Central Bank Digital Currency: Implications for the U.S. Financial System and Regulatory Landscape

Abstract

Central Bank Digital Currencies (CBDCs) represent a transformative frontier in global financial infrastructure, eliciting profound interest and extensive debate, particularly within the United States. This comprehensive report meticulously explores the evolving landscape of CBDCs, delving into their multifaceted potential impact on the U.S. financial system, the intricate web of regulatory frameworks, and the broader macroeconomic environment. Through an in-depth analysis of recent pivotal legislative developments, critical design considerations, and the dynamic interplay between the theoretical constructs of CBDCs and the established architecture of existing financial institutions, this report endeavors to furnish a granular and panoramic overview. It critically examines the inherent challenges and substantial opportunities presented by the potential adoption and integration of CBDCs within the unique context of the U.S. economy, aiming to illuminate the complex policy decisions and strategic imperatives confronting policymakers, financial institutions, and the public alike.

Many thanks to our sponsor Panxora who helped us prepare this research report.

1. Introduction

The profound and accelerating advent of digital financial technologies has catalyzed a paradigm shift, compelling central banks across the globe to meticulously explore, research, and even pilot the issuance of their own Central Bank Digital Currencies (CBDCs). These innovative digital assets, which fundamentally constitute a novel form of central bank money – a direct liability of the monetary authority – possess an inherent capacity to fundamentally reshape and redefine established monetary systems, foundational payment infrastructures, and the existing labyrinth of financial regulations. Unlike commercial bank money, which is a liability of private financial institutions, or physical cash, which has inherent limitations in a digital age, a CBDC offers a direct digital claim on the central bank, potentially altering the very nature of money in a modern economy.

Globally, the impetus for exploring CBDCs stems from a diverse array of motivations, including the desire to enhance payment efficiency and resilience, foster greater financial inclusion for underserved populations, counter the rise of private digital currencies (including stablecoins and cryptocurrencies) that could fragment the monetary system, and to maintain monetary sovereignty and control in an increasingly digitized and globalized financial landscape. Jurisdictions such as the Bahamas, with its Sand Dollar, and Nigeria, with its eNaira, have already launched retail CBDCs, while the European Central Bank is actively progressing towards a Digital Euro, and China is extensively piloting its Digital Yuan. These international developments exert a discernible influence on the strategic considerations within the United States, prompting a rigorous re-evaluation of its domestic digital asset policy.

In the United States, discussions surrounding the feasibility, desirability, and potential design of a CBDC have intensified significantly. This heightened focus is particularly attributable to a confluence of factors, including the rapid proliferation of private digital assets, the imperative to maintain the dollar’s preeminent global status, and, crucially, recent pivotal legislative actions and shifts in executive policy that have recalibrated the nation’s approach to digital money. The debate in the U.S. is uniquely complex, balancing the potential benefits of innovation with deep-seated concerns regarding financial stability, individual privacy, the role of commercial banks, and the very structure of the nation’s dual banking system. This report navigates these intricate considerations, providing a detailed examination of the journey towards understanding and potentially implementing a U.S. CBDC.

Many thanks to our sponsor Panxora who helped us prepare this research report.

2. Legislative Developments and Regulatory Framework

The trajectory of Central Bank Digital Currencies in the United States is inextricably linked to, and heavily influenced by, an evolving landscape of legislative efforts and executive policy directives concerning digital assets writ large. These developments reflect a concerted effort by policymakers to grapple with the transformative potential of digital currencies while simultaneously addressing inherent risks to financial stability, consumer protection, and national security. The U.S. approach has been marked by a deliberative, often cautious, stance, distinct from the more proactive embrace seen in some other major economies.

2.1 The GENIUS Act and Its Implications

In a significant legislative move, July 2025 witnessed the U.S. Senate’s passage of the GENIUS Act (Generating Economic New Ideas in US Stablecoins). This landmark legislative framework is meticulously crafted to establish a comprehensive regulatory regime specifically for dollar-pegged stablecoins. The act represents a pivotal recognition by U.S. lawmakers of the growing prominence and systemic importance of stablecoins within the broader digital asset ecosystem. Stablecoins, by their design, aim to maintain a stable value relative to a reference asset, typically the U.S. dollar, and have rapidly become integral to the functioning of cryptocurrency markets, facilitating trading, lending, and payments by bridging the gap between volatile cryptocurrencies and traditional fiat currencies.

The primary objectives of the GENIUS Act are multifaceted: to foster responsible innovation within the stablecoin sector, to mitigate potential risks to financial stability by ensuring adequate reserves and robust redemption mechanisms, and to provide enhanced consumer protection by establishing clear regulatory oversight. The act mandates that stablecoin issuers adhere to stringent requirements, including regular audits of their reserves, transparency regarding their backing assets, and compliance with anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations. It seeks to delineate regulatory responsibilities among federal agencies, potentially clarifying jurisdictional ambiguities that have previously plagued the digital asset space. For instance, the act might classify certain stablecoins as securities, commodities, or payment instruments depending on their specific characteristics and use cases, thereby bringing them under the purview of existing regulatory bodies like the SEC, CFTC, or state banking regulators.

However, the GENIUS Act’s implications extend far beyond mere stablecoin regulation, casting a significant shadow over the broader digital asset ecosystem, including the ongoing discourse surrounding CBDCs. The regulatory clarity provided for stablecoins could either pave the way for their deeper integration into the financial system, potentially reducing the perceived need for a retail CBDC, or it could highlight the unique attributes and benefits a central bank-issued digital currency could offer that private stablecoins cannot, such as direct central bank liability and inherent sovereign backing. Furthermore, the act’s regulatory approach to private digital money influences the policy environment for any future official digital dollar.

