Anyone seeking a Federal Reserve ally for a central bank digital currency (CBDC) should look beyond the agency’s top supervisor, Randal Quarles – in his view, it’s not likely to happen.
In a speech Monday, Quarles – the Fed Board vice chair for supervision – listed three reasons why he’s skeptical about the effectiveness of (or need for) a Fed-backed CBDC:
- the U.S. dollar payment system is very good, and it is getting better;
- the potential benefits of a Federal Reserve CBDC are unclear; and
- developing a CBDC could pose considerable risks.
Speaking before the Utah Bankers Association convention in Sun Valley, Idaho, Quarles said the Fed’s work is “cut out for us” as it proceeds to “rigorously evaluate the case” for development of a Fed CDBC.
“Even if other central banks issue successful CBDCs, we cannot assume that the Federal Reserve should issue a CBDC,” Quarles said. “The process that Chair (Jerome H. [“Jay”]) Powell recently announced is a genuinely open process without a foregone conclusion, although obviously I think the bar to establishing a U.S. CBDC is a high one.”
He said the Fed’s upcoming discussion paper – announced by Powell in May and set to be released sometime this summer – constitutes a first step in the process of considering a Fed CBDC. According to Powell, the summer that will delve into the implications of digital payments – including possibly a U.S.-issued digital currency.
Quarles said the paper will ask for input from the public. “I look forward to reviewing public input on the discussion paper, which will inform the Federal Reserve’s ultimate evaluation of a potential CBDC,” he said.
The Fed vice chair, at the outset of his remarks, gave some insight as to his view of CBDCs. He said America has a long enthusiasm for novelty, that has served the country well. But, he indicated, there are limits. “Especially when coupled with an equally American susceptibility to boosterism and the fear of missing out, (novelty) has also sometimes led to a mass suspension of our critical thinking and to occasionally impetuous, deluded crazes or fads.”
He compared today’s interest in CBDCs to the fashion craze of a year in the 1980s “when millions of Americans suddenly started wearing parachute pants,” he said. But the consequences of a CBDC, he asserted, are more serious.
He said that public interest in a “digital dollar” has reached fever pitch in recent months. “But before we get carried away with the novelty, I think we need to subject the promises of a CBDC to a careful critical analysis,” he said.
For instance, Quarles asserted, he is skeptical that the Fed has the legal authority without legislation to issue CBDCs in either an account-based model (in which the Federal Reserve would provide individual accounts directly to the general public), or a non-account-based model (which would represent a digital claim against the Fed, but could be potentially transferred from person to person like a banknote or through intermediaries).
“Nevertheless, the recent clamor over CBDCs makes it appropriate to explore the benefits, costs, and practicalities of implementing one in the United States if such legislative authority were granted,” he said.
Among the risks that Quarles outlined as inherent with a CBDC: it can create considerable challenges for the structure of the banking system, which relies on deposits to support credit needs; if the Federal Reserve replaces commercial banks as the dominant provider of money to the general public, it could constrict the availability of credit, fundamentally altering the economy and exposing the public to a host of unanticipated, and undesirable, consequences; and it could “undermine the consumer and other economic benefits that accrue when commercial banks compete to attract customers.”
He also cited the risk of illicit activity and questioned whether a CBDC could be designed that “respects individuals’ privacy while appropriately minimizing the risk of money laundering.”
As for cost, Quarles contended that establishing a Fed CBDC would set up the central bank as a retail bank to the general public. “That would mean introducing large-scale, resource-intensive central bank infrastructure,” he said. “We will need to consider whether the potential use cases for a CBDC justify such costs and expansion of the Federal Reserve’s responsibilities into unfamiliar activities, together with the risk of politicization of the Fed’s mandate that would come with such an expansion.”