On 20th January, the Federal Reserve released the discussion paper Money and Payments: the U.S. Dollar in the Age of Digital Transformation and invited the public’s comments to 22 questions. For transparency, Coinfirm’s CIO, Pawel Aleksander, provides his answers.
- What additional potential benefits, policy considerations, or risks of a CBDC may exist that have not been raised in this paper?
There is a potential benefit for the U.S. treasury resulting from a U.S. CBDC becoming an important global means of capital accumulation governed by the U.S. FED. There is a potential risk for the U.S. and other countries and their citizens resulting from the same. Newly issued assets tend to reward the issuer and those closest to them in the distribution chain the most.
- Could some or all of the potential benefits of a CBDC be better achieved in a different way?
Yes, a CBDC can better achieve its goals if a degree of decentralization is enabled.
- Could a CBDC affect financial inclusion? Would the net effect be positive or negative for inclusion?
Yes, a CBDC will affect financial inclusion. The net effect will likely be negative if it will contribute to increasing wealth distribution divisions in society through the further centralization of distribution and governance. Otherwise, it has a great chance to have a positive effect on financial inclusion.
- 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?
Blockchain technology allowed for programmable money. Technically, issuers can design monetary policy rules and regulatory rules at the level of the code of a particular asset. Achieving goals such as maximizing employment and price stability will be vastly dependent on the intent and functioning of such rules, e.g. limits on asset supply, the possibility of blocking, reversing and flagging transactions, existence of non-custodial wallets, capital control and monitoring scenarios. These rules have not been discussed in the whitepaper provided.
- How could a CBDC affect financial stability? Would the net effect be positive or negative for stability?
Same as above.
- Could a CBDC adversely affect the financial sector? How might a CBDC affect the financial sector differently from stablecoins or other nonbank money?
It is unlikely that a CBDC would adversely affect the financial sector if the asset will not have significant privileges over other asset classes. Otherwise, privileges such as prohibiting other asset classes from being legal tender in selected use cases while maintaining this privilege for a CBDC might adversely affect the financial sector, especially wealth distribution.
- 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?
Tools that Coinfirm provides allow for precise, real-time monitoring, tracking or rule-based notifications on every single unit of assets in a blockchain-based network already exist. These tools can greatly supplement any capital control-related goals that were not embodied in the CBDC protocol. This includes exchange controls, tax controls, anti-money laundering and sanctions, monetary and financial repression policies. One of the key benefits of using these tools is the possibility of keeping the core CBDC technological layer simpler, less vulnerable to failures and elegant like Bitcoin. Regardless of its architecture, the rules should be defined and known to the public prior to a CBDCs issuance.
- 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?
Decline in cash usage does not logically imply the necessity of creating central bank money. A CBDC might be just another asset, the competitiveness of which will be determined by its usability and privileges. The balance of privileges given to a CBDC in favor of other asset classes, such as cash and cryptocurrency (e.g. more favorable tax treatment) is critical. It may cause either declining or increasing usage of these assets and deter or promote development of a competitive U.S. financial industry.
- How might domestic and cross-border digital payments evolve in the absence of a U.S. CBDC?
Financial markets will autonomously deliver decentralized solutions outperforming all functions of the centralized digital payments, if the balance of privileges and regulatory framework attributed to different asset classes is properly managed at the government level.
- How should decisions by other large economy nations to issue CBDCs influence the decision whether the United States should do so?
CBDCs have great potential of becoming a favorable reserve and means of accumulation asset. Except for its design, first mover advantage will play a key role. Bitcoin was the first asset in its class and despite the existence of better solutions, its adoption and image as a cultural icon is the greatest. The U.S. being the first issuer will give it a great advantage.
- Are there additional ways to manage potential risks associated with CBDC that were not raised in this paper?
Yes, for example, a fair system should not allow one group of privileged actors to issue money as a liability or debt to the state, while penalizing others for doing so. Therefore, it is worth considering a limited supply of CBDC assets, implemented similarly to the Bitcoin protocol. This step should help mitigate the risk of a CBDCs loss of value and creating excessive liability or debt to keep its value stable.
