Money, Payments, USD Digital Transformation

Money and Payments the USD and Digital Transformation

Loading

Money and Payments the USD and Digital Transformation

The Federal Reserve System is the central
bank of the United States. It performs five
key functions to promote the effective
operation of the U.S. economy and, more
generally, the public interest.
The Federal Reserve
■ conducts the nation’s monetary policy to promote maximum employment
and stable prices in the U.S. economy;
■ promotes the stability of the financial system and seeks to minimize and
contain systemic risks through active monitoring and engagement in the
U.S. and abroad;
■ promotes the safety and soundness of individual financial institutions
and monitors their impact on the financial system as a whole;
■ fosters payment and settlement system safety and efficiency through
services to the banking industry and U.S. government that facilitate
U.S.-dollar transactions and payments; and
■ promotes consumer protection and community development through
consumer-focused supervision and examination, research and analysis of
emerging consumer issues and trends, community economic development
activities, and administration of consumer laws and regulations.
To learn more about us, visit www.federalreserve.gov/aboutthefed.htm.

Contents
Executive Summary …………………………………………………………………………………………… 1
Background ……………………………………………………………………………………………………….. 1
Key Topics …………………………………………………………………………………………………………. 2
Public Outreach ………………………………………………………………………………………………….. 2

Introduction ………………………………………………………………………………………………………. 3
The Existing Forms of Money ……………………………………………………………………………. 5
The Payment System ………………………………………………………………………………………… 7
Recent Improvements to the Payment System ……………………………………………………………. 7
Remaining Challenges for the Payment System ………………………………………………………….. 8

Digital Assets ………………………………………………………………………………………………….. 11
Central Bank Digital Currency …………………………………………………………………………. 13
Uses and Functions of a CBDC …………………………………………………………………………….. 14
Potential Benefits of a CBDC ……………………………………………………………………………….. 14
Potential Risks and Policy Considerations for a CBDC ………………………………………………… 17

Seeking Comment and Next Steps ………………………………………………………………….. 21
CBDC Benefits, Risks, and Policy Considerations ………………………………………………………. 21
CBDC Design ……………………………………………………………………………………………………. 22

Appendix A: Federal Reserve Research on Digital Currencies ………………………… 23
Technological Experimentation ……………………………………………………………………………… 23
Economic and Policy Research ……………………………………………………………………………… 23
Stakeholder Engagement and Outreach ………………………………………………………………….. 24
International Collaboration …………………………………………………………………………………… 24

Appendix B: Types of Money ……………………………………………………………………………. 25
Central Bank Money …………………………………………………………………………………………… 25
Commercial Bank Money …………………………………………………………………………………….. 25
Nonbank Money ………………………………………………………………………………………………… 26

Appendix C: Access to Money and Payment Services ……………………………………. 29
References ………………………………………………………………………………………………………. 33

1

Executive Summary
For a nation’s economy to function effectively, its citizens must have confidence in its money and
payment services. The Federal Reserve, as the nation’s central bank, works to maintain the public’s confidence by fostering monetary stability, financial stability, and a safe and efficient payment system.
This paper is the first step in a public discussion between the Federal Reserve and stakeholders
about central bank digital currencies (CBDCs). For the purpose of this paper, a CBDC is defined as
a digital liability of a central bank that is widely available to the general public. In this respect, it is
analogous to a digital form of paper money. The paper has been designed to foster a broad and
transparent public dialogue about CBDCs in general, and about the potential benefits and risks of
a U.S. CBDC. The paper is not intended to advance any specific policy outcome, nor is it intended
to signal that the Federal Reserve will make any imminent decisions about the appropriateness of
issuing a U.S. CBDC.

Background
Payment technologies offered by the Federal Reserve have evolved over time. In the Federal
Reserve’s early years, it established a national check-clearing system and used dedicated telegraph wires to transfer funds between banks. In the 1970s, the Federal Reserve developed an
automated clearinghouse (ACH) system that offered an electronic alternative to paper checks. And
in 2019, the Federal Reserve committed to building the FedNowSM Service, which will provide realtime, around-the-clock interbank payments, every day of the year.
Recent technological advances have ushered in a wave of new private-sector financial products
and services, including digital wallets, mobile payment apps, and new digital assets such as cryptocurrencies and stablecoins. These technological advances have also led central banks around
the globe to explore the potential benefits and risks of issuing a CBDC.
Federal Reserve policymakers and staff have studied CBDC closely for several years, guided by an
understanding that any U.S. CBDC should, among other things
• provide benefits to households, businesses, and the overall economy that exceed any costs
and risks;
• yield such benefits more effectively than alternative methods;
• complement, rather than replace, current forms of money and methods for providing financial
services;

2

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

• protect consumer privacy;
• protect against criminal activity; and
• have broad support from key stakeholders.
The Federal Reserve is committed to soliciting and reviewing a wide range of views as it continues
to study whether a U.S. CBDC would be appropriate. Irrespective of any ultimate conclusion, Federal Reserve staff will continue to play an active role in developing international standards
for CBDCs.

Key Topics
This paper begins with a discussion of existing forms of money; the current state of the U.S. payment system and its relative strengths and challenges; and the various digital assets that have
emerged in recent years, including stablecoins and other cryptocurrencies. The paper then turns
to CBDC, focusing on its uses and functions; potential benefits and risks; and related policy
considerations.
The Federal Reserve’s initial analysis suggests that a potential U.S. CBDC, if one were created,
would best serve the needs of the United States by being privacy-protected, intermediated, widely
transferable, and identity-verified. As noted above, however, the paper is not intended to advance a
specific policy outcome and takes no position on the ultimate desirability of a U.S. CBDC.

Public Outreach
The Federal Reserve will seek input from a wide range of stakeholders that might use a CBDC or
be affected by its introduction. This paper concludes with a request for public comment, the first
step in a broad consultation that will also include targeted outreach and public forums.

3

Introduction
The Federal Reserve is exploring the implications of, and options for, issuing a CBDC. For the purpose of this paper, a CBDC is defined as a digital liability of the Federal Reserve that is widely
available to the general public. While Americans have long held money predominantly in digital
form—for example in bank accounts recorded as computer entries on commercial bank
ledgers—a CBDC would differ from existing digital money available to the general public because a
CBDC would be a liability of the Federal Reserve, not of a commercial bank.1
A CBDC could potentially offer a range of benefits. For example, it could provide households and
businesses a convenient, electronic form of central bank money, with the safety and liquidity that
would entail; give entrepreneurs a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments); and expand consumer access to the financial system. A CBDC could also pose certain risks and would raise a
variety of important policy questions, including how it might affect financial-sector market structure, the cost and availability of credit, the safety and stability of the financial system, and the efficacy of monetary policy.
The introduction of a CBDC would represent a highly significant innovation in American money.
Accordingly, broad consultation with the general public and key stakeholders is essential. This
paper is the first step in such a conversation. It describes the economic context for a CBDC, key
policy considerations, and the potential risks and benefits of a U.S. CBDC. It also solicits feedback from all interested parties.
The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support
from the executive branch and from Congress, ideally in the form of a specific authorizing law.

1

For the purpose of this paper, “commercial bank” includes all depository institutions.

5

The Existing Forms of Money
Money serves as a means of payment, a store of value, and a unit of account. In the United
States, money takes multiple forms:2
• Central bank money is a liability of the central bank. In the United States, central bank money
comes in the form of physical currency issued by the Federal Reserve and digital balances held
by commercial banks at the Federal Reserve.
• Commercial bank money is the digital form of money that is most commonly used by the public.
Commercial bank money is held in accounts at commercial banks.
• Nonbank money is digital money held as balances at nonbank financial service providers.
These firms typically conduct balance transfers on their own books using a range of technologies, including mobile apps.
The different types of money carry different amounts of credit and liquidity risk. Commercial bank
money has very little credit or liquidity risk due to federal deposit insurance, the supervision and
regulation of commercial banks, and commercial banks’ access to central bank liquidity.3 Nonbank
money lacks the full range of protections of commercial bank money and therefore generally carries more credit and liquidity risk. Central bank money carries neither credit nor liquidity risk, and
is therefore considered the safest form of money.
Central bank money serves as the foundation of the financial system and the overall economy.
Commercial bank money and nonbank money are denominated in the same units as central bank
money (i.e., U.S. dollars) and are intended to be convertible into central bank money.

