Earlier today, the Federal Reserve Board released its much-anticipated discussion paper on central bank digital currency. To be frank, little was new: Chair Powell has already said that the Fed will not develop or deploy a US CBDC without congressional approval. And Fed staff and governors have already done a good job explaining some of the pros, cons, and potential for a US CBDC. Perhaps the most novel announcement was a concrete outline of the Fed’s vision for a CBDC, which it said would most effectively be “privacy-protected, intermediated, widely transferable, and identity-verified.”
Overall, I think the best analysis of the potential for a US CBDC can be found in former Fed Governor Waller’s August 5th, 2021 speech on the subject. Titled “CBDC: A Solution in Search of a Problem?”, he clearly outlined all of the best arguments for why the Fed should develop a CBDC then rebutted them. Because his analysis was so cogent and powerful, I don’t want to spend too much time repeating it when you can just read what he had to say. In the table below, I’ve listed a short summary of arguments for a US CBDC and the flaws I see in those arguments. [1]
As you can tell, I’m skeptical that the development and deployment of a US CBDC is an imperative task for the Federal Reserve System. It seems like the “blockchain, not Bitcoin” talking point, but for stablecoins. Crypto and blockchain are still powerful, alluring concepts for people, and there’s an impulse to do something with “the underlying technology,” fit to traditional structures. But “blockchain, not Bitcoin” was wrong. And “CBDC, not stablecoins” is also wrong. Stablecoins are dollars usable on public blockchains; CBDCs are not. Certainly, US payments infrastructure (and the payments market) would benefit from modernization, but a US CBDC would offer little that cannot be provided through upgrades to traditional systems that are ongoing.
I’m sure that CBDCs will continue to be a talking point and a will they/won’t they guessing game for at least the next few years. Because of the development of Libra and cryptocurrency and stablecoins, the Fed has been forced into consideration of a US CBDC. But my prediction is that the Fed will never launch a US CBDC. And I, for one, am thankful for that.
These are my independent thoughts and do not necessarily represent the views of my employer.
[1] Another excellent analysis of the features of a CBDC is this paper by Paul Wong (FRB) and Jesse Maniff (KC Fed). The CBDC imagined in today’s discussion paper is the “hybrid CBDC” model described by Wong and Maniff. As you can see, the “hybrid CBDC” model offers only marginal improvements over the “RTGS+” system, what is essentially Fed Now. Wong currently leads the FRB’s Tech Lab, the FRB office that seems to have drafted the discussion paper.
