Exploring the Design of a Potential U.S. Federal Reserve Digital Currency

Exploring the Design of a Potential U.S. Federal Reserve Digital Currency

Embracing the digital age, the U.S. is pondering the creation of a tokenized and blockchain-based form of the good 'ol greenback - the Central Bank Digital Currency (CBDC). This innovative digital money would be backed by the Federal Reserve, regulated as legal tender, and recognized as an extension of the U.S. dollar.

With this future CBDC, people could use a new method of central bank money alongside physical cash and digital balances held in banks. As of 2025, no official CBDC has been launched in the United States, but it's essential to grasp the concept, particularly with it being under discussion. It's all about weighing the benefits alongside the risks.

What Exactly is a CBDC?

Think of it as an evolution in the way money has been passing hands since people used seashells for payments. From gold standards to the arrival of fiat currency, digital currencies are the latest metamorphosis in the monetary realm.

Fiat currency is government-issued, not bound to any physical commodity like gold or silver, and backed solely by the issuing government's trust. Most economies rely on this type of currency for making transactions. In the U.S., the Federal Reserve is responsible for issuing fiat currency.

A CBDC would be more than just an extension of the central bank reserve account balances, but also a way to facilitate instant, seamless, and secure cross-border transactions.

Dive Deeper into a CBDC

The Federal Reserve acknowledges the innovative potential of digital assets as a form of money. However, there are concerns related to risks that could leave customers vulnerable to theft and fraud. A CBDC would have similar pros and cons.

For the Federal Reserve to consider launching a CBDC, it must ensure it's a safe digital asset, free of credit and liquidity risks, and safeguards consumer privacy while preventing criminal activity. Privacy protection, intermediated transactions, transferability, and identity verification are all important factors to consider.

Privacy implications include protecting consumers' rights while impeding criminal activities.

Intermediated transactions refer to the acceptance of CBDC management and payment through digital wallets and accounts offered by private entities, such as banks and non-bank institutions.

Transferability ensures the CBDC is accessible to Americans, regardless of the intermediaries they use, providing more efficient payment solutions.

Identity-verification procedures are designed to prevent money laundering and the financing of terrorism activities.

The Federal Reserve aims to consider all aspects, including households, businesses, and consumers, by offering more uses and efficiency than fiat or other supplementary monetary options.

Necessary Requirements for a CBDC

Before the U.S. makes a digital currency available to the public, specific requirements need to be met, including:

1. The CBDC should benefit U.S. households, businesses, and the overall economy, exceeding its costs and risks.
2. It should yield these benefits more efficiently than alternative fiat or physical money.
3. The CBDC should complement rather than replace existing forms of money and financial services.
4. It must protect consumer privacy and prevent criminal activity.
5. It must have support from important stakeholders.

Advantages and Disadvantages of a CBDC

The Federal Reserve has outlined the benefits and drawbacks of having a CBDC in circulation:

Advantages

A CBDC should:

1. Safely meet future payment service needs.
2. Be free of credit and liquidity risks, offering a secure option for the public.
3. Improve cross-border payments and simplify their distribution.
4. Advance the global role of the dollar and benefit both the government and public through reduced transaction and borrowing costs.
5. Boost financial inclusivity and lower costs for lower-income households.
6. Provide the public with access to central bank funds and expand the payment options available.

Disadvantages

A CBDC might:

1. Affect the financial structure of the U.S. and alter the duties and responsibilities of the private sector and the central bank.
2. Put the safety and stability of the financial system at risk during conversion from other forms of money to a CBDC, potentially leading to instability and runs on financial institutions.
3. Impact the effectiveness of monetary policy implementation.
4. Raise privacy and data protection concerns and enable financial crimes, resulting in the loss of assets.
5. Face operational resilience and cybersecurity challenges, as a CBDC may be susceptible to attacks like existing payment services.

A U.S. President's Drive for a CBDC

Former President Biden focused on digital assets and the creation of a U.S. CBDC in collaboration with the White House Office of Science and Technology Policy (OSTP). In March 2022, Biden issued an order to examine various aspects of digital assets and a U.S. CBDC. A digital dollar plan was outlined, aiming to provide guidance on its creation.

The CBDC Pushback

While some embrace the idea, others, such as former President Trump, oppose the development of a CBDC. Trump described it as a dangerous threat to freedom, warning of government control, monitoring, confiscation of assets, and potential instability. As president during his second term, Trump issued an executive order in January 2025 that prohibited federal agencies from establishing, issuing, or promoting a CBDC in the U.S. or abroad.

Central Bank Digital Currencies Around the World

Numerous countries are exploring, researching, or developing CBDCs. As of February 2025, the Atlantic Council had observed:

• 3 countries had launched a CBDC (Jamaica, The Bahamas, and Nigeria).
• 44 countries had initiated a pilot program.
• 19 countries were developing a CBDC.
• 39 countries were researching the potential integration of a CBDC.

Important

As of May 2025, 134 countries were experimenting, researching, developing, or exploring a CBDC initiative.

All G20 economies had progressed into the development or pilot stages of a CBDC as of May 2025. Among those, 13 countries were already in the pilot stage, including Brazil, Japan, India, Australia, Russia, and Turkey.

CBDC vs. Cryptocurrency

While similar in some ways, it is essential to understand the differences between a CBDC and cryptocurrency. A CBDC will be centralized and controlled by the Federal Reserve, while a cryptocurrency is decentralized and places more control in the hands of users. Both may run on distributed ledgers or blockchains, but key differences arise in who controls the network and how consensus is reached (and if needed).

Will CBDC Replace Cash?

A U.S. CBDC wouldn't replace cash; rather, it would complement physical currency by offering more payment options. According to the Federal Reserve, a CBDC is "not to reduce or replace" cash.

Is the Federal Reserve Heading Towards Digital Currency?

If digital currency means a CBDC, then the Federal Reserve is still considering the best way to implement and secure it, as well as its impact on the economy.

Is the U.S. Going Digital Dollars?

As of May 2025, the U.S. Federal Reserve hasn't yet made the decision to transition to a CBDC or supplement its existing monetary system with one. It is researching the potential effects a CBDC would have on the dollar, the U.S., and the global economy.

1. A CBDC, if launched in the United States, would be an extension of the US dollar, backed by the Federal Reserve and regulated as legal tender.
2. The Federal Reserve is evaluating the potential of digital assets as a form of money, considering the innovative aspects, while addressing potential risks.
3. The creation of a CBDC would facilitate instant, seamless, and secure cross-border transactions, beyond simply being an extension of the central bank reserve account balances.
4. Privacy protection, intermediated transactions, transferability, and identity verification are key considerations for the Federal Reserve in ensuring a safe and secure CBDC that prevents criminal activity.
5. The adoption of a CBDC would complement rather than replace existing forms of money and financial services.
6. The advantages of having a CBDC in circulation include safeguarding future payment service needs, reducing credit and liquidity risks, simplifying cross-border payments, advancing the global role of the US dollar, boosting financial inclusivity, and providing the public with access to central bank funds.
7. Potential disadvantages of a CBDC include affecting the financial structure of the US, impacting the effectiveness of monetary policy, raising privacy and data protection concerns, enabling financial crimes, facing operational resilience and cybersecurity challenges, and potentially leading to instability during conversion from other forms of money to a CBDC.

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