Editor’s note: This column ran in the Feb. 29 edition of The Pulse, a weekly BankBeat email sent to subscribers which also includes top stories from the previous week.
I attended Federal Reserve Gov. Christopher Waller’s speech last Thursday at the University of St. Thomas in Minneapolis. Though much of his speech focused on why the Fed should temporarily delay lowering interest rates, Waller also briefly touched on his opposition to a central bank digital currency.
I was especially concerned by Waller’s comment that a CBDC would likely include direct customer accounts at the Federal Reserve. Having consumer accounts parked at the Federal Reserve could remove a crucial source of deposits from community banks while making the Fed a direct competitor for deposits. That could be especially damaging for community banks as the industry continues to grapple with consolidation and deposit competition from larger banks and fintechs.
Waller’s remarks left me with two questions that must be addressed before the federal government authorizes a CBDC: Will community banks be an intermediary for the digital dollar? And, what will be the total impact of a CBDC on the broader financial system?
For now, I agree with Waller’s description of a CBDC: “A solution in search of a problem.” Supporters of a digital dollar have not provided a compelling reason to issue one, nor has there been a major market failure in the payments system showing why a CBDC is necessary.
A CBDC would likely have only a minimal impact on the international standing of the dollar, according to a Feb. 16 Federal Reserve report. The dollar’s value is instead based on the stability of the U.S. economy and political system along with a strong liquid market for U.S. Treasuries.
“Although a CBDC is unlikely to harm the international role of the dollar or worsen cross-border payments, the improvements that could come from a CBDC could also be realized by improvements to non-CBDC payment systems that are already underway,” said Federal Reserve Senior Economist Jean Flemming and Senior Economic Project Manager Ruth Judson.
Supporters of a CBDC also say that a properly-designed digital dollar would serve as an entry point to the broader financial system for those who have been excluded. However, bankers have already proven effective in bringing more customers into the financial system. A record 96 percent of U.S. households were banked in 2021, according to the FDIC’s 2021 National Survey of Unbanked and Underbanked Households. Approximately 1.2 million more households became banked from 2019-21.
Another concern for any CBDC is the possibility of government surveillance. Last September, the House Financial Services Committee passed legislation to ban the Federal Reserve and Treasury Department from issuing a CBDC without congressional authorization. The bill was introduced by House Majority Whip Tom Emmer (R-Minn.). Sen. Ted Cruz (R-Texas) introduced the bill this week in the Senate.
“Any digital version of the dollar must uphold our American values of privacy, individual sovereignty and free market competitiveness,” Emmer noted. “Anything less opens the door to the development of a dangerous surveillance tool.”
A CBDC should not be issued until a compelling use case is presented and its impacts on the traditional financial system and customer privacy are properly addressed. Doing so is essential to protect community banks and their customers from any unintended consequences.