- On September 16, 2022, the U.S. Department of the Treasury published a report, "The Future of Money and Payments" (Report), in response to the President's March 2022 Executive Order on Ensuring Responsible Development of Digital Assets (EO).
- The Report analyzes how instant payment systems, stablecoins, and the potential creation of a U.S. Central Bank Digital Currency (CBDC) may impact U.S. money and payment systems and anti-money laundering/countering the financing of terrorism (AML/CFT) obligations.
- The Report acknowledges that blockchain-based stablecoins "could have far-reaching implications" that are "difficult to predict" and at various times provides indicia of the perceived pros and cons of "asset-backed stablecoins" versus prospective CBDC models.1
- The Report recommends that the U.S. government:
- Advance work on a possible U.S. CBDC, in case one is determined to be in the national interest;
- Encourage use of instant payment systems to support a more competitive, efficient, and inclusive U.S. payment landscape;
- Establish a federal framework for payments regulation to protect users and the financial system, while supporting responsible innovations in payments; and
- Prioritize efforts to improve cross-border payments.
The Report responds to Section 4(b) of the EO and evaluates the U.S. system of money and payments, developments in stablecoins and instant payment systems, and a potential CBDC, using the following policy objectives as a guide: (1) provide benefits and mitigate risks for consumers, investors, and businesses; (2) promote economic growth and financial stability and mitigate systemic risk; (3) improve payment systems; (4) ensure the global financial system has appropriate transparency, connectivity, and platform and architecture interoperability; (5) advance financial inclusion and equity; (6) protect national security; (7) protect human rights; and (8) align with democratic and environmental values, including privacy protections.
1. Developments in Instant Payment Systems and Stablecoins
Instant Payment Systems
Instant payment systems process small-value interbank transfers almost instantaneously. According to the Report, widespread adoption of instant payment systems is affected by various factors related to participation and implementation by financial institutions, and "[b]roadening the range of financial institutions ... eligible to participate in instant payment systems, as certain foreign jurisdictions have done, could help to enhance speed and efficiency, competition, and inclusion in payments, including for cross-border payments."2 The Report notes that the FedNow interbank clearing system, which is an instant payment system planned for launch by the Federal Reserve in 2023, will not initially facilitate cross-border payments but may do so in the future.
The Report cites reduced transaction costs as a key benefit of instant payment systems. Risks cited by the Report include the risk of loss due to irreversible payments and new risks related to intraday liquidity, AML/CFT obligations, fraud detection, and cyber threats. However, "differences in AML/CFT obligations for institutions that directly participate in instant payment systems ... could complicate efforts to create a seamlessly functioning whole" across instant payment systems.3
Stablecoins are "[d]igital assets issued by private entities that aim to maintain a stable value relative to a national currency or other reference assets, often utilizing distributed ledger technology, such as blockchain."4 According to the Report, "proponents believe that stablecoins could become used widely as a means of payment by households and businesses, as well as offering some improvement to the efficiency of cross-border payments by reducing the number of intermediaries in a payment chain."5
With regard to asset-backed stablecoins, the Report notes the risk that "markets for reserve assets could experience dislocations if stablecoin activities were to obtain significant scale and if runs on stablecoins were to lead to fire sales of these reserve assets."6 Other stablecoin risks highlighted by the Report include "congestion or high fees" caused by permissionless blockchains and "the same basic risks as traditional payment systems, including credit risk, liquidity risk, operational risk, risks arising from improper or ineffective system governance, and settlement risk."7
The Report notes that "if a stablecoin was widely adopted globally as a means of payment, the stablecoin could pose greater risks for illicit finance due to uneven implementation of global AML/CFT standards for digital assets."8 According to the Report, "[t]he liquidity of a widely adopted stablecoin could also make it attractive to criminals and the design of a stablecoin arrangement (e.g., use of permissioned blockchain) could affect the implementation of AML/CFT requirements."9
2. Potential U.S. CBDC
The Report defines a CBDC as a digital form of a country's sovereign currency that would (1) be legal tender, (2) be convertible one-for-one into reserve balances or paper currency, and (3) clear and settle with finality nearly instantly. The Report distinguishes between a "wholesale CBDC intended for banks and other financial institutions, and retail CBDC intended to be accessed and used by a wide range of consumers and businesses."10 The Report also notes that "[a] key question is whether a CBDC would pay interest."11