Concerns have been prominently raised, both domestically and internationally, regarding the potential for such comprehensive U.S. stablecoin regulations to disrupt the delicate balance of the global payment system and potentially impact national monetary sovereignty. Amundi, Europe’s largest asset manager, issued a stark caution, suggesting that the widespread, regulated adoption of dollar-pegged stablecoins could inadvertently lead to an increased demand for U.S. Treasury bonds, as stablecoin issuers typically hold such assets as reserves to back their digital liabilities. This heightened demand, if substantial, could theoretically strengthen the dollar in the short term but, paradoxically, might also create systemic vulnerabilities by concentrating global liquidity in U.S. assets. Amundi’s statement indicated that a rapid expansion of stablecoins could ‘destabilise the global payments system’ and potentially weaken the dollar in the long run by diminishing the autonomy of other nations’ monetary policy through increased dollarization pressures (reuters.com). This highlights a critical geopolitical dimension: how U.S. domestic digital asset policy reverberates across international financial markets and influences the strategic considerations of other central banks contemplating their own CBDCs.

2.2 Executive Order 14178: A Shift in Policy Direction

In a significant and decisive policy pivot, January 2025 saw President Donald Trump sign Executive Order 14178, unequivocally titled ‘Strengthening American Leadership in Digital Financial Technology’. This executive order marked a profound departure from previous administrations’ directives concerning digital assets, most notably revoking Executive Order 14067, signed by President Joe Biden in March 2022, which had previously mandated a comprehensive whole-of-government approach to assess the risks and benefits of digital assets, including the exploration of a potential U.S. CBDC. Executive Order 14067 had tasked various federal agencies with conducting research and developing policy recommendations on six key areas: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.

Executive Order 14178, however, fundamentally reoriented the U.S. government’s stance. Its most striking provision was the explicit prohibition of the establishment, issuance, or promotion of a U.S. CBDC. This directive signaled a clear intent to halt any ongoing efforts towards developing a digital dollar, at least for the foreseeable future under this administration. The rationale underpinning this prohibition, as implicitly suggested by the order’s title, appears to center on a belief that U.S. leadership in digital financial technology should primarily be driven by private sector innovation and market-based solutions, rather than direct government intervention through the issuance of a central bank digital currency. Arguments against a U.S. CBDC often cite concerns over potential government surveillance, the erosion of financial privacy, the perceived threat to the commercial banking sector through disintermediation, and the belief that the existing robust private payment system in the U.S. already meets the needs of its citizens effectively.

Instead of a CBDC, Executive Order 14178 mandated the formation of an inter-agency task force. This task force was specifically charged with the formidable responsibility of proposing a comprehensive federal regulatory framework for the entire spectrum of digital assets within an ambitious timeframe of 180 days. This mandate underscores a strategic shift: rather than developing an official digital currency, the administration prioritized establishing clear rules of the road for the burgeoning private digital asset industry. The task force’s scope is broad, encompassing not only stablecoins but also cryptocurrencies, NFTs, and other digital financial instruments, with an emphasis on ensuring market integrity, preventing illicit activities, and fostering a competitive environment conducive to technological advancement (en.wikipedia.org).

This executive order signifies a profound strategic pivot in U.S. digital asset policy, underscoring a commitment to caution and thorough evaluation before embarking on any CBDC initiatives. It reflects a preference for leveraging the innovation capacity of the private sector while ensuring robust regulatory oversight to manage risks. This cautious approach contrasts with the more proactive stance of some international counterparts, setting a distinct tone for the U.S.’s role in the global evolution of digital currencies. The outcome of the task force’s recommendations will undoubtedly shape the future landscape of digital finance in the United States, determining how private digital assets are regulated, how they interact with traditional finance, and whether the U.S. will eventually revisit the concept of an official digital dollar.

2.3 Other Relevant Policy Discourse and Regulatory Developments

Beyond these specific legislative and executive actions, the broader U.S. policy environment for digital assets has been shaped by various discussions and reports. The Federal Reserve, for instance, released a discussion paper in January 2022, ‘Money and Payments: The U.S. Dollar in the Age of Digital Transformation,’ which explored the potential benefits and risks of a CBDC without taking a definitive policy stance. This paper served as a crucial catalyst for public and industry debate, outlining key design choices and their implications, such as privacy, intermediation, and financial inclusion (federalreserve.gov).

Furthermore, various congressional committees have held numerous hearings, soliciting input from academics, industry leaders, and consumer advocates on topics ranging from the classification of digital assets to the appropriate regulatory body for oversight. The Treasury Department, too, has been actively involved, particularly in addressing the illicit finance risks associated with digital assets, publishing reports and strategies aimed at combating money laundering and terrorist financing in the crypto space. These ongoing discussions highlight a complex and fragmented regulatory landscape, where different agencies (e.g., SEC, CFTC, FinCEN, OCC, FDIC) assert jurisdiction over various aspects of digital assets based on their interpretation of existing laws. The push for a unified federal regulatory framework, as mandated by Executive Order 14178, aims to bring much-needed coherence to this environment, which is often criticized for its regulatory uncertainty and ‘patchwork’ approach. The outcomes of these discussions and policy mandates will ultimately determine the future operating environment for all forms of digital money, whether privately issued or potentially, at a later date, centrally issued.

Many thanks to our sponsor Panxora who helped us prepare this research report.

