Yesterday U.S. Federal Reserve Vice Chair Randal Quarles gave a talk on central bank digital currency (CBDC) and stablecoins, emphasizing his comments were his personal opinions. He deconstructed the proposed benefits of a digital dollar and highlighted CBDC risks, leading to the conclusion that he does not support a digital dollar project at this stage.
“The potential benefits of a Federal Reserve CBDC are unclear. Conversely, a Federal Reserve CBDC could pose significant and concrete risks,” said Quarles.
In analyzing some of the motivations for a CBDC, he painted quite a positive picture of stablecoins.
He noted that some have argued that a CBDC is needed to compete with U.S. dollar stablecoins. In his view, “we do not need to fear stablecoins.” In fact, he believes the potential use of dollar stablecoins for cross border payments will support the U.S. currency’s role in the global economy. It could be deployed faster and with fewer of the downsides of a CBDC.
However, he also highlighted the risks but believes these can be addressed, particularly if a stablecoin is fully backed by central bank reserves and short term government bonds. Yesterday former head of the Bank of England, Mark Carney, expressed similar views.
The conclusion was current improvements in existing payments systems “combined with the cross-border efficiency of properly structured stablecoins could well make superfluous any effort to develop a CBDC.”
In terms of Quarles’s comments on other motivations for a CBDC, he does not believe the form of the currency as a CBDC will impact the dollar’s global reserve status. Other foreign currencies may get stronger but not challenge the dollar. Domestic financial inclusion is best served by ongoing efforts to improve low cost access to bank accounts. And he does not believe a US CBDC will spur private sector innovation. In fact, it could deter it.
Quarles sees significant challenges with a CBDC, including cybersecurity risks and the potential for illicit activities. Designing a currency that balances privacy and addresses money laundering is a tricky task. Plus, he thinks the development could be expensive and the solution could be hard to manage.
His conclusion was that “the potential benefits of a Federal Reserve CBDC are unclear” and “developing a CBDC could, I believe, pose considerable risks.”
Meanwhile, the Federal Reserve is exploring a CBDC with MIT, and is planning to publish a discussion paper shortly. At the same time, the private sector Digital Dollar Project is forging ahead with pilot programs.