2
3

For fuller descriptions of central bank, commercial bank, and nonbank money, see appendix B.
The Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 per depositor, per insured bank, for each
account ownership category for every FDIC-insured bank. The National Credit Union Administration (NCUA) insures up to
$250,000 per share owner, per insured credit union, for each account ownership category.

7

The Payment System
The U.S. payment system connects a broad range of financial institutions, households, and businesses. Most payments in the United States rely on interbank payment services—such as the
ACH network or wire-transfer systems—to move money from a sender’s account at one bank to a
recipient’s account at another bank.4 Accordingly, interbank payment services are critical to the
functioning and stability of the financial system and the economy more broadly. The firms that
operate interbank payment services are subject to federal supervision, and systemically important
payment firms are subject to heightened supervision and regulation.
Interbank payment systems may initially settle in commercial bank money, or in central bank
money, depending on their design. However, because central bank money has no credit or liquidity
risk, central bank payment systems tend to underpin interbank payments and serve as the backbone of the broader payment system. The use of central bank money to settle interbank payments
promotes financial stability because it eliminates credit and liquidity risk in systemically important
payment systems.

Recent Improvements to the Payment System
Recent improvements to the U.S. payment system have focused on making payments faster,
cheaper, more convenient, and more accessible. “Instant” payments have been a particularly
active field of private- and public-sector innovation. For example, The Clearing House has developed the RTP network, which is a real-time interbank payment system for lower-value payments.
The Federal Reserve is also building a new interbank settlement service for instant payments, the
FedNow Service, scheduled to debut in 2023. These instant payment services will enable commercial banks to provide payment services to households and businesses around the clock, every day
of the year, with recipients gaining immediate access to transferred funds. The growth of these
instant payment services also could reduce the costs and fees associated with certain types of
payments.5
In addition, a host of consumer-focused services that are accessible through mobile devices have
made digital payments faster and more convenient. Some of these new payment services, however, could pose financial stability, payment system integrity, and other risks. For example, if the
4

5

Nonbank service providers also typically rely on interbank payment infrastructures to establish and transfer customer
balances. For example, a customer of a nonbank service provider may need to fund its balance at the nonbank service
provider by transferring funds from the customer’s account at a commercial bank to the nonbank service provider’s
account at another commercial bank.
However, the costs and fees for certain payment methods (e.g., card transactions) may remain comparatively high for
some parties to the extent that instant payments do not serve as a close substitute for those methods.

8

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

growth of nonbank payment services were to cause a large-scale shift of money from commercial
banks to nonbanks, the resulting lack of equivalent protections that come with commercial bank
money could introduce run risk or other instabilities to the financial system.

Remaining Challenges for the Payment System
While the existing U.S. payment system is generally effective and efficient, certain challenges
remain. In particular, a significant number of Americans currently lack access to digital banking
and payment services. Additionally, some payments—especially cross-border payments—remain
slow and costly.
Digital financial services and commercial bank money have become more accessible over time,
and increasing numbers of Americans have opened and maintain bank accounts.6 Nonetheless,
more than 7 million—or over 5 percent of U.S. households—remain unbanked.7 Nearly 20 percent
more have bank accounts, but still rely on more costly financial services such as money orders,
check-cashing services, and payday loans.8
A variety of public- and private-sector efforts are underway to support financial inclusion. For
example, the private-sector Bank On initiative promotes low-cost, low-risk consumer checking
accounts.9 The Federal Reserve Bank of Atlanta has also formed a Special Committee on Payments Inclusion, a public-private sector collaboration that is working to promote access to digital
payments for vulnerable populations.10
Cross-border payments currently face a number of challenges, including slow settlement, high
fees, and limited accessibility. The sources of these frictions include the mechanics of currency
exchange, variations in different countries’ legal regimes and technological infrastructure, timezone complications, and coordination problems among intermediaries, including correspondent
banks and nonbank financial service providers. Regulatory requirements related to money laundering and other illicit activities introduce further complications. Finally, certain destination coun6

7

8

9

10

The proportion of unbanked U.S. households has steadily decreased over the past 10 years; in 2011, an estimated
8.2 percent of U.S. households were unbanked, compared with 5.4 percent in 2019. Federal Deposit Insurance Corporation, How America Banks: Household Use of Banking and Financial Services, 2019 FDIC Survey, October 2020, https://
www.fdic.gov/analysis/household-survey/.
Among the reasons cited by the unbanked for not having a bank account are insufficient funds to meet minimum deposit
requirements, distrust of banking or other financial service providers, high fees, and privacy concerns. Federal Deposit
Insurance Corporation, How America Banks: Household Use of Banking and Financial Services, 2019 FDIC Survey,
October 2020, https://www.fdic.gov/analysis/household-survey/.
Financial Health Network, FinHealth Spend Report 2021, June 11, 2021, https://finhealthnetwork.org/research/
finhealth-spend-report-2021/.
Bank On coalitions offer banking and financial education classes, partner with local financial institutions to promote
checking accounts that are verified as low-cost and low-risk for consumers, and offer online resources to their
community-based partners. See https://cfefund.org/project/bank-on/.
Federal Reserve Bank of Atlanta,“New Committee to Advance Safe, Efficient, Inclusive Payments,” news release,
May 12, 2021, https://takeonpayments.frbatlanta.org/news/pressreleases/2021/05/12/new-committee-to-advancesafe-efficient-inclusive-payments.

The Payment System

tries for cross-border payments have limited competition, allowing existing providers to charge
high fees.
As of the second quarter of 2021, the average cost of sending a remittance from the United
States to other countries was 5.41 percent of the notional value of the transaction.11 These high
costs have a significant impact on households that make remittance transactions. High costs for
cross-border payments also affect smaller businesses that make infrequent global payments to
suppliers. Reducing these costs could benefit economic growth, enhance global commerce,
improve international remittances, and reduce inequality.12

11

12

Average cost of sending $200. The World Bank, Remittance Prices Worldwide Quarterly (Washington: World Bank Group,
June 2021), https://remittanceprices.worldbank.org/sites/default/files/rpw_main_report_and_annex_q221.pdf.
To help address these frictions and unlock growth, the G20 countries agreed in 2020 to a multiyear roadmap to identify
and deploy improvements to cross-border payments. See Financial Stability Board, Enhancing Cross-border Payments:
Stage 3 Roadmap (Washington: FSB, October 2020), https://www.fsb.org/2020/10/enhancing-cross-border-paymentsstage-3-roadmap/.