3. Design Considerations for CBDCs

The effective and responsible implementation of a Central Bank Digital Currency hinges critically on a meticulous and comprehensive approach to its design. The design choices made at the foundational stage will profoundly influence a CBDC’s functionality, its rate and breadth of adoption, and its ultimate impact on the financial system, monetary policy, and society at large. These decisions are not merely technical but are deeply intertwined with policy objectives and societal values.

3.1 Retail vs. Wholesale CBDCs

CBDCs are broadly categorized into two principal types, each serving distinct purposes and catering to different segments of the financial ecosystem:

• Retail CBDCs (or General Purpose CBDCs): These are envisioned for use by the general public, analogous to physical cash, facilitating everyday transactions for individuals and businesses. A retail CBDC would provide consumers with direct access to central bank money in digital form, bypassing traditional commercial bank accounts for certain transactions. The potential benefits include enhanced payment efficiency, reduced transaction costs (especially for cross-border payments), increased financial inclusion for the unbanked and underbanked, and a resilient payment system less susceptible to commercial bank failures. However, retail CBDCs pose significant challenges, primarily the risk of disintermediation of commercial banks, potential impacts on monetary policy transmission, and complex privacy concerns. They also necessitate robust infrastructure capable of handling massive transaction volumes and widespread public education and adoption strategies. Examples include the Bahamian Sand Dollar and the eNaira in Nigeria, which aim to address specific domestic challenges like geographic dispersion and financial exclusion (annualreviews.org; arxiv.org).

• Wholesale CBDCs: These are specifically designed for interbank settlements and large-value transactions between financial institutions, often utilizing distributed ledger technology (DLT). Unlike retail CBDCs, wholesale CBDCs are not intended for public use but rather for improving the efficiency, security, and speed of wholesale financial markets, such as interbank payments, securities settlement, and foreign exchange transactions. They can streamline complex processes, reduce counterparty risk, and potentially enable atomic settlement (where two legs of a transaction occur simultaneously, eliminating settlement risk). Wholesale CBDCs typically involve a limited number of participants (e.g., commercial banks, large corporations, and other financial entities) with direct accounts at the central bank. The implications for financial stability are generally considered less disruptive than retail CBDCs, as they primarily enhance existing wholesale payment systems rather than creating an entirely new monetary layer for the public. Many central banks, including the Bank for International Settlements (BIS), are actively exploring wholesale CBDC designs through various cross-border projects like Project Dunbar and Project Mariana (bis.org).

The choice between a retail and wholesale CBDC (or even a hybrid model combining aspects of both) has profound implications for financial stability, the conduct of monetary policy, and the fundamental role of commercial banks within the financial ecosystem. A retail CBDC, if widely adopted, could reshape the banking sector, while a wholesale CBDC primarily offers efficiency gains for financial markets. The U.S. Federal Reserve, in its initial discussions, highlighted concerns about retail CBDCs’ impact on banking, leaning towards a preference for an intermediated model if a CBDC were ever pursued, where private financial institutions would manage customer relationships and transactions, while the central bank provides the underlying digital currency (federalreserve.gov).

3.2 Privacy and Anonymity

Privacy stands as one of the most contentious and ethically charged issues in CBDC design, representing a fundamental tension between individual rights and societal objectives. The degree of privacy afforded by a CBDC directly impacts public acceptance, utility, and its potential for misuse.

• Arguments for Robust Privacy: Advocates for strong privacy features emphasize the importance of financial anonymity as a cornerstone of personal liberty. They argue that a CBDC should emulate the privacy characteristics of physical cash, allowing for transactions without centralized tracking of every financial interaction. Without robust privacy, concerns arise about potential government surveillance, the misuse of personal transaction data, and the chilling effect on legitimate economic activities. This perspective often highlights the risk of a ‘surveillance state’ where the central bank or government could monitor and potentially control individual spending patterns. From a technological standpoint, privacy-preserving technologies such as zero-knowledge proofs (ZKPs), anonymization techniques, and tiered access to transaction data could be integrated into a CBDC system to balance privacy with regulatory needs.

• Arguments for Transparency and Traceability: Conversely, strong arguments are made for the necessity of transparency and traceability to prevent illicit activities, including money laundering, terrorist financing, tax evasion, and fraud. Central banks and law enforcement agencies typically require access to transaction data to fulfill their mandates in maintaining financial integrity and combating financial crime. A fully anonymous CBDC could become a haven for illicit transactions, undermining national and international efforts to combat financial crime. Moreover, in a crisis, the ability to trace funds could be crucial for financial stability operations. The International Monetary Fund (IMF) has emphasized the importance of balancing privacy with the imperative to combat illicit financial flows, suggesting that ‘striking the right balance is crucial to ensure user trust and regulatory compliance’ (m.elibrary.imf.org).

• Balancing Approaches: Many proposed CBDC designs attempt to strike a balance. One common approach is a ‘tiered’ privacy model, where small-value transactions might be highly anonymous, akin to cash, requiring minimal or no identification, while larger transactions or those exceeding certain thresholds would require varying degrees of identification and traceability, similar to current bank transfers. Another model involves an ‘intermediary’ approach, where commercial banks or payment service providers hold customer data and conduct AML/CFT checks, only sharing aggregated or anonymized data with the central bank unless specific illicit activity is suspected and a legal warrant is issued. This model leverages existing financial institutions’ expertise in compliance and customer onboarding, preserving a degree of separation between the central bank and individual transaction data.