With regard to technical infrastructure, the Report states "current technology suggests that CBDC would be transferred on a system administered by the central bank"12 and notes that a central bank would be unlikely to adopt a permissionless system. The Report describes a "single-tier" and a "two-tier" architecture for a CBDC and favors a two-tiered system where "the Federal Reserve would issue and redeem ... CBDC, but the distribution ... would be handled by intermediaries eligible for an account at the Federal Reserve and payment services would be managed by intermediaries ... similar to how paper currency is distributed through commercial banks."13
The Report cites several challenges related to CBDCs. One key challenge relates to cross-border payments, which would require interoperability with foreign CBDCs between central bank–operated payment systems. Among other challenges, the Report notes "CBDC ledger design could have significant implications for user privacy, cybersecurity, and illicit finance risks ... A CBDC ledger could collect significant amounts of information and, without appropriate safeguards, would pose privacy risks and could be a target for cyber attacks."14
Addressing illicit finance risks, the Report notes that in a two-tiered CBDC system, "intermediaries would be responsible for implementing all AML/CFT and sanctions obligations, including customer verification, transaction monitoring, record keeping, and the filing of Suspicious Activity Reports (SARs)."15 The CBDC can also improve supervision of AML/CFT compliance. According to the Report, "[f]or example, automated SAR filings for certain potentially suspicious activities, such as structuring transactions to avoid reporting requirements, could be built-in and thereby reduce the compliance burden on financial institutions."16 The Report notes that "a CBDC system could increase the amount of data generated on users and transactions," which would pose "privacy and cyber security risks, but ... offer opportunities for proper ... supervision and law enforcement efforts."17 The Report identifies strategies to maximize privacy protections for users—including identity-verified systems, zero knowledge proofs, digital identity solutions that minimize fraud, and tiered accounts to allow for some level of access to a CBDC without identity credentials, which promotes inclusion.
The Report sets forth four policy considerations related to the introduction of a CBDC and addresses them in relation to instant payment systems and stablecoins:
- Building the future of money and payments, which includes implementing efficient systems, laying foundations for further technological innovation, achieving a high degree of resilience, and facilitating cross-border transactions.
- Supporting U.S. global financial leadership and the global role of the dollar, the enforcement of sanctions, and the advancement of democratic values, human rights, and privacy.
- Advancing financial inclusion and equity, particularly for those underserved by the traditional banking system.
- Preserving economic growth and financial stability, while minimizing the risk of illicit financial transactions, and becoming environmentally sustainable.
To fulfill the above policy considerations, the Treasury recommends that the U.S. government: (1) advance work on a possible U.S. CBDC, in case one is determined to be in the national interest; (2) encourage use of instant payment systems to support a more competitive, efficient, and inclusive U.S. payment landscape; (3) establish a federal framework for payments regulation to protect users and the financial system, while supporting responsible innovations in payments; and (4) prioritize efforts to improve cross-border payments.
The Report lays the groundwork for the introduction of a CBDC into the U.S. payments system, noting a "natural use case" for a CBDC18 and that a CBDC could ameliorate AML/CFT concerns more than instant payment systems and stablecoins. Still, more work needs to be done to determine when—or if—a CBDC can feasibly and responsibly be created, and the actual introduction of a CBDC is likely years away. In the meantime, the FedNow interbank clearing system is set to launch in 2023, and asset-backed stablecoins continue to expand opportunities for alternative payment rails underpinned by public, permissionless blockchain networks. As U.S. and cross-border payment systems continue to evolve, businesses should explore the advantages and understand the legal implications.
1. U.S. Department of the Treasury, Report on the Future of Money and Payments, at 2 (Sep. 2022).
2. Id. at 15.
3. Id. at 16.
5. Id. at 17.
7. Id. at 18.
10. Id. at 19.
11. Id. at 20.
12. Id. at 21.
13. Id. at 23.
14. Id. at 22.
15. Id. at 25.
16. Id. at 27.
18. Id. at 19.
The next key event related to the EO will take place on Monday, October 3, when Treasury Secretary Yellen will preside over a meeting of the Financial Stability Oversight Council. The preliminary agenda for the public session includes, among other items, a vote on the Council's report in response to the EO.19
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