9

11

Digital Assets
Technological innovation has recently ushered in a wave of digital assets with money-like characteristics. These “cryptocurrencies” arose from a combination of cryptographic and distributedledger technologies, which together provide a foundation for decentralized, peer-to-peer payments.
Cryptocurrencies have not been widely adopted as a means of payment in the United States. They
remain subject to extreme price volatility, are difficult to use without service providers, and have
severe limitations on transaction throughput.13 Many cryptocurrencies also come with a significant
energy footprint14 and make consumers vulnerable to loss, theft, and fraud.15
Stablecoins are a more recent incarnation of cryptocurrency that peg their value to one or more
assets, such as a sovereign currency or commodity.16 Stablecoins pegged to the U.S. dollar are
predominantly used today to facilitate trading of other digital assets, but many firms are exploring
ways to promote stablecoins as a widespread means of payment.
A full discussion of stablecoin arrangements is outside the scope of this paper. However, the
President’s Working Group on Financial Markets (PWG),17 along with the Federal Deposit Insurance
Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), recently published a
report on payment stablecoins.18 The PWG report notes that well-designed and appropriately regulated stablecoins could potentially support faster, more efficient, and more inclusive payment
13

14

15

16

17

18

Transaction throughput refers to the rate at which a distributed ledger can process transactions within a given timeframe. Factors such as consensus mechanism used, block size, traffic, and complexity of transactions can affect transaction throughput. For example, Bitcoin, which was originally designed as a peer-to-peer digital cash system, is only
capable of supporting roughly five transactions per second and can cost up to $60 per transaction depending on
demand. See Blockchain.com, “Transaction Rate Per Second,” 2021, web page, https://www.blockchain.com/charts/
transactions-per-second, and “Fees Per Transaction (USD),” web page, https://www.blockchain.com/charts/fees-usd-pertransaction. This may not always be the case for Bitcoin and other cryptocurrencies, of course. Potential solutions for
lower-fee, higher-scale capacity are in development. For comparison, Visa states that it is capable of handling up to
24,000 transactions per second. See Visa, “Visa Acceptance for Retailers,” 2021, web page, https://usa.visa.com/runyour-business/small-business-tools/retail.html.
See Forbes Advisor, “Bitcoin’s Energy Usage, Explained,” June 7, 2021, https://www.forbes.com/advisor/investing/
bitcoins-energy-usage-explained/ for additional information on cryptocurrency energy usage.
According to data from the Federal Trade Commission, consumers have reported losing more than $80 million to cryptocurrency investment scams from October 2020 to March 2021. See the Federal Trade Commission, Consumer Protection Data Spotlight, May 17, 2021, https://www.ftc.gov/news-events/blogs/data-spotlight/2021/05/cryptocurrencybuzz-drives-record-investment-scam-losses.
These underlying assets for a stablecoin are typically held in a reserve pool that could be used to fund redemptions.
When a stablecoin ties its value to a sovereign currency, it often claims to do so with a pool of assets that include bank
deposits and highly liquid securities, such as short-term government bonds, denominated in that currency.
Executive Order 12631 of March 18, 1988 (Working Group on Financial Markets) established the President’s Working
Group on Financial Markets, which is chaired by the Secretary of the Treasury, or their designee, and includes the Chair
of the Board of Governors of the Federal Reserve System, the Chair of the Securities and Exchange Commission, and
the Chair of the Commodity Futures Trading Commission, or their designees.
See President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the
Comptroller of the Currency, Report on Stablecoins, November 2021, https://home.treasury.gov/system/files/136/
StableCoinReport_Nov1_508.pdf.

12

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

options. The PWG report also notes, however, that the potential for the increased use of stablecoins as a means of payment raises a range of concerns related to the potential for destabilizing
runs, disruptions in the payment system, and concentration of economic power. The PWG report
highlights gaps in the authority of regulators to reduce these risks.
To address the risks of payment stablecoins, the PWG report recommends that Congress act
promptly to enact legislation that would ensure payment stablecoins and payment stablecoin
arrangements are subject to a consistent and comprehensive federal regulatory framework. Such
legislation would complement existing authorities regarding market integrity, investor protection,
and illicit finance.

13

Central Bank Digital Currency
The Federal Reserve is considering how a CBDC might fit into the U.S. money and payments landscape. A crucial test for a potential CBDC is whether it would prove superior to other methods that
might address issues of concern outlined in this paper.
As noted above, for the purposes of this discussion paper, CBDC is defined as a digital liability of
the Federal Reserve that is widely available to the general public.19 Today, Federal Reserve notes
(i.e., physical currency) are the only type of central bank money available to the general public.
Like existing forms of commercial bank money and nonbank money, a CBDC would enable the general public to make digital payments. As a liability of the Federal Reserve, however, a CBDC would
not require mechanisms like 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 the safest
digital asset available to the general public, with no associated credit or liquidity risk.
The Federal Reserve will continue to explore a wide range of design options for a CBDC. While no
decisions have been made on whether to pursue a CBDC, analysis to date suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being
privacy-protected, intermediated, widely transferable, and identity-verified.
Privacy-protected: Protecting consumer privacy is critical. Any CBDC would need to strike an
appropriate balance, however, between safeguarding the privacy rights of consumers and affording
the transparency necessary to deter criminal activity.
Intermediated: The Federal Reserve Act does not authorize direct Federal Reserve accounts for
individuals, and such accounts would represent a significant expansion of the Federal Reserve’s
role in the financial system and the economy. Under an intermediated model, the private sector
would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments. Potential intermediaries could include commercial banks and regulated nonbank financial
service providers, and would operate in an open market for CBDC services. Although commercial
banks and nonbanks would offer services to individuals to manage their CBDC holdings and pay19

Narrower-purpose CBDCs could also be developed, such as one designed primarily for large-value institutional payments
and not widely available to the public. In this paper, the term “general purpose” includes such potential uses for a CBDC
but is not limited to it. The Board welcomes comments that may address whether there is a potential more limited role
for a CBDC for such uses. CBDC is formally and broadly defined as a type of digital money issued by the central bank,
denominated in the same way as its currency, that is in some way different from traditional reserve bank balances or
settlement accounts. See Committee on Payments and Market Infrastructures, Central Bank Digital Currencies (Basel:
BIS, March 2018), https://www.bis.org/cpmi/publ/d174.pdf; Bank for International Settlements, Central Bank Digital
Currencies: Foundational Principles and Core Features (Basel: BIS, October 2020), https://www.bis.org/publ/othp33.pdf.

14

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

ments, the CBDC itself would be a liability of the Federal Reserve. An intermediated model would
facilitate the use of the private sector’s existing privacy and identity-management frameworks;
leverage the private sector’s ability to innovate; and reduce the prospects for destabilizing disruptions to the well-functioning U.S. financial system.
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. The ability to transfer value
seamlessly between different intermediaries makes the payment system more efficient by allowing
money to move freely throughout the economy.
Identity-verified: Financial institutions in the United States are subject to robust rules that are
designed to combat money laundering and the financing of terrorism. A CBDC would need to be
designed to comply with these rules. In practice, this would mean that a CBDC intermediary would
need to verify the identity of a person accessing CBDC, just as banks and other financial institutions currently verify the identities of their customers.20

Uses and Functions of a CBDC
CBDC transactions would need to be final and completed in real time, allowing users to make payments to one another using a risk-free asset. Individuals, businesses, and governments could
potentially use a CBDC to make basic purchases of goods and services or pay bills, and governments could use a CBDC to collect taxes or make benefit payments directly to citizens. Additionally, a CBDC could potentially be programmed to, for example, deliver payments at certain times.

Potential Benefits of a CBDC
A CBDC could potentially serve as a new foundation for the payment system and a bridge between
different payment services, both legacy and new. It could also maintain the centrality of safe and
trusted central bank money in a rapidly digitizing economy.

Safely Meet Future Needs and Demands for Payment Services
A U.S. CBDC would offer the general public broad access to digital money that is free from credit
risk and liquidity risk. As such, it could provide a safe foundation for private-sector innovations to
meet current and future needs and demands for payment services. All options for private digital
money, including stablecoins and other cryptocurrencies, require mechanisms to reduce liquidity
risk and credit risk. But all these mechanisms are imperfect. In our rapidly digitizing economy, the

20

In this regard, a CBDC would differ materially from cash, which enables anonymous transactions. While central banks
are unable to fully prevent cash from being used for illicit purposes, a CBDC could potentially be used at much greater
scale and velocity than cash, so compliance with laws designed to combat money laundering and funding terrorism is
particularly important for CBDC.