3.3 Financial Inclusion

Financial inclusion stands as a compelling potential benefit for CBDCs, particularly in economies where a significant portion of the population remains unbanked or underbanked. These individuals often lack access to affordable and efficient financial services, including traditional bank accounts, credit, and reliable payment mechanisms. CBDCs offer a unique opportunity to bridge this gap.

• Mechanisms for Inclusion: A well-designed CBDC could enhance financial inclusion by providing: (1) Direct Access to Digital Money: For individuals without traditional bank accounts, a CBDC wallet could serve as a direct entry point into the digital economy, enabling them to send and receive payments, store value, and potentially access other financial services. (2) Lower Transaction Costs: By potentially streamlining payment rails and reducing reliance on traditional intermediaries, CBDCs could offer lower fees for transactions, making digital payments more accessible and affordable for low-income individuals. (3) Offline Capability: Critical for populations in remote areas with unreliable internet access or during power outages, an offline CBDC functionality could ensure continuity of payments and access to funds, mimicking the resilience of cash. (4) Government Disbursements: CBDCs could facilitate more efficient and direct distribution of government benefits or aid to vulnerable populations, reducing administrative overhead and ensuring funds reach intended recipients without leakage. The IMF has specifically highlighted how CBDCs can serve as inclusive strategies for intermediaries and users, noting that success depends on ‘design, accessibility, and integration with existing financial infrastructures’ (m.elibrary.imf.org).

• Challenges to Inclusion: Despite the promise, the effectiveness of CBDCs in truly promoting inclusion is contingent upon overcoming significant challenges: (1) Digital Literacy and Access: The unbanked often lack digital literacy, access to smartphones, or reliable internet connectivity, which are prerequisites for using digital wallets. Robust education programs and accessible user interfaces would be crucial. (2) Integration with Existing Infrastructure: For a CBDC to be truly inclusive, it must seamlessly integrate with existing payment networks, point-of-sale systems, and merchant infrastructure. (3) Design Choices: Decisions around interest-bearing vs. non-interest-bearing, privacy settings, and limits on holdings can inadvertently create barriers or disincentives for adoption by vulnerable groups. (4) Identity Verification: While aiming for inclusion, the need for Know Your Customer (KYC) and AML compliance can pose challenges for individuals who lack official identification documents.

3.4 Technology Stack and Infrastructure

The underlying technology upon which a CBDC is built is a critical design choice, influencing its scalability, security, resilience, and operational costs.

• Centralized vs. Distributed Ledger Technology (DLT): While many early discussions about digital currencies focused on blockchain-based DLT (like Bitcoin and Ethereum), a CBDC does not necessarily have to be built on DLT. Traditional centralized database systems could also be used, particularly for retail CBDCs, potentially offering higher transaction speeds and lower energy consumption. However, DLT offers benefits such as enhanced resilience through decentralization (even if permissioned), transparency, and programmability. Most central banks exploring DLT for CBDCs envision a ‘permissioned’ DLT, where only authorized entities can participate in maintaining the ledger, rather than the ‘permissionless’ public blockchains that are open to anyone.

• Interoperability: Regardless of the chosen technology, ensuring interoperability with existing payment systems (e.g., ACH, Fedwire, SWIFT) and future digital payment rails is paramount. A CBDC should seamlessly integrate into the broader financial ecosystem to maximize its utility and avoid creating isolated silos.

• Offline Capability: For enhanced resilience and financial inclusion, particularly in areas with intermittent internet access or during disasters, a CBDC design that allows for offline transactions could be invaluable. This would involve technologies that enable peer-to-peer transfers without immediate central verification, with subsequent reconciliation once connectivity is restored.

3.5 Interest-Bearing vs. Non-Interest-Bearing

This is a fundamental monetary policy consideration. A non-interest-bearing CBDC would closely mimic physical cash, primarily serving as a medium of exchange. An interest-bearing CBDC, however, could become a powerful new tool for monetary policy transmission. Central banks could directly influence consumer spending and saving behavior by adjusting the interest rate on CBDC holdings. This could enhance the effectiveness of negative interest rates during economic downturns, potentially overcoming the ‘zero lower bound’ constraint associated with physical cash. However, an interest-bearing CBDC could also accelerate disintermediation of commercial banks, as consumers might prefer to hold central bank money directly, especially if its interest rate is attractive compared to bank deposits (ecb.europa.eu).

3.6 Programmability and Smart Contracts

Programmability, often enabled by smart contracts, is a feature that distinguishes digital currencies from traditional money. A programmable CBDC could enable ‘conditional payments,’ where funds are released only when specific criteria are met (e.g., upon delivery of goods, completion of a service). This could revolutionize payment processes, reduce fraud, and facilitate new financial products. However, concerns arise about the potential for ‘expiring money’ or the use of programmability for surveillance or control over individual spending, raising significant ethical and societal questions.

3.7 Cross-Border Payments

CBDCs hold immense potential to revolutionize cross-border payments, which are currently often slow, expensive, and opaque. By enabling direct, real-time settlement between central banks or their designated intermediaries, CBDCs could significantly reduce transaction times and costs, enhance transparency, and improve efficiency in international trade and remittances. Projects like the BIS’s Project mBridge are exploring multi-CBDC platforms for cross-border transactions, aiming to establish common technical standards and regulatory frameworks to facilitate seamless global digital payments.

Many thanks to our sponsor Panxora who helped us prepare this research report.