Another important example allows the use of non-custodial wallets. Paradoxically, the existence of non-custodial, ‘anonymous’ wallets, criticized by some government bodies, allows for effective AML and a fair level of privacy at the same time. Banning or restricting the use of non-custodial wallets would drive CBDC AML toward banking in silo-like AML systems, and would help engender a mentality that occludes visibility of transactions to individual banks only. Thus, being totally ineffective despite hindering privacy. Allowing non-custodial wallets will help to mitigate AML and capital control related risks.
A further example is enabling elements of decentralization. Every centralized control system fails on collusion. Collusion is how the biggest economic scandals happen. Adding an element of decentralization related to consensus on the protocol parameters or off-chain attributes assigned to transactions will help to manage sustainability and fraud risks.
- How could a CBDC provide privacy to consumers without providing complete anonymity and facilitating illicit financial activity?
This can be done in the same way as it is currently done in the crypto space now, by allowing non-custodial wallets and equipping the system with proper AML and capital control tools. Crypto AML and capital control systems are many times more effective than traditional finance systems. To give an example, Coinfirm can inform an entity in real-time of situations such as: “There are 100 BTC that are related to terrorism financing that have just arrived to your account number XYZ. Please freeze the account; enclosed is evidence of 1k+ transaction flows.” This is impossible in a traditional financial system, as well as the CBDC, in the form currently under discussion.
- How could a CBDC be designed to foster operational and cyber resiliency? What operational or cyber risks might be unavoidable?
Careful consideration of which functions of a CBDC should remain at the protocol layer and which should be moved to supporting tools should be given. The more functions are embodied in the protocol layer, the more operational it might be but at the tradeoff of vulnerability to exploits. State issued assets should rather give a preference of security over operational resiliency.
- Should a CBDC be legal tender?
If it is not legal tender, it will struggle to be competitive with cryptocurrencies.
- Should a CBDC pay interest? If so, why and how? If not, why not?
No, it will increase preference towards older versus younger generations (adopters) and their heirs. It will also continuously limit the treasury capability of open market operations or create incentives for new issuance and increasing liability or debt. Instead, it is much more practical and equitable to limit the supply of the asset. Functions such as staking or liquidity provision should be left to the open market.
- Should the amount of CBDC held by a single end-user be subject to quantity limits?
No, the function of capital accumulation is the part of the winning formula for any asset that aims at mass adoption and reserve asset status. Quantity limits will also create incentives for gray areas, money mules and offshore trustee conglomerates.
- What types of firms should serve as intermediaries for CBDC? What should be the role and regulatory structure for these intermediaries?
Institutions as defined in anti-money laundering regime that have obtained appropriate banking or virtual asset service provider licenses.
- Should a CBDC have “offline” capabilities? If so, how might that be achieved?
The possibility of moving part of the transaction ledger offline is tempting and has multiple benefits, but it would create tremendous technological challenges regarding security and data integrity that have not yet been fully resolved for distributed ledgers. The crypto space has introduced so-called side chains, e.g. lightning networks that have some of the benefits of ‘offline’ transactions, but technically these transactions are executed ‘off-chain’ and not ‘offline’.
- Should a CBDC be designed to maximize ease of use and acceptance at the point of sale? If so, how?
Yes, however ease of use and acceptance at the point of sale depends not only on the design of the CBDC itself but possibly even more on the ecosystem that includes e.g. custodian and non-custodian wallets design, listings on exchanges, infrastructure providers, developer tools, cyber security solutions, dedicated hardware (e.g. hardware wallets), privacy tools, venture capital, media and marketing supporting projects for every needed market niche and more.
Corresponding infrastructure has already been greatly developed by the crypto space, with billions of dollars invested, and a CBDC should be more than welcome to that infrastructure if its privileges will not be extraordinarily higher than those of crypto assets.
- How could a CBDC be designed to achieve transferability across multiple payment platforms? Would new technology or technical standards be needed?
Transferability across multiple payment platforms is independent of technology, and does not require any special design or technology if private keys are managed by a user or a custodian.
- How might future technological innovations affect design and policy choices related to CBDC?
Similarly, to how it was resolved in the crypto space, the CBDC design should have the possibility of protocol upgrades while maintaining correct and undisturbed accounting.
- 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?
Consider a community-created CBDC.

Comments from the public will be accepted by the Federal Reserve Board for a period of 120 days counting from 20/01/2022, and can be submitted here.