Central Bank Digital Currency

proliferation of private digital money could present risks to both individual users and the financial
system as a whole. A U.S. CBDC could mitigate some of these risks while supporting privatesector innovation.
A CBDC might also help to level the playing field in payment innovation for private-sector firms of
all sizes. For some smaller firms, the costs and risks of issuing a safe and robust form of private
money may be prohibitive. A CBDC could overcome this barrier and allow private-sector innovators
to focus on new access services, distribution methods, and related service offerings.
Finally, a CBDC might generate new capabilities to meet the evolving speed and efficiency requirements of the digital economy. As noted above, for example, a CBDC could potentially be programmed to deliver payments at certain times. Additionally, a CBDC could potentially be used to
carry out micropayments—financial transactions that usually occur online and involve very small
sums of money—which traditional payment systems are not necessarily designed to facilitate.

Improvements to Cross-Border Payments
CBDC has the potential to streamline cross-border payments by using new technologies, introducing simplified distribution channels, and creating additional opportunities for crossjurisdictional collaboration and interoperability. Realizing these potential improvements would
require significant international coordination to address issues such as common standards and
infrastructure, the types of intermediaries that would be able to access any new infrastructure,
legal frameworks, preventing illicit transactions, and the cost and timing of implementation.

Support the Dollar’s International Role
Another potential benefit of a U.S.-issued CBDC could be to preserve the dominant international
role of the U.S. dollar. The dollar is the world’s most widely used currency for payments and investments; it also serves as the world’s reserve currency. The dollar’s international role benefits the
United States by, among other things, lowering transaction and borrowing costs for U.S. households, businesses, and government. The dollar’s international role also allows the United States to
influence standards for the global monetary system.
Today, the dollar is widely used across the globe because of the depth and liquidity of U.S. financial markets, the size and openness of the U.S. economy, and international trust in U.S. institutions and rule of law. It is important, however, to consider the implications of a potential future
state in which many foreign countries and currency unions may have introduced CBDCs. Some
have suggested that, if these new CBDCs were more attractive than existing forms of the U.S.
dollar, global use of the dollar could decrease—and a U.S. CBDC might help preserve the international role of the dollar.

15

16

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

Financial Inclusion
Promoting financial inclusion—particularly for economically vulnerable households and
communities—is a high priority for the Federal Reserve. Private-sector electronic transactions
accounts facilitate access to digital payments; enable rapid and cost-effective payment of taxes;
enable rapid and cost-effective delivery of wages, tax refunds, and other federal payments; provide
a secure way for people to save; and promote access to credit.
Some have suggested that a CBDC could reduce common barriers to financial inclusion and could
lower transaction costs, which could be particularly helpful for lower-income households. Further
study would be helpful to assess the potential for CBDC to expand financial inclusion, including
cases targeted to underserved and lower income households.21

Extend Public Access to Safe Central Bank Money
Cash is currently the only central bank money that is available to the general public, and it
remains an important and popular means of payment. According to a 2020 survey, U.S. consumers used cash for 19 percent of total transactions (6 percent by value).22 The Federal Reserve
is committed to ensuring the continued safety and availability of cash and is considering a CBDC
as a means to expand safe payment options, not to reduce or replace them.
In some jurisdictions, however, digital payments have rapidly supplanted cash. While cash use in
the United States fell from 40 percent of transactions in 2012 (12 percent by value) to 19 percent
in 2020, other countries have seen more rapid declines.23 In Sweden, for example, the proportion
of cash payments fell from 33 percent to less than 10 percent over the same period.24 In China,
50 percent of point-of-sale (POS) payments are made with a mobile wallet or app, while cash
accounts for just 13 percent of POS payments.25 If these trends were to emerge in the United
States, consumers might want the option of digitized central bank money that, like cash, would
have no credit or liquidity risk attached to it.26
21

22

23

24

25
26

For example, there is an initiative at the Federal Reserve Bank of Cleveland to explore the prospects for CBDC to
increase financial inclusion. The initiative will identify CBDC design features and delivery approaches focused on
expanding access to individuals who do not currently use traditional financial services.
Kelsey Coyle, Laura Kim, and Shaun O’Brien, 2021 Findings from the Diary of Consumer Payment Choice (San Francisco:
Federal Reserve Bank of San Francisco, May 2021), https://www.frbsf.org/cash/publications/fed-notes/2021/may/
2021-findings-from-the-diary-of-consumer-payment-choice/.
Claire Greene, Scott Schuh, and Joanna Stavins, The 2012 Diary of Consumer Payment Choice (Atlanta: Federal Reserve
Bank of Atlanta, 2018), https://www.atlantafed.org/banking-and-payments/consumer-payments/research-data-reports/
2018/the-2012-diary-of-consumer-payment-choice.aspx?panel=2. See also Kelsey Coyle, Laura Kim, Shaun O’Brien,
2021 Findings from the Diary of Consumer Payment Choice (San Francisco: Federal Reserve Bank of San Francisco,
May 2021), https://www.frbsf.org/cash/publications/fed-notes/2021/may/2021-findings-from-the-diary-ofconsumer-payment-choice/.
This decrease was also concurrent with Sweden’s 2010 announcement and later execution of redesign and replacement
of its banknotes, which rendered old notes invalid. Riksbank, Payments in Sweden 2020 (Stockholm: Riksbank,
October 2020), https://www.riksbank.se/en-gb/payments–cash/payments-in-sweden/payments-in-sweden-2020/.
Worldpay, The Global Payments Report 2021, https://worldpay.globalpaymentsreport.com/en/.
Historically, physical cash has been the most frequently used instrument for payments under $25. See Kelsey Coyle,
Laura Kim, Shaun O’Brien, 2021 Findings from the Diary of Consumer Payment Choice (San Francisco: Federal Reserve

Central Bank Digital Currency

Potential Risks and Policy Considerations for a CBDC
Although the introduction of a CBDC could benefit U.S. consumers and the broader financial
system, it would also raise complex policy issues and risks. Each of the issues described below
will require additional research and analysis.

Changes to Financial-Sector Market Structure
A 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.
Banks currently rely (in large part) on deposits to fund their loans. A widely available CBDC would
serve as a close—or, in the case of an interest-bearing CBDC, near-perfect—substitute for commercial bank money. This substitution effect could reduce the aggregate amount of deposits in the
banking system, which could in turn increase bank funding expenses, and reduce credit availability
or raise credit costs for households and businesses.27 Similarly, an interest-bearing CBDC could
result in a shift away from other low-risk assets, such as shares in money market mutual funds,
Treasury bills, and other short-term instruments. A shift away from these other low-risk assets
could reduce credit availability or raise credit costs for businesses and governments.
These concerns could potentially be mitigated by CBDC design choices. A non-interest-bearing
CBDC, for example, would be less attractive as a substitute for commercial bank money. In addition, a central bank might limit the amount of CBDC an end user could hold.
A CBDC could spur innovation by banks and other actors and would be a safer deposit substitute
than many other products, including stablecoins and other types of nonbank money. These forms
of nonbank money could cause a shift in deposits away from banks even without a CBDC.28

Safety and Stability of the Financial System
Because central bank money is the safest form of money, a widely accessible CBDC would be particularly attractive to risk-averse users, especially during times of stress in the financial system.
The ability to quickly convert other forms of money—including deposits at commercial banks—into
CBDC could make runs on financial firms more likely or more severe. Traditional measures such
as prudential supervision, government deposit insurance, and access to central bank liquidity may
be insufficient to stave off large outflows of commercial bank deposits into CBDC in the event of
financial panic.

