Washington, D.C., May 20, 2022 – In a letter responding to the recent discussion paper published by the Board of Governors of the Federal Reserve System entitled “The U.S. Dollar in the Age of Digital Transformation,” which discusses issues related to the potential introduction of a U.S. central bank digital currency (CBDC), SIFMA shares its view that policymakers need to be clear on why a CBDC is needed and what problems it would address before undertaking what the Federal Reserve calls “a highly significant innovation in American money.”

“Much qualitative and quantitative analyses still need to be conducted in the coming years to properly evaluate whether the costs of this significant change to our existing system of money would outweigh the benefits, particularly given the high degree of efficiency and reliability of existing payments systems for both institutional actors and consumers,” notes SIFMA president and CEO Kenneth E. Bentsen, Jr. in the letter.  “These analyses should include, but would not be limited to, an evaluation of the effects of different types of CBDC systems on financial stability and the implementation of monetary policy; on key short-term funding markets; on existing payments systems, with which any CBDC would need to be interoperable; on consumer privacy; as well as on anti-money laundering (AML) and sanctions regimes. Given that much more study needs to be undertaken to properly understand these benefits and costs, we do not take a position on the desirability of adopting a U.S. CBDC in this response.”

Given that 73 percent of all U.S. economic activity is funded through capital markets activities, SIFMA believes it is vital that capital markets impacts be a central consideration for policymakers considering adoption of a U.S. CBDC, and that is the focus of its response.

SIFMA believes, if policymakers were to move forward with CBDC adoption at some future point, the primary focus should be on “limited purpose” or “wholesale” CBDC (wCBDC) which would be used for institutional financial transactions rather than a more widely available public “retail” CBDC (rCBDC), at least initially. This would allow further time to consider and evaluate the risks that a more widely available rCBDC may present.  A wCBDC would be less disruptive to the financial system and financial stability than a rCBDC; it would provide a testing ground for experimentation of key systems amongst a small group of sophisticated and established financial actors; and has more proven and obvious use cases than a rCBDC.  A wCBDC would also be less politically fraught, raising fewer concerns around issues such as consumer privacy than a rCBDC.  A wCBDC may also be helpful in preserving the U.S. dollar’s status as a reserve currency and as the predominant currency for international financial transactions in a way that a rCBDC would not.

In its response, SIFMA also makes the following recommendations:

• Access: in addition to our view that a wCBDC ought to be the primary focus of policymakers initially, we recommend that direct access to any wCBDC be restricted to institutions that are subject to a framework of regulation and supervision that is comparable to that currently in place for institutions with access to Federal Reserve master accounts and services. The Board could also consider whether the imposition of activities restrictions on non-bank institutions would be warranted.
• Legal Status: it is crucial that the legal status and treatment of any U.S. CBDC (whether under statute and/or through regulation) be made equivalent to the legal status of legacy fiat currency, and that both be fungible with one another. There should also be clarity and consistency regarding key terminology, particularly as it pertains to CBDC “tokens.”
• Prudential Treatment: any U.S. CBDC should be treated in an analogous fashion to other central bank money under international prudential standards and domestic rules, particularly with respect to capital, liquidity, and reserve requirements.
• Risk Management: wCBDCs should be incorporated into existing risk management processes and solutions for clients and policymakers should avoid imposing any new, additional risk charges on financial institutions handling wCBDCs. However, wCBDC design and implementation should bear in mind considerations related to operational risk, credit and liquidity risk and cyber risk, and adopt design features to minimize them.
• Domestic and Cross Border Interoperability: wCBDCs ought to be able to operate alongside legacy instruments and systems rather than replace them in order to both minimize disruptions to the financial system and given that legacy systems have become significantly more efficient in recent years. Planning for interoperability will require coordination with market participants, infrastructure providers, and the regulators who oversee them domestically. International coordination between regulators will be vital in order to realize the potential benefits of multi-CBDC (“mCBDC”) arrangements, which may include faster, cheaper and more reliable cross-border payments.
• Programmability: the potential for wCBDCs to be embedded with logic, or programmability, offers the potential for innovation and new functionality. However, programmability features need to be developed so they do not impair the fungibility of central bank money or introduce operational risk.
• Public-Private Partnerships: it is crucial that policy making in this area occur in close collaboration between financial institutions, the Federal Reserve and other important government actors whose supervisory functions and regulations could be impacted by a wCBDC. This partnership with market participants and infrastructure providers should extend from the research and decision-making phases through the design and testing of any future wCBDC.
• Privacy: a wholesale environment does not raise the same sorts of privacy concerns that a rCBDC would. However, privacy concerns are not completely absent from the design of a wCBDC and privacy oriented mitigants need to be embedded from the outset even in a wCBDC system.
• Product Specific Considerations: it is crucial that not only the general impacts of CBDC be considered, but also the impact of different types of CBDC on specific capital markets products and processes. The review and analysis and potential design process should closely examine how CBDCs (particularly wCBDC) would impact products and process such as securities settlement, the mechanics of monetary policy operation, FX markets and infrastructure, funding models, and cross-border payments.
• Securities Settlement: wCBDCs have the potential to allow for new settlement models and potentially faster settlement for some transactions. However, the potential impacts of wCBDCs on securities settlement must not be viewed insolation from broader settlement processes and securities markets operations. wCBDC would be neither necessary nor sufficient for the development of new settlement models, and the experiences of pilot programs for faster settlement cannot be generalized to the markets as a whole, where major challenges exist for settlements on timeframes shorter than T+1.

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SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development.

SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).