Independent Banker - July 2021 - 39

What would the Fed's
CBDC model look like?
A CBDC could take wholesale or
retail form. While a wholesale
CBDC would be used by fi nancial
institutions to enable the payment
and settlement of transactions
between banks, a retail CBDC would
be accessible to the public, including
individuals and businesses. If not
structured properly, this could create
a signifi cant drain on retail deposits.
If people were to substitute retail
CBDC for commercial bank deposits,
it would reduce available funding for
consumer and small business loans at
commercial banks.
This threat of bank
disintermediation is most likely if
the Fed adopts a direct model, or
1-tier model, which would make the
Fed function like a retail bank where
people could deposit, store, transfer
and withdraw money. The Fed would
require substantial new infrastructure
and take on massive technological
and operational risk with this model.
It's more favorable for the Fed to
adopt an indirect model, or 2-tier
model. In this scenario, the Fed
would issue CBDC to regulated and
supervised fi nancial institutions,
which would then distribute CBDC
to the public through electronic
wallets. This model would preserve
the valuable role of community banks.
However, this model is also not
without risks.
These risks include the potential
migration of bank balances to the
central bank. Some experts are
considering ways to make CBDC's less
attractive to hoarding. One proposal
would enable CBDCs only for
payments. Another would establish a
lower interest rate, a negative interest
rate, or even a tiering of interest
rates by volume for retail CBDC. An
alternative solution would limit the
amount of CBDC a person can hold.
As a [central bank digital currency]
moves forward, ICBA will represent
the community bank perspective,
advocating for an infrastructure
that preserves the role of
financial institutions.
Another possible approach is a
blend of the direct and indirect, or
a synthetic model. In this scenario,
large nonbank companies could
also become players in fi nancial
markets and present a threat to
community banks.
More research is needed to fully
understand the overall risks and
impacts of the diff erent CBDC models.
ICBA is closely monitoring research
and developments in this area.
Chairman Powell has suggested the
Fed understands the importance of
preserving the role of banks.
" We think it is important that
any potential CBDC could serve
as a complement to, and not a
replacement of, cash and current
private-sector digital forms of the
dollar, such as deposits at commercial
banks, " Powell said in May. " The
design of a CBDC would raise
important monetary policy, fi nancial
stability, consumer protection, legal
and privacy considerations and will
require careful thought and analysis,
including input from the public and
elected offi cials. "
Preparing community banks
As a CBDC moves forward, ICBA
will represent the community bank
perspective, advocating for an
infrastructure that preserves the role
of fi nancial institutions. Any new
form of currency would require an
act of Congress.
In the meantime, ICBA
will continue its campaign to
educate community bankers on
cryptocurrency, CBDCs and other
advances in digital currency. This
includes our Digital Dollar Digest
blog (icba.org/mainstreetmatters),
which provides a primer and the
latest updates on digital currency.
ICBA will continue to bring
together industry experts and other
stakeholders, from regulators to
technology providers, to provide
opportunities for in-depth learning
so community bankers are prepared
for the opportunities and challenges
ahead and are ready to engage
with the public, Congress and the
regulatory agencies.
As the U.S. begins to form its plan
for a CBDC, ICBA will be there at
every step, ensuring a future where
community banks are heard and
continue to serve as economic engines
of prosperity throughout the U.S. 
Nasreen Quibria (nasreen.
quibria@icba.org) is ICBA's vice
president of emerging payments
and technology policy
independentbanker.org Q 39
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Independent Banker - July 2021

Table of Contents for the Digital Edition of Independent Banker - July 2021