27

28

Bank of San Francisco, May 2021), https://www.frbsf.org/cash/publications/fed-notes/2021/may/2021-findings-fromthe-diary-of-consumer-payment-choice/.
Even without a CBDC, households and businesses might increasingly use nonbank money (including stablecoins) as a
substitute for bank deposits.
Deposit substitution, whether by CBDC, stablecoins, or other private-sector developments, could increase bank funding
costs and, consequently, the price at which they offer credit.

17

18

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

As with concerns related to financial-sector market structure, some of these flight-to-safety concerns could potentially be mitigated by CBDC design choices. For example, a central bank could
pay no interest on CBDC. Nonetheless, because a liability of the central bank is essentially riskless, depositors may prefer CBDC over bank deposits in a crisis even if the CBDC has a less
attractive rate of return. A central bank could potentially address this risk by limiting the total
amount of CBDC an end user could hold, or it could limit the amount of CBDC an end user could
accumulate over short periods.

Efficacy of Monetary Policy Implementation
A CBDC’s design would influence how it might affect monetary policy. Under the current “ample
reserves” monetary policy regime, the Federal Reserve exercises control over the level of the federal funds rate and other short-term interest rates primarily through the setting of the Federal
Reserve’s administered rates. This regime does not require active management of the supply of
reserves. Expected levels of daily fluctuations in the quantity of reserves generally have little
effect on the level of the federal funds rate and other short-term interest rates.29
In this framework, the introduction of CBDC could affect monetary policy implementation and
interest rate control by altering the supply of reserves in the banking system. In the case of a noninterest-bearing CBDC, the level and volatility of the public’s demand for CBDC might be comparable to other factors that currently affect the quantity of reserves in the banking system, such as
changes in physical currency or overnight repurchase agreements. In this case, a decline in CBDC
that resulted in a corresponding increase in reserves would only make reserves more ample and
would have little effect on the federal funds rate.30
Similarly, an increase in CBDC that pushed reserves lower would also have little effect on the federal funds rate if the initial supply of reserves were large enough to provide an adequate buffer.
Over the long term, the Federal Reserve might have to increase the size of its balance sheet to
accommodate CBDC growth, similar to the balance-sheet impact of issuing increasing amounts of
physical currency. This need would be mitigated to the extent that demand for the CBDC represented a shift, directly or indirectly, away from the Federal Reserve’s nonreserve liabilities,
including physical currency. Additionally, the Federal Reserve would likely need to increase the level
of reserves on average, in order to provide an adequate buffer against unanticipated increases in
CBDC. Such surges could otherwise push the aggregate quantity of reserves in the banking
system below the “ample” level and put upward pressure on the federal funds rate.

29

30

See Jane Ihrig, Zeynep Senyuz, and Gretchen C. Weinbach, “The Fed’s ‘Ample-Reserves’ Approach to Implementing Monetary Policy,” Finance and Economics Discussion Series 2020-022 (Washington: Board of Governors of the Federal
Reserve System, February 2020), https://doi.org/10.17016/FEDS.2020.022.
If U.S. currency were the substitute for CBDC, there would be no impact on reserves; however, if private-sector assets
were the substitute, changes in CBDC aggregate balances would have a direct impact on aggregate reserve levels.

Central Bank Digital Currency

The interactions between CBDC and monetary policy implementation would be more pronounced
and more complicated if the CBDC were interest-bearing at levels that are comparable to rates of
return on other safe assets. In this case, the level and volatility of the public’s demand for CBDC
could be quite substantial. Consumers, businesses, and potentially others could decide to pare
their holdings of bank deposits, Treasury bills, and money market mutual fund investments and
increase holdings of CBDC.
The potential for significant foreign demand for CBDC in this scenario would further complicate
monetary policy implementation. Changes in interest rates and other market factors could also
significantly affect public demand for CBDC over time. To maintain an ample supply of reserves,
the Federal Reserve might need to substantially expand its holdings of securities. The potential for
market developments to have a material effect on the variability in demand for CBDC could also
present challenges for managing reserves and implementing policy.
Beyond these reserve-management effects, a rapidly expanding economic literature has considered the broader potential of interest-bearing CBDC as a new policy tool with associated effects on
the channels of influence in monetary policy.31 The issues studied include topics such as the
potential effects of CBDC on bank deposits and bank lending, the potential effects of CBDC on the
economic decisions of households and businesses, and the possible interactions of CBDC with
the Federal Reserve’s other tools in conducting monetary policy to achieve its macroeconomic
objectives. These and related topics are active areas of research that will no doubt yield additional
insights over time.

Privacy and Data Protection and the Prevention of Financial Crimes
Any CBDC would need to strike an appropriate balance between safeguarding consumer privacy
rights and affording the transparency necessary to deter criminal activity.
Consumer privacy: A general-purpose CBDC would generate data about users’ financial transactions in the same ways that commercial bank and nonbank money generates such data today. In
the intermediated CBDC model that the Federal Reserve would consider, intermediaries would
address privacy concerns by leveraging existing tools.
Prevention of financial crimes: Relatedly, financial institutions must comply with a robust set of
rules that are designed to combat money laundering and the financing of terrorism. These rules
include customer due diligence, recordkeeping, and reporting requirements. As noted above, any
CBDC would need to be designed in a manner that facilitates compliance with these rules. Inter-

31

See Francesca Carapella and Jean Flemming, “Central Bank Digital Currency: A Literature Review,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System, November 2020), https://www.federalreserve.gov/econres/
notes/feds-notes/central-bank-digital-currency-a-literature-review-20201109.htm for examples.

19

20

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

mediated models for a U.S. CBDC have the distinct advantage of involving private-sector partners
with established programs to help ensure compliance with these rules.

Operational Resilience and Cybersecurity
Threats to existing payment services—including operational disruptions and cybersecurity risks—
would apply to a CBDC as well. Any dedicated infrastructure for a CBDC would need to be
extremely resilient to such threats, and the operators of the CBDC infrastructure would need to
remain vigilant as bad actors employ ever more sophisticated methods and tactics. Designing
appropriate defenses for CBDC could be particularly difficult because a CBDC network could
potentially have more entry points than existing payment services.
Although securing CBDC would be challenging, a CBDC could enhance the operational resilience of
the payment system if it were designed with offline capability (that is, if it allowed some payments
to be made without internet access). Many digital payments today cannot be executed during
natural disasters or other large disruptions, and affected areas must rely on in-person cash transactions. Central banks are currently researching whether offline CBDC payment options would be
feasible.

21

Seeking Comment and Next Steps
As noted above, the introduction of a CBDC would represent a highly significant innovation in
American money. This paper is the first step in a public discussion between the Federal Reserve
and stakeholders about CBDC.
The Federal Reserve will only take further steps toward developing a CBDC if research points to
benefits for households, businesses, and the economy overall that exceed the downside risks, and
indicates that CBDC is superior to alternative methods. Furthermore, the Federal Reserve would
only pursue a CBDC in the context of broad public and cross-governmental support.
The Federal Reserve welcomes comments from all stakeholders on the questions listed below.
The Federal Reserve will also conduct targeted outreach and convene public forums to foster a
broad dialogue about CBDC.
Please provide any answers to questions by May 20, 2022, using the form at https://
www.federalreserve.gov/apps/forms/cbdc. It is not a requirement that all questions be
answered.
Please note: All public questions and comments on the Money and Payments: The U.S. Dollar in
the Age of Digital Transformation discussion paper, however they are submitted (i.e., electronically or
in paper form), will be made available publicly (including by posting on our website). Questions and
comments are not edited for public viewing but are reproduced as submitted. However, the Board
reserves the ability to redact information when necessary for technical reasons or to remove sensitive information. The names and addresses of commenters are included with all comments made
available for public viewing.

