Federal Reserve Chairman Jerome Powell poured cold water on the idea of a United States-issued central bank digital currency (CBDC) happening anytime soon.
In a November 19 response to questions from Rep. French Hill (R-Ark.) and Rep. Bill Foster (D-Ill.), Powell wrote, “it is not yet clear what additional value a general purpose CBDC could provide in the U.S.”
When Powell answered a question about the benefits and drawbacks of a CBDC, he spent four paragraphs listing serious problems, and one sentence about potential benefits. That amounted to conceding that a CBDC might lead to “safer, less expensive, faster, or otherwise more efficient payments.”
However, the reasons to create a CBDC largely apply to poorer, developing countries, he said. They included a slow and unreliable payments infrastructure and a large unbanked population, as well as consumers rapidly abandoning physical cash.
Those aren’t problems in the United States, Powell wrote.
“The U.S. payments landscape is highly innovative and competitive, with many fast, reliable digital options available for consumers,” he said. That means the United States has no need for a CBDC at this time, Powell added.
Congressmen push CBDC
In October, the two congressmen wrote to Powell saying they believed it may be “imperative” for the Federal Reserve to develop a U.S. digital currency.
“We are concerned that the primacy of the U.S. Dollar could be in long-term jeopardy from wide adoption of digital fiat currencies,” they said. “Relying on the private sector to develop digital currencies carries its own risks, including loss of control of monetary policy.”
Rep. Hill chose to take a positive view of the Fed chairman’s response.
“I’m pleased to learn that the Federal Reserve is carefully exploring the costs and benefits of developing a U.S. digital currency,” Rep. Hill said in a statement emailed to Modern Consensus. “This decision would have far-reaching implications on every aspect of America’s monetary policy and requires a deep level of analysis to ensure proper implementation.”
The first and most critical of the potential downsides Powell mentioned are the unknown impact on monetary policy and the potential for high speed runs on banks and other financial institutions and markets.
Then there’s the extra burden running a CBDC would put on the Federal Reserve’s shoulders.
“[A] general purpose CBDC could conceivably require the Federal Reserve to keep a running record of all payment data using the digital currency—a stark difference from cash, for instance—and something that raises issues related to data privacy and information security,” he said. “[C]onsideration would need to be given to whether the ownership of and transactions made with general purpose CBDC should be anonymous, akin to cash ownership and transactions, or traceable by the Federal Reserve.”
Another issue is “the need to potentially open and provide service to accounts which could number in the hundreds of millions,” Powell added.
He also mentioned fighting off hackers. That’s a frightening thought. Remember 2014’s theft of 850,000 bitcoins, then worth about $450 million and about $6.4 billion at press time, from the Mt. Gox cryptocurrency exchange? Now imagine it scaled up for a digital Fort Knox.
In short, he concluded, “we have not identified potential material benefits of [a] general purpose CBDC.”
Protect the dollar’s power
One reason for a CBDC that Hill and Porter cited was the threat of being left behind in a digital currency arms race.
“We are concerned that the primacy of the dollar could be in long-term jeopardy from wide adoption of digital fiat currencies,” Reps. Hill and Foster noted. “[T]he Bank for International Settlement conducted a survey that found that over 40 countries around the world have currently developed or are looking into developing a digital currency.”
They pointed to projects in smaller countries like Sweden and Uruguay, but also highlighted China’s CBDC plans, which many believe it is coming as soon as next year. Concerns have been raised that this could threaten the dollar’s position as the world’s reserve currency. Of course, similar fears were cited for Libra.
Powell did agree that the Fed must closely monitor global CBDC developments “to be able to react more expeditiously to rapid developments in this arena” that may occur.
Not coming soon
In short, Powell’s letter means a U.S. CBDC isn’t likely anytime soon.
Others agreed. In a recent survey, bankers and regulators attending an anti-money laundering conference predicted that the U.S. would be the first to launch one, but that it wouldn’t happen for five to 10 years.
In early October, Philadelphia Federal Reserve Bank president Patrick Harker called a U.S. CBDC “inevitable,” according to Reuters. That means the Federal Reserve needs to “start getting our hands around it,” he said.
However, he added that he thinks the U.S. shouldn’t be the first to launch a digital currency.