4. Implications for the U.S. Financial System

The potential introduction of a Central Bank Digital Currency in the United States, whether retail or wholesale, carries profound and far-reaching implications for the nation’s complex and highly evolved financial system. These effects would ripple through various segments, impacting not only the operational aspects but also the fundamental structure of banking, the efficacy of monetary policy, and the overarching stability of the financial landscape.

4.1 Impact on Commercial Banks

The most significant and frequently debated implication of a retail CBDC, in particular, revolves around its potential impact on commercial banks, primarily through the mechanism of ‘disintermediation.’

• Disintermediation Risks: A retail CBDC would offer the public a direct digital claim on the central bank, which is perceived as the safest form of money. This could lead to a substantial shift of deposits from commercial banks to the central bank, as individuals and businesses might opt to hold their funds in a risk-free, central bank-backed digital currency. This ‘deposit flight’ would directly diminish commercial banks’ primary funding source, which is crucial for their lending activities. A reduced deposit base would constrain banks’ ability to extend credit to households and businesses, potentially leading to a contraction in credit availability across the economy and dampening economic growth. The Federal Reserve has extensively analyzed this risk, noting that ‘a retail CBDC could lead to disintermediation, where consumers and businesses shift deposits from commercial banks to the central bank’ (federalreserve.gov).

• Mitigation Strategies: To mitigate these severe disintermediation risks and preserve the vital role of commercial banks in financial intermediation, central banks contemplating a retail CBDC often consider various design features and policy measures:

  • Limits on CBDC Holdings: Imposing caps on the amount of CBDC an individual or entity can hold could prevent large-scale deposit migration, ensuring that the majority of savings remain within the commercial banking system. For example, a central bank might set a limit of a few thousand dollars per CBDC wallet, making it suitable for everyday transactions but not for large-scale savings.
  • Tiered or Zero Interest Rates: A CBDC could be designed to be non-interest-bearing (like physical cash) or to pay a lower interest rate than commercial bank deposits. This would create a financial incentive for individuals to keep their savings in commercial banks, preserving their funding base.
  • Two-Tiered Architecture (Intermediated Model): This widely favored model positions commercial banks and other regulated payment service providers as intermediaries. In this setup, the central bank issues the CBDC, but commercial banks manage customer accounts, conduct KYC/AML checks, provide customer service, and facilitate transactions. This leverages the existing infrastructure and customer relationships of commercial banks, minimizing disruption while allowing them to continue performing their essential functions, including lending. McKinsey & Company has highlighted that ‘an active role for commercial banks’ is crucial, as they ‘leverage their existing infrastructure, customer relationships, and expertise’ in a CBDC ecosystem (mckinsey.com).

• Competitive Pressures and Adaptation: Even with mitigation strategies, a CBDC would introduce new competitive pressures on commercial banks. They would need to innovate their services, potentially focusing more on credit provision, wealth management, and value-added services built on top of the CBDC infrastructure, rather than solely relying on deposits for funding. Banks might also face increased competition from non-bank payment providers who gain direct access to central bank money via the CBDC. This could accelerate the digital transformation of the banking sector.

4.2 Monetary Policy Transmission

• Enhanced Transmission Mechanisms: A CBDC, particularly an interest-bearing one, could significantly alter and potentially enhance the transmission of monetary policy. Central banks could directly influence the economy by adjusting the interest rate on CBDC holdings. This direct channel could make monetary policy more effective and precise, especially in times of crisis. For instance, in a deflationary environment, a central bank could implement negative interest rates on CBDC, providing a direct incentive for individuals and businesses to spend rather than hoard money, thereby stimulating economic activity. This could help overcome the ‘zero lower bound’ problem, where conventional interest rate policy loses effectiveness because nominal interest rates cannot realistically fall below zero due to the existence of physical cash (ecb.europa.eu). Furthermore, CBDCs could enable more targeted and rapid fiscal transfers during emergencies, directly injecting liquidity into the economy.

• Challenges to Monetary Control: Conversely, an unconstrained, highly attractive CBDC could complicate monetary policy. If large amounts of commercial bank deposits shift to the central bank, it could reduce the volume of reserves in the banking system, potentially affecting the money multiplier and the effectiveness of traditional open market operations. The central bank would need to carefully manage the CBDC’s design and features to ensure it complements, rather than disrupts, existing monetary policy frameworks. For example, if a CBDC offered a significantly higher interest rate than commercial bank deposits, it could lead to rapid and unpredictable shifts in money demand, making it harder for the central bank to control the overall money supply and credit conditions.

4.3 Financial Stability

• Digital Bank Runs: One of the most frequently cited risks to financial stability posed by a retail CBDC is the potential for ‘digital bank runs.’ In times of economic uncertainty, financial distress, or even unfounded rumors, depositors might rapidly shift their funds from commercial banks to the perceived safety of a CBDC, which is a direct liability of the central bank and thus free from credit risk. This rapid conversion of commercial bank deposits into CBDC could precipitate a liquidity crisis for banks, potentially leading to widespread bank failures and undermining the stability of the entire financial system. Unlike physical bank runs, which are limited by logistics and physical cash availability, a digital run could occur almost instantaneously and on a far greater scale (annualreviews.org).

• Mitigation Measures: To address this systemic risk, central banks would need to implement robust safeguards:

  • Holding Limits: As mentioned earlier, imposing caps on CBDC holdings could limit the scale of potential deposit flight.
  • Tiered Interest Rates: Designing a CBDC with tiered interest rates (e.g., lower or zero interest above a certain threshold) could disincentivize hoarding and encourage funds to remain in commercial banks.
  • Collaboration with Deposit Insurance: Integrating a CBDC with existing deposit insurance schemes (like FDIC in the U.S.) or establishing new mechanisms to ensure public confidence in commercial bank deposits would be crucial.
  • Lender of Last Resort (LOLR) Role: The central bank’s role as an LOLR would become even more critical, requiring swift and decisive action to provide emergency liquidity to banks facing CBDC-induced deposit outflows.

