The United States doesn't need a central bank digital currency (CBDC) because such a thing will not notably improve the nation's financial system. And also, the US dollar isn't threatened by digital currencies nor other nations' CBDCs, so what's the point?
So said Randal K Quarles, a member of the US Federal Reserve's Board of Governors and its Vice Chair for Supervision, in a speech delivered on Monday to the 113th Annual Utah Bankers Association Convention.
Quarles said one argument he hears in favor of a US CBDC – a government-created cryptocurrency, essentially – is to counter private cryptocurrencies, which he divided into two classes: stablecoins; and non-stablecoins, such as Bitcoin and other cryptoassets. As one might very well expect, the vice chair was not kind to Bitcoin, which he likened to gold inasmuch as it is scarce and its price fluctuates.
"Unlike gold, however, which has industrial uses and aesthetic attributes quite apart from its vestigial financial role, Bitcoin's principal additional attractions are its novelty and its anonymity," he added.
"The anonymity will make it appropriately the target for increasingly comprehensive scrutiny from law enforcement, and the novelty is a rapidly wasting asset. Gold will always glitter, but novelty, by definition, fades. Bitcoin and its ilk will, accordingly, almost certainly remain a risky and speculative investment rather than a revolutionary means of payment."
Quarles rated Bitcoin et al as "therefore highly unlikely to affect the role of the US dollar or require a response with a CBDC."
For what it's worth, Bitcoin isn't completely anonymous, contrary to popular belief. And its price in US dollars right now, $34,500, is about what it started the year on, nearly seven months ago, though during that time it emerged above the $60,000 mark before crashing down, taking investors on a rollercoaster. Given Bitcoin has been running for about 12 years, it's taking its sweet time to lose that novelty.
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Quarles was more enthusiastic about stablecoins – crypto-coins that are pegged to things like fiat currencies and precious metals – which, he argued, have risks but are not so exotic that regulators like the Fed don't understand how to manage them. Stablecoins could also improve international payments, and that's an outcome the vice chair sees as desirable because the cost and complexity of such transactions are among the weaknesses he sees in America's current payment systems.
Those systems, he said, are generally robust – the United States' large-scale payment systems handle six trillion dollars of transfers each day without breaking a sweat. Quarles also noted that smaller payments can be slow, and the Fed has therefore created a new instant payment scheme to speed things up. That scheme, called FedNow, is due to commence operations soon.
The vice chair also considered whether a US CBDC would help the nation compete against those with digital currencies. He concluded the US dollar's role as "the dominant currency in international financial transactions" won't be challenged by any CBDC.
Gold will always glitter, but novelty, by definition, fades. Bitcoin and its ilk will almost certainly remain risky
"The dollar's role in the global economy rests on a number of foundations, including the strength and size of the US economy; extensive trade linkages between the United States and the rest of the world; deep financial markets, including for US Treasury securities; the stable value of the dollar over time; the ease of converting US dollars into foreign currencies; the rule of law and strong property rights in the United States; and last but not least, credible US monetary policy," he argued. "None of these are likely to be threatened by a foreign currency, and certainly not because that foreign currency is a CBDC."
Quarles also worried that a US CBDC would be expensive to establish, represent an irresistible target for cyber-attackers, and could mean the Fed effectively becomes a retail bank.
The vice chair nonetheless welcomed the Fed's ongoing exploration of a CBDC but concluded: "I think the bar to establishing a US CBDC is a high one." ®