CBDC Benefits, Risks, and Policy Considerations
1. What additional potential benefits, policy considerations, or risks of a CBDC may exist that
have not been raised in this paper?
2. Could some or all of the potential benefits of a CBDC be better achieved in a different way?
3. Could a CBDC affect financial inclusion? Would the net effect be positive or negative for
inclusion?
4. How might a U.S. CBDC affect the Federal Reserve’s ability to effectively implement monetary
policy in the pursuit of its maximum-employment and price-stability goals?

22

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

5. How could a CBDC affect financial stability? Would the net effect be positive or negative for
stability?
6. Could a CBDC adversely affect the financial sector? How might a CBDC affect the financial
sector differently from stablecoins or other nonbank money?
7. What tools could be considered to mitigate any adverse impact of CBDC on the financial
sector? Would some of these tools diminish the potential benefits of a CBDC?
8. If cash usage declines, is it important to preserve the general public’s access to a form of central bank money that can be used widely for payments?
9. How might domestic and cross-border digital payments evolve in the absence of a U.S. CBDC?
10. How should decisions by other large economy nations to issue CBDCs influence the decision
whether the United States should do so?
11. Are there additional ways to manage potential risks associated with CBDC that were not
raised in this paper?
12. How could a CBDC provide privacy to consumers without providing complete anonymity and
facilitating illicit financial activity?
13. How could a CBDC be designed to foster operational and cyber resiliency? What operational
or cyber risks might be unavoidable?
14. Should a CBDC be legal tender?

CBDC Design
15. Should a CBDC pay interest? If so, why and how? If not, why not?
16. Should the amount of CBDC held by a single end user be subject to quantity limits?
17. What types of firms should serve as intermediaries for CBDC? What should be the role and
regulatory structure for these intermediaries?
18. Should a CBDC have “offline” capabilities? If so, how might that be achieved?
19. Should a CBDC be designed to maximize ease of use and acceptance at the point of sale?
If so, how?
20. How could a CBDC be designed to achieve transferability across multiple payment platforms?
Would new technology or technical standards be needed?
21. How might future technological innovations affect design and policy choices related to CBDC?
22. Are there additional design principles that should be considered? Are there tradeoffs around
any of the identified design principles, especially in trying to achieve the potential benefits
of a CBDC?

23

Appendix A: Federal Reserve Research
on Digital Currencies
The Federal Reserve is actively researching and experimenting with digital currencies. The work
falls into four categories: technological experimentation, economic and policy research, stakeholder engagement and outreach, and international collaboration.

Technological Experimentation
The Federal Reserve is engaged in a number of experiments related to digital currencies, including
a hypothetical CBDC. These experiments enrich the Federal Reserve’s policy discussions related
to digital currency by giving experimenters hands-on experience with the opportunities and limitations of various technologies. Examples of current experiments include
• building a hypothetical CBDC that would leverage existing technologies and systems: The
Board’s Technology Lab has been assessing the potential of a centralized CBDC design that
leverages existing infrastructure and technology;
• exploring a CBDC design that would leverage newer technologies, such as blockchain: The Federal Reserve Bank of Boston is collaborating with the Massachusetts Institute of Technology’s
Digital Currency Initiative to explore the development of alternative platforms;
• considering the use of distributed ledger technology for wholesale payments: The Board’s Technology Lab has been studying how distributed ledger technology could be used to support interbank settlement;
• enhancing existing services to support privately issued digital currencies: The Board’s Technology Lab has been studying the use of application programming interfaces to support the
issuance, distribution, and use of privately issued digital currencies;
• advancing other payments innovation, including payments fraud research: The Federal Reserve
Bank of Atlanta is collaborating with Georgia State University and its Evidence-Based Cybersecurity Research Group on using darknet data to reduce fraud; and
• advancing thinking on key issues related to security, programmable money, interoperability, and
standards, among other topics.

Economic and Policy Research
The Federal Reserve is engaged in extensive economic and policy research on digital currencies,
focusing especially on financial inclusion and financial stability.

24

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

• The Federal Reserve Bank of Cleveland is creating an academic collaboration that will examine
how a CBDC could be designed to support financial inclusion.
• The Federal Reserve Bank of Atlanta is considering whether cash-based and vulnerable populations could safely access and benefit from digital payments.
• Policy analysts and economists are studying a range of digital currency issues, including privacy
considerations and monetary policy implications for CBDCs and private digital assets.

Stakeholder Engagement and Outreach
The Federal Reserve closely follows developments related to digital payments and CBDC in the private sector, foreign central banks, and academia. The Federal Reserve also meets with a variety of
stakeholders to understand different perspectives on CBDC. One venue for such dialogue is the
Innovation Office Hours hosted by the Federal Reserve Banks. These meetings help Federal
Reserve staff understand market developments and allow private-sector and academic stakeholders to better understand the types of questions the Federal Reserve is considering related to
CBDC. The Federal Reserve will expand its public dialogue this year to ensure it solicits a wide
range of views.

International Collaboration
The Federal Reserve works closely with other central banks and international organizations to
understand key issues related to CBDCs and other payment innovations. The Federal Reserve collaborated with six other central banks and the Bank for International Settlements to produce a
report in October 2020 on foundational principles for CBDCs.32 It has continued this work in 2021
with further analysis of policy options and practical implementation issues.33
The Federal Reserve is also an active participant in workstreams supporting the Financial Stability
Board’s roadmap for improving cross-border payments.34 In addition, the Federal Reserve Bank of
New York has established an Innovation Center to facilitate collaboration with the Bank for International Settlements on a number of financial innovations.

32

33

34

Bank for International Settlements, Central Bank Digital Currencies: Foundational Principles and Core Features (Basel:
BIS, October 2020), https://www.bis.org/publ/othp33.htm.
Bank for International Settlements, Central Banks and the BIS Explore What a Retail CBDC Might Look Like, press
release, September 2021, https://www.bis.org/press/p210930.htm.
Financial Stability Board, Enhancing Cross-border Payments: Stage 3 Roadmap (Washington: FSB, October 2020),
https://www.fsb.org/2020/10/enhancing-cross-border-payments-stage-3-roadmap/.

25

Appendix B: Types of Money
Central Bank Money
In the United States, central bank money is a liability of the Federal Reserve and comes in two
forms: (1) physical currency circulating among the general public (with some held by banks) and
(2) digital account balances held by banks and a limited number of other eligible institutions at the
Federal Reserve.35 Physical currency has legal tender status in the United States.
As of November 2021, there was around $6.39 trillion of central bank money. Of this, $4.18 trillion was in the form of balances at the Federal Reserve and $2.21 trillion was in the form of circulating cash.36
Central bank money is the most trusted and safest form of money because the Federal Reserve,
as a central bank issuer, presents no credit risk and no liquidity risk. As the safest form of money,
central bank money plays an important role as a settlement asset for critically important interbank
payment systems.37

Commercial Bank Money
Dollar-denominated balances held by consumers in commercial bank accounts are “commercial
bank money.” These balances are liabilities of commercial banks, not of the Federal Reserve.38 As
of November 2021, commercial banks held approximately $4.76 trillion in demand deposits and
$13.47 trillion in other liquid deposits.39
Balances at commercial banks are also integral to banks’ function as providers of credit to the
economy. Banks extend loans to consumers and businesses, funded in part by the deposits they

35

36

37

38
39

U.S. law specifically designates U.S. coins and currency (including Federal Reserve notes) as legal tender, “for all debts,
public charges, taxes, and dues.” 31 U.S.C. 5103. This statute means that these forms of U.S. money are a valid and
legal offer of payment for debts when tendered to a creditor. Even still, consumers and businesses may agree to use
other methods of payment unless there is a state or local law that says otherwise.
Board of Governors of the Federal Reserve System, Money Stock Measures–H.6 Release, December 28, 2021, https://
www.federalreserve.gov/releases/h6/current/.
For further discussion, see Bank for International Settlements, Committee on Payment and Settlement Systems, The
Role of Central Bank Money in Payment Systems (Basel: BIS, August 2003), https://www.bis.org/cpmi/publ/d55.pdf.
Commercial banks include banks licensed either by federal or state banking agencies, credit unions, and thrifts.
Seasonally adjusted amounts. See Board of Governors of the Federal Reserve System, Money Stock Measures–H.6
Release, December 28, 2021, https://www.federalreserve.gov/releases/h6/current/.

