Late last week, the Federal Reserve released a 40-page report on the potential creation of a digital U.S. dollar. The government body seeks public input through a 22-question feedback form, and has invited explicit policy guidance from the White House and Congress.

Why should we care?
Jerome Powell insisted that the Fed won’t act unilaterally to issue central bank digital currencies (CBDCs)—but the long-awaited report does suggest that a U.S. digital dollar should possess particular attributes, which may drive eventual legislation to encourage those features. "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," the report concludes. Crucially, an identity-verification framework, including know-your-customer and anti-money laundering (KYC/AML) checks, would help CBDCs integrate with existing financial services. Banks, for example, could both issue loans more quickly through CBDCs and also offer competitive interest rates according to a consumer’s existing credit score. These use cases confirm that CBDCs will probably function more like traditional fiat currency than existing cryptocurrency. But the Fed’s report was far from pure boosterism; it cautioned that CBDCs could cannibalize demand for existing financial instruments. Looking to the existing volatility of our financial system and various cryptocurrencies, the government body predicted runs on financial firms during times of crisis, with droves attempting to quickly convert their savings into CBDCs, which are a more stable digital cash. Such a panicked exodus could be prevented by imposing limits on how much digital money can be accrued in short spans of time—suggesting digital currencies can stabilize through regulation and centralization.