagement, one that the FTI team is skilled at positioning for clients every day.

Whereas traditional financial services firms have had decades of relationship building with regulators and policymakers, the crypto industry has had to quickly cover a lot of ground as the US regulatory landscape evolves. The ability to participate in the regulatory process during its deliberative phase is crucial for any industry, especially for crypto, as its novelty, technical foundation, global reach, broad appeal, and potential risks put it squarely in the crossfire of policymakers.

The crypto industry should utilize this comment period as a tool to engage in the regulatory process by submitting feedback that demonstrates not only leadership, but a willingness to engage in advancing the industry’s penultimate and collective goal of achieving regulatory clarity that fosters innovation.

Submitting feedback on this study is not the only opportunity the crypto industry can leverage to weigh in on a CBDC and broader crypto issues. In the study, the Fed announced that it would be convening public forums to foster further discussion on a CBDC.[vii] Congress is also expected to hold several hearings in response to the Fed report, which would provide another vehicle for industry engagement with policymakers. Aside from the Fed’s study, the government will continue to roll out further studies and reports and is expected to issue an Executive Order in February on digital assets. The crypto industry should use each opportunity to provide insight and views so that their voices are heard.

FTI can help

Preparing to engage is the first step towards executing a successful feedback campaign. FTI’s financial services public affairs and government affairs team is well versed in creating strategies that position crypto companies for regulatory success. As public affairs experts, our team provides crypto firms with the skills necessary for shaping and highlighting their narratives and policy messages to policymakers, thus highlighting them as leaders on regulation. Whether providing drafting assistance for a comment letter, conducting hearing preparation, decoding the financial services policymaking process, or clarifying comments on crypto, our team is skilled at supporting crypto companies with their goals of educating policymakers on digital assets in Washington.

References

[i] Board of Governors of the Federal Reserve System, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” p. 3, January 2022, https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf.

[ii] Ibid, p. 13.

[iii] Ibid, p. 1-2.

[iv] Ibid, p. 14-17.

[v] Ibid, p. 14-15.

[vi] Ibid, p. 17-18.

[vii] Ibid, p. 21.