• Impact on Financial Intermediation: A CBDC could fundamentally alter the landscape of financial intermediation. If commercial banks’ ability to gather stable deposits diminishes, they may become more reliant on wholesale funding, which can be more volatile and expensive. This could lead to a shrinking of traditional bank balance sheets and a shift in credit provision towards non-bank financial institutions, potentially creating new areas of systemic risk outside traditional banking oversight.

4.4 International Role of the U.S. Dollar

The U.S. dollar’s status as the world’s primary reserve currency and the dominant currency for international trade and finance is a significant consideration. The decision to issue (or not issue) a U.S. CBDC could impact this preeminence. If other major economies, particularly China with its Digital Yuan, make significant strides in CBDC adoption for cross-border payments, and the U.S. lags, it could potentially erode the dollar’s global standing over time. Conversely, a well-designed and widely adopted U.S. CBDC could reinforce the dollar’s global role by enhancing its efficiency, security, and accessibility in the digital age, especially in cross-border transactions. The U.S. Treasury and Federal Reserve have expressed the importance of maintaining U.S. leadership in global finance, and a CBDC would be assessed through this lens.

4.5 Competition with Private Digital Assets

A U.S. CBDC would enter an already evolving landscape of private digital assets, including stablecoins and cryptocurrencies. Its introduction could create direct competition with private stablecoins, particularly those pegged to the U.S. dollar, by offering a superior, risk-free alternative. This could either marginalize private stablecoins or compel them to innovate and demonstrate unique value propositions. For cryptocurrencies, a CBDC might reduce their appeal as a medium of exchange, reinforcing the supremacy of fiat currencies, but it is unlikely to diminish their role as speculative assets or as decentralized alternatives to traditional finance. The regulatory framework for private digital assets, such as the GENIUS Act, will heavily influence this competitive dynamic, shaping how a CBDC would coexist with or displace these private alternatives.

4.6 Data and Surveillance Implications

The introduction of a CBDC, by centralizing payment data, raises significant societal questions regarding data privacy and the potential for government surveillance. Unlike cash, which offers anonymity, or current bank transfers, where data is held by private entities, a CBDC system could theoretically provide the central bank or government with unprecedented access to detailed transaction data. While policymakers generally state that a CBDC would be designed to protect privacy, the potential for such data to be used for surveillance, financial censorship, or profiling is a profound concern for civil liberties advocates. The design choices around privacy (e.g., tiered privacy, intermediary model) would directly determine the extent of this risk, making public trust and transparency in data governance paramount.

Many thanks to our sponsor Panxora who helped us prepare this research report.

5. The Role of Commercial Banks in a CBDC Ecosystem

Despite the disintermediation risks associated with a retail CBDC, commercial banks are widely recognized as indispensable players in any future CBDC ecosystem. Their established infrastructure, deep-rooted customer relationships, extensive branch networks, and specialized expertise in financial services position them not merely as potential victims of disruption but as critical partners in the successful and stable implementation of a CBDC. The preferred model for many central banks, including implicitly the U.S. Federal Reserve, is a two-tiered intermediated architecture that actively preserves and leverages the role of commercial banks.

5.1 Collaboration with Central Banks

Effective and continuous collaboration between central banks and commercial banks is absolutely essential for the seamless integration of a CBDC into the existing financial system. This partnership is vital to ensure that a CBDC is not introduced in a vacuum but rather complements and enhances the current payment landscape. Key areas of collaboration include:

• Distribution and Onboarding: Commercial banks possess the necessary infrastructure and expertise for customer onboarding, identity verification (Know Your Customer/KYC), and anti-money laundering (AML) compliance. In an intermediated CBDC model, banks would act as direct interfaces with consumers and businesses, managing CBDC wallets, facilitating transactions, and providing customer support. This leverages their existing operational capabilities and regulatory compliance frameworks.

• Innovation and Product Development: Banks can collaborate with central banks to develop innovative financial products and services that leverage the unique features of a CBDC. This could include new lending models, enhanced payment solutions for businesses, or integrated financial management tools that combine traditional bank accounts with CBDC holdings.

• Risk Management and Security: Commercial banks have extensive experience in managing financial risks, including cybersecurity, fraud detection, and operational resilience. Their collaboration would be crucial in building a secure and robust CBDC infrastructure, ensuring its integrity and protecting users from illicit activities. The BIS has highlighted that ‘commercial banks’ strong risk management and AML/CFT capabilities are integral to ensure a secure and resilient CBDC ecosystem’ (bis.org).

• Pilot Programs and Testing: Banks are critical partners in pilot programs and testing phases of a CBDC, providing real-world feedback on design, functionality, and user experience. Their insights are invaluable in refining the CBDC to meet market needs and ensure operational efficiency.

5.2 Innovation and Adaptation

The introduction of a CBDC, while potentially disruptive, simultaneously presents a significant catalyst for commercial banks to innovate and adapt their business models. Instead of viewing a CBDC solely as a threat, forward-thinking banks can embrace it as an opportunity to modernize their offerings and enhance their competitive edge.

