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A key payments official at the Federal Reserve has dismissed the idea of a US central bank digital currency (CBDC), arguing that CBDC remains a solution in search of a problem.
During a speech at The Clearing House Annual Conference last week, Federal Reserve governor Christopher Waller said the US government should stay out of the payments sector where possible.
Although not the main focus of his speech, Waller made several critical remarks with regard to CBDC, arguing that central banks still have no justification for issuing one.
Waller, who is also chair of the Fed’s Payments System Policy Advisory Committee, said he began to see an increase in public discussion of CBDC three years ago.
“In a speech I gave in August 2021, I asked what problem would a CBDC solve?” said Waller. “In other words, what market failure or inefficiency demands this specific intervention?
“In more than three years, I have yet to hear a satisfactory answer as applied to CBDC.”
At the time, the Federal Reserve Board was compiling a report and seeking comment on the potential risks and benefits of CBDC.
That report, which was published in January 2022, came to few definitive conclusions about CBDC, other than a promise from the Fed to continue “exploring” the technology.
“While no decisions have been made on whether to pursue a CBDC, analysis to date suggests that a potential US CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified,” the report notes.
In his speech, Waller also expressed concern that some see new technologies such as CBDC as an opportunity for the public sector to play a bigger role in payments, which may crowd out private investment.
“I believe this would be a policy mistake,” he said. “A better approach is one in which the private sector continues to have a significant footprint, with the role of government limited.
“One important reason is that the private sector, through competition, is typically best situated to sort out good ideas from bad ideas, rather than central banks or other public-sector institutions choosing winners and losers.”
At the early stages of an innovation, the true value of a new technology can be difficult to gauge, Waller said, but soon becomes clear when subject to market competition.
“Competition typically leads to a wider range of products that can be better suited to the needs of consumers,” he said.
What can the Fed do for payments?
In general, Waller said, the government should not compete directly with the private sector in the provision of goods or services to the economy, including within the payments sector.
However, there are areas of the payments market in which government intervention is required in order to solve inefficiencies that participants cannot solve themselves, he said.
Such inefficiencies can arise due to incomplete markets, coordination problems or lack of resilience.
Unlike other economies, where a small number of large banks dominate, the US is home to thousands of banks and credit unions.
Connecting such a large number of organisations within a single payment system has historically been a challenge for the US, and was one of the reasons for the creation of the Federal Reserve in 1913.
The Federal Reserve has a “unique” ability to reliably settle interbank obligations using balances at the central bank, he said.
In other words, it is well-positioned to play a coordinating role within US payments systems, and to thereby ensure confidence among its participants.
A recent example given by Waller is the FedNow instant payments system, which reached the milestone of more than 1,000 connected financial institutions in October this year.
“That approach is consistent with my overall view of the appropriate role of government — to narrowly address problems like coordination that can't always be efficiently solved by the private sector alone,” he said.
“In doing so, we complement the private sector and promote responsible and efficient innovation in the broader market.”
Trump CBDC ban
Waller’s speech was delivered one week after Donald Trump’s victory in the US presidential election.
Trump, a vocal critic of CBDC, promised during the campaign that he would prohibit the US government from issuing a CBDC, calling it a “dangerous threat to freedom”.
Whether it is possible for the President to impose such a ban unilaterally remains to be seen.
It is worth noting, however, that in its 2022 consultation on CBDC, the Federal Reserve said it does not plan on issuing a CBDC without legislative backing.
“The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress,” it said. “Ideally in the form of a specific authorising law.”
