Many central banks, including the Federal Reserve, are actively exploring central bank digital currency, which is defined as a “new form of digital money, denominated in the national unit of account, that is a direct liability of the central bank.” Retail forms of CBDC would be available directly to the public to spend on everyday transactions. In contrast, a wholesale CBDC is intended to be limited to settlement between banks and central banks. 

Community banks are strongly opposed to retail CBDC as it could destabilize the existing banking system that serves as the backbone of the US economy. The introduction of retail CBDC could erode the Federal Reserve’s ability to conduct monetary policy and interest rate control by altering the supply of reserves in the banking system and forcing the Fed to balloon its balance sheet. Depositors may prefer CBDC over bank deposits in a crisis even if the CBDC has a less attractive rate of return, introducing the potential for bank runs. The Federal Reserve must preserve the vital role of community banks as economic engines of the U.S. economy.  

Moreover, the policy goals of a CBDC can be achieved by other means. With the introduction of FedNow instant payment services and increased Same Day ACH adoption, Americans are enjoying faster transactions clearance and can expect further innovations to be built upon these rails. FedNow and RTP must be given a chance to succeed in achieving payments modernization.