26

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

hold. As of December 2021, there was around $16.41 trillion in bank credit outstanding, reflecting
loans and other credit provided to households, businesses, and governments.40
Today, the safety of commercial bank money is supported by federal deposit insurance (subject to
certain limits), a system of prudential regulation and supervision, and access to liquidity from the
Federal Reserve.41 Under this regime, commercial bank money is sufficiently safe that the general
public can transact in commercial bank money with confidence that a dollar of bank deposits is
easily exchangeable for a dollar of physical currency or a dollar of deposits at another bank. This
has not always been the case. In the early nineteenth century, the principal form of commercial
bank money was the banknote—paper money issued by a particular bank rather than the
government—rather than deposit balances, and banknotes were often treated very differently
depending on the issuing bank.42

Nonbank Money
Some nonbank financial service providers also issue liabilities that can be considered money.43
These providers often hold balances on behalf of consumers or businesses and effect transfers of
those balances on their own books for users that have signed up for their services.44
Money market mutual fund (MMF) shares can be viewed as another form of nonbank money.45
MMF shares are issued by nonbanks, and some MMFs, particularly those offered to businesses
and institutions, offer immediate liquidity through the sale of shares, fostering their use as money.
MMF shares can also serve as a store of value, and frequently are designed to offer investors a
stable share price.46

40

41

42

43

44

45

46

Seasonally adjusted amounts. This figure does not include credit unions or other thrifts. Board of Governors of the Federal Reserve System, Assets and Liabilities of Commercial Banks in the United States—H.8, January 14, 2022, https://
www.federalreserve.gov/releases/h8/current/.
The Federal Reserve shares supervisory and regulatory responsibility for domestic banks with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation at the federal level, and with individual state
banking departments at the state level. Additionally, the National Credit Union Administration oversees federal credit
unions, which provide similar if more limited services as banks. The FDIC insures deposits in federally insured banks up
to $250,000 per depositor, per insured bank, for each account ownership category for every FDIC-insured bank.
See Gary Gorton, “Reputation Formation in Early Bank Note Markets,” Journal of Political Economy 104.2: 346–97, 1996
and Gary Gorton, “Pricing Free Bank Notes,” Journal of Monetary Economics 44.1: 33–64, 1999.
Nonbank financial service providers are broadly defined as institutions other than banks that offer financial services.
See Bank for International Settlements, Committee on Payments and Market Infrastructures, Non-Banks in Retail Payments (Basel: BIS, September 2014), https://www.bis.org/cpmi/publ/d118.pdf for more information on nonbanks.
A variety of mechanisms are used by nonbanks to offer payment services, many of which do not involve issuing liabilities. Some nonbank service providers provide user interfaces as an overlay for the customer’s deposit relationship with
the bank. These types of arrangements would be considered “commercial bank money.” Such balances may vary in
terms, conditions, and protections.
An MMF is a kind of mutual fund that invests in highly liquid, near-term instruments. It is intended to offer investors high
liquidity with low risk.
MMFs are registered with and regulated by the Securities and Exchange Commission under the Investment Company Act
of 1940. For discussion of recent MMF market events and regulatory reforms, see President’s Working Group on Financial Markets, “Overview of Recent Events and Potential Reform Options for Money Market Funds,” December 2020,
https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf.

Appendix B: Types of Money

Balances held at nonbank financial service providers are typically supported by specific assets or
are backed one-for-one with deposits in a bank account. The public often expects that nonbank
money will maintain a stable value and remain readily convertible into both physical currency and
bank deposits, but that is not always the case because the assets supporting nonbank money are
not risk-free. For example, a decline in the value of a security that backs nonbank money may
imperil the nonbank money’s conversion into commercial bank money quickly and at a fixed rate.
Concern that nonbank money will not remain convertible quickly at full one-for-one value may fuel
runs on this money. That is, having lost confidence, holders will try to convert out of their nonbank
money more quickly and in greater amounts. This puts more pressure on sales of supporting securities or other assets, causing worse losses.
Over the years, many forms of nonbank money have succumbed to these types of runs. Indeed,
the global financial crisis in 2008 was in large part a crisis of nonbank money, and nonbank
money contributed to financial strains again at the onset of the COVID-19 pandemic.47
While nonbank financial service providers may be subject to certain state regulations (such as
money transmitter laws48) and MMFs are regulated by the Securities and Exchange Commission,
nonbank money lacks many of the protections of commercial bank money. For example, nonbank
money issuers are currently not eligible for certain protections against run risk, including regular
access to liquidity from the Federal Reserve and federal deposit insurance for customer balances.

47

48

See, for example, Gary Gorton and Andrew Metrick, “Securitized Banking and the Run on Repo,” Journal of Financial Economics, 104.3: 425–51, 2012, https://www.sciencedirect.com/science/article/pii/S0304405X1100081X; and Isabel
Schnabel, “COVID-19 and the Liquidity Crisis of Non-Banks: Lessons for the Future,” speech at the Financial Stability
Conference on “Stress, Contagion, and Transmission” (Cleveland: Federal Reserve Bank of Cleveland and the Office of
Financial Research, November 19, 2020), https://www.ecb.europa.eu/press/key/date/2020/html/
ecb.sp201119_1~4a1ff0daf9.en.html.
Although these laws are not uniform among the states, many of them include registration and bonding requirements and
investment restrictions.

27

29

Appendix C: Access to Money and
Payment Services
In order to serve as a means of payment and a store of value, money must be accessible to the
general public. The means by which the general public accesses different types of money vary.

Figure C.1. Overview of a typical payment

In this example, the general public interacts with the “front end” of the payment system by swiping their credit card at a checkout
machine or using a mobile app to send money. These payments may 1 flow solely through applications operated by and accounts
maintained by banks, 2 originate in a nonbank financial service and then flow through the banking system, or 3 remain only in
the records of the nonbank services (though customer nonbank accounts may be funded/defunded by bank accounts).

Receiver

Sender
(e.g., consumer)

(e.g., merchant)

Payment transaction
Funds are sent as credits (sender pushes funds) or debits (receiver pulls funds)

Front
end
(consumer
facing)

1

2

3

3

1 2

2
Sender’s bank

Receiver’s bank

Nonbank*
1

2

Payment clearing and settlement

2

1

Back
end
(payment
processing)

Payment infrastructure
(e.g., Federal Reserve,
private-sector providers)
*Nonbank financial service providers may be involved in various stages of both the front-end and the back-end of the payment chain. For example, there may
be multiple paths from a nonbank to the receiver.

30

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

As described above, central bank money currently comes in two forms: physical currency and
digital account balances held by eligible institutions at the Federal Reserve.49 The Federal Reserve
distributes physical currency to commercial banks, which in turn distribute physical currency to the
general public.50 Digital account balances, by law, may only be maintained at the Federal Reserve
by banks and a limited number of other eligible entities, which are then able to use these balances to settle payments between each other. That is, such transfers are effected by the Federal
Reserve through accounts held at Reserve Banks, with the Federal Reserve maintaining records of
transactions that are accepted by all parties.

Figure C.2. Circulation of Federal Reserve Notes

Federal Reserve Banks process notes to ensure that they
are genuine and fit for recirculation. Suspect counterfeit
notes are sent to the U.S. Secret Service.

The Federal Reserve Banks’ cash offices distribute
banknotes to the public through commercial banks,
credit unions, and savings and loan associations.