• Enhanced Payment Solutions: Banks can integrate CBDCs into their existing payment platforms, offering faster, cheaper, and more efficient payment services to their customers. This could include real-time gross settlement for larger corporate payments or instant retail payments for consumers, potentially reducing the need for costly card network fees or traditional wire transfers.

• New Value-Added Services: With the underlying payment rail provided by the CBDC, banks can shift their focus towards offering higher-value services. This could involve sophisticated data analytics for businesses, personalized financial advice, cross-border payment solutions built on CBDC rails, or even specialized lending products collateralized by digital assets. Banks could also become key providers of identity verification services for the CBDC ecosystem.

• Improved Customer Experience: By leveraging the digital nature of a CBDC, banks can streamline customer journeys, simplify onboarding processes, and offer more intuitive digital banking experiences. This could also extend to providing financial literacy support for CBDC users, particularly for those in unbanked or underbanked communities.

• Adapting Funding Models: While deposits may face pressure, banks can adapt their funding strategies by diversifying their funding sources, becoming more reliant on wholesale funding, or focusing on fee-based services. They can also explore new forms of lending that are less reliant on traditional deposit funding, such as originating loans for securitization.

McKinsey & Company aptly notes that ‘the CBDC is not necessarily a threat to banks but rather a potential accelerator of existing trends and a new platform for innovation.’ Banks that proactively embrace this transformation and leverage their core strengths—trust, regulatory compliance, risk management, and customer relationships—are best positioned to thrive in a CBDC-enabled financial landscape (mckinsey.com).

Many thanks to our sponsor Panxora who helped us prepare this research report.

6. Security and Operational Risks

Ensuring the utmost security and operational resilience of a Central Bank Digital Currency is paramount, given its potential systemic importance as a national payment infrastructure. The digital nature of a CBDC exposes it to a complex array of threats, ranging from sophisticated cyberattacks to systemic failures, which could have devastating consequences for economic stability and public trust. These risks must be rigorously assessed and mitigated through a comprehensive and multi-layered approach.

6.1 Cybersecurity Measures

Cybersecurity is perhaps the most critical concern for any digital currency. A CBDC system would be a prime target for malicious actors, including state-sponsored hackers, organized crime groups, and individual cybercriminals, due to the immense value of the assets it would facilitate and store. Robust cybersecurity protocols are not merely desirable but absolutely essential to protect the CBDC infrastructure from a diverse range of threats:

• Advanced Encryption and Cryptographic Security: Implementing state-of-the-art encryption standards (e.g., post-quantum cryptography in anticipation of future threats) for data in transit and at rest is fundamental. Secure cryptographic primitives are necessary for transaction validation, user authentication, and data integrity.

• Access Control and Identity Management: Strict access controls, multi-factor authentication (MFA), and robust identity management systems are vital to prevent unauthorized access to sensitive financial data and system controls. This includes privileged access management and zero-trust architectures.

• Continuous Monitoring and Threat Intelligence: Real-time monitoring of the CBDC system for suspicious activities, anomalies, and potential intrusion attempts is crucial. This requires sophisticated security information and event management (SIEM) systems, intrusion detection/prevention systems (IDS/IPS), and integration with global threat intelligence feeds to anticipate and respond to emerging cyber threats.

• Vulnerability Management and Penetration Testing: Regular security audits, vulnerability assessments, and penetration testing (ethical hacking) by independent third parties are necessary to identify and remediate weaknesses before they can be exploited. This also includes secure software development life cycles (SSDLC) to build security into the system from its inception.

• Distributed Denial of Service (DDoS) Protection: Given that a CBDC system must handle high transaction volumes, it would be vulnerable to DDoS attacks aimed at disrupting service. Robust DDoS mitigation strategies are essential to ensure continuous availability.

• Supply Chain Security: The security of third-party vendors, software components, and hardware used in the CBDC infrastructure must be rigorously vetted to prevent supply chain attacks, where vulnerabilities are introduced at earlier stages of development or deployment. The Federal Reserve has emphasized that ‘security considerations for a central bank digital currency’ encompass a broad range of technical and operational safeguards, underscoring the need for a holistic security framework (federalreserve.gov).

6.2 Operational Continuity and Resilience

Beyond external cyber threats, a CBDC system must demonstrate exceptional operational resilience to ensure continuous service availability, even in the face of internal failures, natural disasters, or other disruptive events. Maintaining operational continuity is critical to preserve public confidence and prevent economic disruption:

• Redundancy and Geographic Dispersion: Building redundancy into all critical components of the CBDC infrastructure (servers, databases, network connections) and geographically dispersing data centers can prevent single points of failure. This ensures that if one component or site fails, others can seamlessly take over.

• Disaster Recovery and Business Continuity Planning (DR/BCP): Comprehensive DR/BCP frameworks are essential, outlining procedures for rapid recovery from major outages, data loss, or catastrophic events. This includes regular testing of recovery plans to ensure their effectiveness.

• Scalability and Performance: The CBDC system must be designed to handle massive transaction volumes, potentially millions per second during peak times, without performance degradation. This requires scalable architecture, efficient transaction processing, and robust network capacity.

• Reliable Power and Connectivity: Ensuring uninterrupted power supply and resilient network connectivity for all CBDC infrastructure components is fundamental. This might involve multiple internet service providers and backup power systems.

• Software and Hardware Integrity: Regular audits and updates of all software and hardware components are necessary to address bugs, vulnerabilities, and ensure optimal performance. Patch management processes must be rigorous and timely. The Bank for International Settlements (BIS) has highlighted that ‘operational risks to central banks’ from CBDCs include maintaining ‘system availability and data integrity’ during various disruptions (bis.org).

