OK to continue looking at CBDC – but its uses remain unclear, at least to one Fed governor

A central bank digital currency’s (CBDC) possible benefits, risks and tradeoffs for the U.S. should continue to be researched – but “potential uses” remain unclear, a member of the Federal Reserve Board said Tuesday.

Speaking at a conference focusing on CBDCs at Harvard University’s law school, Fed Gov. Michelle Bowman said that, given that the U.S. has a “safe and efficient payment system” (augmented by the new FedNow service from the Fed) and a “well-functioning banking system,” the unclear uses of a CBDC “could introduce significant risks and tradeoffs.”

(FedNow is a service introduced by the Fed to provide round-the-clock, instant payment service launched in July. The service, which has not yet been widely adopted, is aimed at providing banks, businesses, and consumers instant payments in real time, with immediately available funds.)

The Fed governor said the introduction of a U.S. CBDC could post such risks and tradeoffs for the financial system, including potential unintended consequences for the U.S. banking system and considerable consumer privacy concerns.

“The U.S. intermediated banking model helps to insulate consumer financial activities from unnecessary government overreach, and I believe this is an appropriate model for future financial innovation,” she said. “If not properly designed, a CBDC could disrupt the banking system and lead to disintermediation, potentially harming consumers and businesses and presenting broader financial stability risks.”

Bowman asserted that policymakers need to carefully consider how an intermediated CBDC, with private-sector service providers, could be designed in a way that maintains financial institution involvement and minimizes or, ideally, eliminates related disruptions to the broader U.S. financial system.

“That said, recognizing the interconnected and global nature of the financial system, I see value in continuing to research and understand the underlying technology and associated policy implications as other jurisdictions continue to actively pursue CBDCs,” Bowman said. “Doing so ensures we are aware of and can be responsive to any developments and can continue to support a safe and efficient financial system into the future.”

Bowman said technologists at the Fed and the reserve banks have conducted focused research and experimentation that she said was intended to provide insight into technical capabilities and risks associated with CBDC and digital assets. She said programmable platforms that could support payment infrastructure improvements are also included in the reserach.

“These experiments give the researchers hands-on experience with new technologies and allow the Federal Reserve to examine the application of emerging technologies in retail, wholesale, and cross-border use cases,” she said.

She also said the Fed is collaborating with international counterparts on issues related to digital payments. That includes, she said, engagement with institutions such as the Bank for International Settlements, the “G7” group of democracies, the Financial Stability Board (FSB), and bilateral engagements with other central banks.

“This work reflects the interconnectedness of the global financial system and allows us to follow actions taken by other jurisdictions and understand any related implications for the United States,” she said.

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