Federal Reserve Board ("FRB") Vice Chair for Supervision Randal K. Quarles questioned the value of developing a U.S. central bank digital currency ("CBDC"), considering that (i) the U.S. dollar payment system operates very well and is being improved, (ii) the potential benefits of a Federal Reserve CBDC are ambiguous and (iii) the development of a CBDC may pose substantial risks. Mr. Quarles also questioned (i) whether the development of a Federal Reserve CBDC is an adequate tool for solving the issues it purports to address and (ii) whether the Federal Reserve has the legal authority necessary to pursue the development of a CBDC.
CBDCs: Increased Access to Faster, Cheaper Payment Systems?
With respect to the existing U.S. payment system, Mr. Quarles argued that the "dollar is already highly digitized." He stated that "the general public already transacts mostly in digital dollars" through electronic banking, and emphasized that such electronic balances are federally insured up to $250,000 (accounting for nearly all U.S. retail deposits). Mr. Quarles also noted that progress has been made by the automated clearinghouse network, the Federal Reserve and the Financial Stability Board in the evaluation and development of faster domestic and cross-border payment services.
Mr. Quarles argued that the "worthwhile goal" of increased access to affordable banking services could be achieved in a more efficient manner by directing efforts towards making "cheap, basic commercial banking accounts more available to people for whom the current cost is burdensome."
Threats Posed by Foreign CBDCs
Mr. Quarles stated that it is unlikely that the foundation of the U.S. dollar's role in the global economy could be threatened by a foreign CBDC considering:
- the strength and breadth of the U.S. economy;
- the United States' far-reaching trade linkages with the rest of the world;
- the depth of the U.S. financial markets, including Treasury securities;
- the stability of the value of the U.S. dollar over time;
- the easy conversion of U.S. dollars into foreign currencies; and
- the strength and credibility of U.S. property rights and monetary policy.
Competition with Stablecoins and Cryptoassets
With regard to arguments that the United States needs to develop a CBDC in order to compete with U.S. dollar stablecoins, Mr. Quarles stated that a U.S. dollar stablecoin might actually support the role of the dollar in the global economy by reducing the costs associated with, and the time it takes to make, cross-border payments without posing the security risks that a CBDC would. However, Mr. Quarles identified concerns that may arise with the proliferation of stablecoins, if:
- it is not a full reserve, but fractional;
- the holder of the stablecoin does not have a solid claim on the underlying asset; or
- the pool is invested in instruments that are not as liquid as possible (e.g., central bank reserves, short-term sovereign bonds, etc.).
Mr. Quarles contended that such risks "are eminently addressable" and that dealing with such risks, in combination with "imminent improvements in the existing payments system," may render the development of a CBDC superfluous.
Mr. Quarles also expressed doubt that the appeal of cryptocurrencies such as Bitcoin necessitates the development of a CBDC, because the way such assets are created makes their value highly volatile. Mr. Quarles analogized cryptoassets to gold, as they both have fluctuating values that are derived from their scarcity. However, Mr. Quarles emphasized that gold has material purposes that render its value less risky and speculative and that the other central appeal of Bitcoin, which is its anonymity, makes it "appropriately the target for increasingly comprehensive scrutiny from law enforcement." Mr. Quarles argued that the novelty of such cryptoassets will wear off and that they are highly unlikely to impact the role of the U.S. dollar or necessitate the development of a CBDC.
Critical Considerations for a U.S. CBDC
Mr. Quarles warned of the "significant and concrete risks" that a Federal Reserve CBDC could pose, including:
- undermining the benefits to the economy and consumers that arise from banks competing to acquire customers;
- the many entry points to a CBDC network that would leave it vulnerable to cyberattacks;
- the difficulty in balancing consumer privacy and managing money laundering risks; and
- the resource-intensive nature of managing a central bank infrastructure.
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