Federal Reserve Board Governor Christopher Waller came out against the development of a Fed-backed digital currency in a speech Thursday, arguing that a digital dollar would not solve any problem currently facing the U.S. economy.
“While [central bank digital currencies] continue to generate enormous interest in the United States and other countries, I remain skeptical that a Federal Reserve CBDC would solve any major problem confronting the U.S. payment system,” Waller said during a virtual speech before the American Enterprise Institute.
The speech comes ahead of a report that Federal Reserve Chairman Jerome Powell has said will be issued in the fall outlining the costs and benefits of creating a digital dollar.
Waller pointed out that the private banking system and the Federal Reserve are currently undertaking projects that will allow payments to be made “immediately” after they are initiated, meaning that a cbdc would not ultimately be able to improve upon technologies currently under development.
He also took aim at the argument that offering Americans individual accounts at the Federal Reserve, where they could store their digital dollars, would help make the banking system more inclusive. He pointed to a recent study by the Federal Deposit Insurance Corporation showing that just 5.4% of U.S. households were unbanked in 2019, and that 75% of the unbanked population was not interested in having a bank account.
“It is implausible to me that developing a CBDC is the simplest, least costly way to reach this 1 percent of households,” Waller said. “Instead, we could promote financial inclusion more efficiently by, for example, encouraging widespread use of low-cost commercial bank accounts.”
Some advocates of the digital dollar argue that it could be a safe replacement for stablecoins, or digital assets that peg their value to the dollar. Stablecoins are a staple in the market for cryptocurrencies like bitcoin
as they enable traders of cryptocurrencies to store their uninvested funds.
Regulators ranging from Fed Chairman Jerome Powell to Treasury Secretary Janet Yellen have discussed the risks that stablecoins pose to the economy as cryptocurrencies become more popular. Critics of stablecoins argue that they raise financial stability concerns, because they function like bank deposits, i.e. they are a digital asset backed by a promise to convert one-to-one into U.S. dollars, but they aren’t regulated or insured by the government.
These concerns grew after New York State Attorney General Letitia James banned the use in New York of a stablecoin called Tether
and an associated crypto exchange, Bitfinex, for making false statements about the currency’s backing.
Waller argued that these concerns should be addressed through regulation rather than the creation of a digital dollar.
“There are many legal, regulatory, and policy issues that need to be resolved before stablecoins can safely proliferate,” he said. “My point, however, is that the private sector is already developing payment alternatives to compete with the banking system. Hence, it seems unnecessary for the Federal Reserve to create a CBDC to drive down” costs of payments.
Waller concluded by arguing that the U.S. payments system has always relied largely on private money created by banks, but regulated and supported by the Federal Reserve system. New, private digital money is simply carrying on this tradition.
The current “division of functions between the Federal Reserve and commercial banks reflects an understanding…that the government should compete with the private sector only to address market failures”, he said. “This bedrock principle has stood America in good stead since its founding, and I don’t think that CBDCs are the case for making an exception.”