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Friday, January 28, 2022

Fed CBDC paper draws rapid-fire responses

The Federal Reserve Board's discussion paper on a U.S. central bank digital currency, published Jan. 20, 2022, drew rapid-fire responses from the Electronic Transactions Association, Merchants Payments Coalition and Independent Community Bankers of America. The paper examined current and emerging digital payments schemes as well as the potential economic impacts of a CBDC on the U.S. payments ecosystem, according to Federal Reserve Chair Jerome H. Powell.

"We look forward to engaging with the public, elected representatives, and a broad range of stakeholders as we examine the positives and negatives of a central bank digital currency in the United States," Powell said, while noting that the paper does not favor any particular policy outcome. Powell described the paper, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, as the first step in a public discussion between the Federal Reserve and stakeholders about central bank digital currencies (CBDCs), defined as a "digital liability of a central bank that is widely available to the general public."

A copy of the report is available at: www.federalreserve.gov/publications/money-and-payments-discussion-paper.htm, and comments can be submitted to www.federalreserve.gov/apps/forms/cbdc.

ETA guidance

Commenting on potential benefits and unexpected outcomes of a U.S. CBDC, the ETA issued a statement on Jan. 20, 2022, in support of ongoing discussions. "We welcome the discussion paper from the Fed and are pleased that it was guided by principles that are consistent with ETA's own, including whether a CBDC would improve upon the existing robust, fast and secure payments system," said Jodie Kelley, CEO of ETA. "We look forward to continuing to work with policymakers on the possible creation of a CBDC."

Kelley further noted that ETA's 7 Guiding Principles for CBDC advocates for a balanced approach to CBDCs within a regulatory framework that contextualizes risk. The seven principles are designed to protect a diverse set of public and private sector stakeholders and can be summarized as follows:

  1. Advances innovation
  2. Provides the right tool for the job
  3. Ensures private sector participation
  4. Allows for interoperability
  5. Encourages open acceptance
  6. Strengthens consumer protection
  7. Utilizes regulation tailored to the risk profile of the participant

To best serve consumers, further financial inclusion, and preserve and strengthen the financial system, the ETA asked the Fed to keep these principles in mind when reviewing proposals to provide consumers with robust, innovative banking and payment options.

MPC comments

The Merchants Payments Coalition—representing retailers, supermarkets, convenience stores, gasoline stations, online merchants and others interested in competitive, transparent processing systems—welcomed the Fed's discussion paper in a Jan. 21, 2022, statement. Leon Buck, MPC executive committee member and vice president of banking and financial services at the National Retail Federation, noted that a U.S. CBDC would be a refreshing alternative to traditional payment card processing.

"The Fed states in its report that a CBDC could reduce the cost of payments, and that would be welcomed by merchants and consumers alike," Buck said. "We appreciate that the Fed is looking at future innovations and has opened a long-needed conversation on how to solve the problems with our nation's payment system."

Buck mentioned the Fed has seen a drop in U.S. cash usage from 40 percent in 2012 to 19 percent in 2020, as payment card and digital payment usage has grown along with the fees that merchants are charged to accept all forms of electronic payments. He expressed hope that initiatives like CBDC and the FedNow service can reduce related costs and fees by providing a cost-effective alternative digital payment solution.

"For Visa and Mastercard credit cards – which account for nearly 80 percent of the U.S. credit card market – swipe fees averaged 2.22 percent of the purchase price and totaled $61.6 billion in 2020, up 137 percent over the previous decade, according to the Nilson Report," MPC representatives said in a statement. "When all types and brands of cards are included, the fees totaled $110.3 billion in 2020, up 70 percent over 10 years. The fees drive up prices merchants must charge and, according to payments consulting firm CMSPI, equate to an estimated $724 a year for the average U.S. family."

ICBA recommendations

The Independent Community Bankers of America issued a statement on Jan. 21, 2022, urging Congress to participate in establishing a clear legal framework for CBDC. ICBA President and CEO Rebeca Romero Rainey said the association is closely reviewing the Federal Reserve's newly issued discussion paper that evaluates the pros and cons of developing a U.S. central bank digital currency.

"Any consideration of a U.S. CBDC must include clearly defined goals and objectives, weigh the benefits and risks, and evaluate the practical impact on consumers and the economy," Rainey said. "Congress must be involved from the start in establishing a clear legal framework and authority for any form of CBDC. Before considering a U.S. CBDC, policymakers must also ensure it would do no harm to the financial system while preserving the vital role of community banks as engines of the U.S. economy."

Rainey acknowledged the Fed's discussion paper cites important policy considerations, such as preserving private-sector intermediaries, balancing consumer privacy with transparency, ensuring transferability between customers of different intermediaries, and supporting compliance with anti-money-laundering and anti-terrorist-financing rules. She urged policymakers to pursue U.S. CBDC only if research shows the benefits outweigh the risks.

"ICBA looks forward to further reviewing the paper, submitting formal comments, and continuing the discussion of this important policy decision," Rainey said. end of article

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