The U.S. will have a “first-mover advantage” in creating a digital dollar no matter how many central bank digital currencies are launched before it, Federal Reserve Chairman Jerome Powell said today.
Which goes a long way towards explaining why Powell doesn’t seem very concerned that China appears to be on the verge of launching a digital yuan renminbi, having already tested it with several lotteries that saw tens of thousands of shoppers using the CBDC for small purchases.
“[S]ince we are the world’s reserve currency we actually think we need to get this right, and we don’t feel an urge or need to be first,” Powell said.
Speaking on Yahoo Finance on Jan. 14, Powell said the reason is simple:
“Effectively we have a first-mover advantage because we’re the reserve currency.”
So, Powell said, “we’re going to look at it very, very carefully and we’re investing heavily in understanding the technology and analyzing the policy questions—the many policy questions.”
That’s a process that will be “measured in years, not months,” he said, promising that there will be extensive outreach to legislators, the financial industry, and the public before anything happens.
Whether it can afford to wait is a matter of debate. As long ago as August 2019, then-Bank of England Governor Mark Carney said digital currencies, whether issued by central bankers or a private company like Facebook, could be a good thing as they would “dampen the domineering influence of the U.S. dollar on global trade.”
Catch the private sector
The Fed Chairman suggested that the U.S. is less concerned with CBDCs like a digital renminbi than with digital currencies issued by the private sector—in other words, stablecoins like the Facebook-founded Diem (formerly Libra).
Now that blockchain has made private currencies technologically possible, Powell said he is concerned that people won’t understand the difference between a diem and a digital dollar. He said:
“We know that in the past, when private sector money [is issued] the public just thinks of it as money, and then at some point they find out that it’s not money and that’s a really bad thing we need to avoid.”
That means there is a very clear need for “better regulatory answers” for potential global stablecoins, Powell argued. That’s a widely shared view in international financial circles, with the G20, European Central Bankand many other organizations calling for a ban on the Diem/Libra project until those regulations are in place.
“So that’s been a high-level focus and that will continue to be a high-level focus because they could become systemically important overnight,” the Fed Chairman said. “[W]e don’t begin to have, you know, our arms around the potential risks and how to manage those risks.”
And, Powell added, “the public will expect we do and has every right to expect that. So that’s something we’ve been working on with our colleagues around the world and that will go on as well. It’s a very high priority.”