Proposals for “central bank digital currency” (CBDC) come in two basic types: account-based and token-based. I have been critical of proposals for an account-based system. Until recently, there didn’t seem to be much active interest in a token-based system. But now comes a significant token-based proposal in a new white paper by the Digital Dollar Project. Would a token-based system be any better than an account-based system? It might, but it all depends on the design details. Let me explain.
An account-based CBDC would mean that households and businesses have retail checking accounts directly on the Federal Reserve System’s balance sheet. A detailed proposal for such a “FedAccounts” system by three legal scholars (Morgan Ricks, John Crawford, and Lev Menand) is available here. (I recently exchanged views with Ricks in an online event hosted by the Cato Center for Monetary and Financial Alternatives.) It is implausible that a FedAccounts system, run by a bureaucracy with no experience in retail payments, unguided by profit and loss, will provide better or more efficient service than systems offered by banks and other competitive private firms. But it isn’t implausible that threats to privacy would arise from a system that gives a government agency real-time access to all deposit transfers.
A token-based CBDC would mean that households and businesses hold circulating digital Fed liabilities in digital wallets (think mobile phone apps), the way they hold Bitcoin or Tether[1], or the way they hold Federal Reserve Notes in analog wallets. This model has been labeled “FedCoin.” The Federal Reserve System would know the dollar quantity of FedCoin in circulation, but in principle, as with physical notes and coins, it needn’t know which users hold how many of these digital dollars. One prominent supporter of the FedCoin concept since 2015 has been Federal Reserve economist David Andolfatto. An early sketch of the concept was provided in 2014 by blogger J. P. Koning.
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