Commercial banks serve as the general public’s primary access point to accounts and payment
services, providing 124 million U.S. households access to commercial bank money and payment
services.51 Given the risks of fraud, theft, and illicit activity related to the access and use of commercial bank money, commercial banks are subject to regulatory requirements for customer identification.52
In recent years, nonbank service providers have developed convenient new ways for the general
public to access both commercial bank and nonbank money. For example, some nonbank financial
49

50

51

52

Central bank money is also known as the monetary base, or M0. The monetary base is the sum of currency in circulation (paper currency and coin held both by the public and in the vaults of depository institutions) and reserve balances
(deposits held by banks and other depository institutions in their accounts at the Federal Reserve).
The Federal Reserve offers accounts and provides payment services to more than 10,000 commercial banks that range
in size, geographic location, and services offered. Commercial banks that do not have accounts at the Federal Reserve
can access payment services, such as access to currency, through correspondent banking services.
Federal Deposit Insurance Corporation, How America Banks: Household Use of Banking and Financial Services, 2019
Survey, October 2020, https://www.fdic.gov/analysis/household-survey/.
For example, the Bank Secrecy Act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000, maintain anti-money-laundering programs, and report suspicious activity.

Appendix C: Access to Money and Payment Services

service providers offer user-friendly interfaces that facilitate transactions in commercial bank
money between participating institutions. Other nonbank financial service providers offer access
to nonbank money in the form of balances at nonbanks that can be accessed online or on mobile
device applications.53 Nonbank financial service providers typically operate closed systems—that
is, both the sender and recipient of a payment must establish a customer relationship with the
nonbank service provider before a transaction can be completed.

53

Balances at nonbanks may require funding or defunding through a commercial bank account.

31

33

References
Bank for International Settlements, Central Bank Digital Currencies: Foundational Principles and
Core Features (Basel: BIS, October 2020), https://www.bis.org/publ/othp33.pdf.
Bank for International Settlements, Central Banks and the BIS Explore What a Retail CBDC Might
Look Like, press release, September 2021, https://www.bis.org/press/p210930.htm.
Bank for International Settlements, Committee on Payment and Settlement Systems, The Role of
Central Bank Money in Payment Systems (Basel: BIS, August 2003), https://www.bis.org/cpmi/
publ/d55.pdf.
Bank for International Settlements, Committee on Payments and Market Infrastructures, NonBanks in Retail Payments (Basel: BIS, September 2014), https://www.bis.org/cpmi/publ/
d118.pdf.
Bank for International Settlements, Committee on Payments and Market Infrastructures, Central
Bank Digital Currencies, (Basel: BIS, March 2018), https://www.bis.org/cpmi/publ/d174.pdf.
Blockchain.com, “Fees Per Transaction (USD),” web page, 2021, https://www.blockchain.com/
charts/fees-usd-per-transaction.
Blockchain.com, “Transaction Rate Per Second,” web page, 2021, https://www.blockchain.com/
charts/transactions-per-second.
Board of Governors of the Federal Reserve System, Money Stock Measures—H.6 Release,
December 28, 2021, https://www.federalreserve.gov/releases/h6/current/.
Board of Governors of the Federal Reserve System, Assets and Liabilities of Commercial Banks in
the United States—H.8, January 14, 2022, https://www.federalreserve.gov/releases/h8/current/.
Carapella, Francesca, and Jean Flemming, “Central Bank Digital Currency: A Literature Review,”
FEDS Notes (Washington: Board of Governors of the Federal Reserve System, November 9, 2020),
https://www.federalreserve.gov/econres/notes/feds-notes/central-bank-digital-currency-aliterature-review-20201109.htm.

34

Money and Payments: The U.S. Dollar in the Age of Digital Transformation

Coyle, Kelsey, Laura Kim, and Shaun O’Brien, 2021 Findings from the Diary of Consumer Payment
Choice (San Francisco: Federal Reserve Bank of San Francisco, May 2021), https://www.frbsf.org/
cash/publications/fed-notes/2021/may/2021-findings-from-the-diary-of-consumer-paymentchoice/.
Federal Deposit Insurance Corporation, How America Banks: Household Use of Banking and Financial Services, 2019 Survey, October 2020, https://www.fdic.gov/analysis/household-survey/.
Federal Reserve Bank of Atlanta, “New Committee to Advance Safe, Efficient, Inclusive Payments,”
news release, May 12, 2021, https://takeonpayments.frbatlanta.org/news/pressreleases/2021/
05/12/new-committee-to-advance-safe-efficient-inclusive-payments.
Federal Trade Commission, Consumer Protection Data Spotlight, May 17, 2021, https://
www.ftc.gov/news-events/blogs/data-spotlight/2021/05/cryptocurrency-buzz-drives-recordinvestment-scam-losses#end2.
Financial Health Network, FinHealth Spend Report 2021, June 11, 2021, https://
finhealthnetwork.org/research/finhealth-spend-report-2021/.
Financial Stability Board, Enhancing Cross-border Payments: Stage 3 Roadmap (Washington: FSB,
October 2020), https://www.fsb.org/2020/10/enhancing-cross-border-payments-stage-3roadmap/.
Forbes Advisor, “Bitcoin’s Energy Usage, Explained,” June 7, 2021, https://www.forbes.com/
advisor/investing/bitcoins-energy-usage-explained/.
Gorton, Gary, “Reputation Formation in Early Bank Note Markets,” Journal of Political Economy,
104.2, 1996.
Gorton, Gary, “Pricing Free Bank Notes,” Journal of Monetary Economics, 44.1, 1999.
Gorton, Gary, and Andrew Metrick, “Securitized Banking and the Run on Repo,” Journal of Financial
Economics, 104.3, 2012.
Greene, Claire, Scott Schuh, and Joanna Stavins, The 2012 Diary of Consumer Payment Choice
(Atlanta: Federal Reserve Bank of Atlanta, 2018), https://www.atlantafed.org/banking-andpayments/consumer-payments/research-data-reports/2018/the-2012-diary-of-consumer-paymentchoice.aspx?panel=2.

References

Ihrig, Jane, Zeynep Senyuz, and Gretchen C. Weinbach, “The Fed’s ‘Ample-Reserves’ Approach to
Implementing Monetary Policy,” Finance and Economics Discussion Series 2020-022 (Washington:
Board of Governors of the Federal Reserve System, February 2020), https://doi.org/10.17016/
FEDS.2020.022.
President’s Working Group on Financial Markets, “Overview of Recent Events and Potential Reform
Options for Money Market Funds,” December 2020, https://home.treasury.gov/system/files/
136/PWG-MMF-report-final-Dec-2020.pdf.
President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and
the Office of the Comptroller of the Currency, Report on Stablecoins, November 2021, https://
home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf.
Riksbank, Payments in Sweden 2020 (Stockholm: Riksbank, October 2020), https://
www.riksbank.se/en-gb/payments–cash/payments-in-sweden/payments-in-sweden-2020/.
Schnabel, Isabel, “COVID-19 and the Liquidity Crisis of Non-Banks: Lessons for the Future,”
speech at the Financial Stability Conference on “Stress, Contagion, and Transmission,” Federal
Reserve Bank of Cleveland and the Office of Financial Research, November 19, 2020, https://
www.ecb.europa.eu/press/key/date/2020/html/ecb.sp201119_1~4a1ff0daf9.en.html.
Visa, “Visa Acceptance for Retailers,” web page, 2021, https://usa.visa.com/run-your-business/
small-business-tools/retail.html.
Worldpay, The Global Payments Report 2021, https://worldpay.globalpaymentsreport.com/en/.
The World Bank, Remittance Prices Worldwide Quarterly (Washington: World Bank Group,
June 2021), https://remittanceprices.worldbank.org/sites/default/files/rpw_main_report_
and_annex_q221.pdf.