6.3 Other Key Risks

• Data Privacy Risks Beyond Illicit Activity: Even with robust security, the sheer volume of transaction data generated by a CBDC raises concerns about its collection, storage, and potential misuse. The risk extends beyond criminal activity to include the possibility of government surveillance, data breaches leading to exposure of personal financial information, or even commercial exploitation of anonymized data.

• Interoperability and Standardization Risks: A lack of common standards or seamless interoperability between a U.S. CBDC and other national CBDCs, or even existing payment systems, could create fragmentation in the global payment landscape, hindering efficiency and increasing complexity.

• Legal and Governance Risks: The legal status of a CBDC, its treatment under existing financial laws, and the governance framework for its operation would need to be meticulously defined to avoid legal ambiguities and ensure accountability.

• Public Trust and Adoption Risks: If the public perceives a CBDC as insecure, privacy-invasive, or unreliable, adoption rates could be low, undermining its potential benefits. Public education campaigns, transparent communication, and demonstrated security are vital to build and maintain trust.

Addressing these security and operational challenges requires a collaborative effort involving central banks, government agencies, private sector technology providers, and cybersecurity experts. A U.S. CBDC, if pursued, would demand an infrastructure of unprecedented resilience and security, surpassing that of many existing critical national infrastructures.

Many thanks to our sponsor Panxora who helped us prepare this research report.

7. Conclusion

The ongoing exploration of Central Bank Digital Currencies represents a monumental undertaking, presenting both formidable challenges and transformative opportunities for the United States. While the potential benefits of a U.S. CBDC—such as enhanced payment efficiency, broader financial inclusion, and a more robust mechanism for monetary policy transmission—are compelling, the associated risks are equally significant and warrant meticulous consideration. These risks span critical areas including potential disintermediation of the commercial banking sector, impacts on financial stability, profound implications for individual privacy, and the paramount necessity of ensuring robust security and operational resilience.

The current policy landscape in the U.S., notably shaped by the GENIUS Act and Executive Order 14178, underscores a cautious and deliberative approach, prioritizing a comprehensive regulatory framework for private digital assets over the immediate issuance of a CBDC. This stance reflects a nuanced understanding of the complexities involved, acknowledging that any step towards a digital dollar must be underpinned by extensive research, rigorous risk assessment, and broad stakeholder consensus. The experience of other nations piloting or implementing CBDCs provides valuable lessons, but the unique characteristics of the U.S. financial system—its scale, its dual banking structure, and the dollar’s global reserve status—necessitate a bespoke strategy.

To effectively navigate these complexities and, should the policy direction shift, to harness the potential benefits of a CBDC while rigorously mitigating its drawbacks, a collaborative and multi-stakeholder approach is indispensable. This collaboration must extend across federal agencies, the central bank, commercial banks, technology providers, and the public. Key areas for continued focus include:

• Comprehensive Risk Assessment: A continuous and dynamic evaluation of all potential risks, including cybersecurity vulnerabilities, operational failures, and systemic financial stability threats.
• Balanced Design Choices: Meticulous consideration of CBDC design features, particularly regarding privacy, intermediation models, interest-bearing characteristics, and programmability, to align with policy objectives and societal values.
• Preserving Commercial Banking: Developing models that protect the vital role of commercial banks in financial intermediation, potentially through intermediated CBDC architectures and appropriate deposit safeguards.
• International Coordination: Engaging with global counterparts to foster interoperability, set common standards, and address cross-border implications, thereby reinforcing the dollar’s global leadership.
• Public Education and Trust: Investing in clear communication and educational initiatives to build public understanding and confidence in any potential digital dollar.

The future of money is undeniably digital. For the United States, the journey towards potentially adopting a CBDC is not a question of ‘if’ digital money will evolve, but rather ‘how’ it will evolve, and what role the central bank will play in shaping its future. A well-considered, cautious, and collaborative approach, grounded in a deep understanding of both technological capabilities and economic implications, remains essential to secure a resilient, efficient, and inclusive digital financial future for the nation.

Many thanks to our sponsor Panxora who helped us prepare this research report.

References

• Amundi warns US stablecoin policy could destabilise global payments system. Reuters. July 3, 2025. (reuters.com)

• Central Bank Digital Currency. Federal Reserve. (federalreserve.gov)

• Central Bank Digital Currencies: An Active Role for Commercial Banks. McKinsey & Company. (mckinsey.com)

• Central bank digital currency (CBDC) information security and operational risks to central banks. Bank for International Settlements. (bis.org)

• Central Bank Digital Currency Adoption: Inclusive Strategies for Intermediaries and Users. International Monetary Fund. (m.elibrary.imf.org)

• Executive Order 14178. The White House. January 23, 2025. (en.wikipedia.org)

• More than an intellectual game: exploring the monetary policy and financial stability implications of central bank digital currencies. European Central Bank. April 2022. (ecb.europa.eu)

• Retail Central Bank Digital Currencies: Implications for Banking and Financial Stability. Federal Reserve Board. November 2023. (federalreserve.gov)

• Retail Central Bank Digital Currencies (CBDC), Disintermediation and Financial Privacy: The Case of the Bahamian Sand Dollar. arXiv. April 2022. (arxiv.org)

• Retail CBDC: Implications for Banking and Financial Stability. Annual Reviews. November 2024. (annualreviews.org)

• Security Considerations for a Central Bank Digital Currency. Federal Reserve Board. February 2022. (federalreserve.gov)