Fed Vice Chair Quarles casts significant doubt on establishing a digital dollar

With the Federal Reserve due to release a highly anticipated report this summer on the possible creation of a digital dollar, the central bank’s vice chairman said Monday that he had significant doubts about the idea.

Fed Governor Randal Quarles has been skeptical of most of the arguments put forward in favor of a central bank digital currency.

“The potential benefits of a Federal Reserve CBDC are unclear,” Quarles said in prepared remarks to the Utah Bankers Association. “Conversely, a Federal Reserve CBDC could pose significant and tangible risks.”

The drawbacks he cited include the challenges if the public could bypass traditional banks and go straight to the Fed for digital money. In the same vein, he said that the benefits consumers get from banking competition could be diminished if the Fed continued to penetrate this area.

He was also concerned about the potential for cyberattacks on a system that would be difficult to secure.

Proponents of a Fed-issued digital dollar say it could speed up payment systems, especially internationally. They also mention the advantages for the non- or under-banks who do not have access to the existing digital payment system.

In essence, a Fed digital currency would behave just like the digital dollars that are exchanged every day, except that they are backed by the Fed rather than guaranteed by banks. Those who don’t have a bank account could use the Fed system to transfer money back and forth. Proponents say, for example, that a digital currency system would make it easier for the central bank to provide stimulus checks to people during crises like the Covid-19 pandemic.

However, Quarles said the system could be difficult and expensive to develop, would likely require a Congressional resolution, and would be redundant to the systems already in place.

“First, the US dollar payment system is very good, and it’s getting better and better. Second, the potential benefits of a Federal Reserve CBDC are unclear. Third, I believe there could be significant risks in developing a CBDC, ”he said. “So our work is crucial to us as we rigorously evaluate the case for developing a Federal Reserve CBDC.”

His remarks come with the Fed, which will publish a research paper this summer to explore the issue further. Several other Fed officials, like Governor Lael Brainard, have expressed support for the CBDC.

Announcing the study, Fed Chairman Jerome Powell said in May that “the focus is on ensuring a secure and efficient payment system that benefits American households and businesses while promoting innovation.”

CBDC proponents fear that the Fed could lose its place in the global financial system if it fails to keep up, with the hegemony of the US dollar as the world’s reserve currency ultimately threatened.

Quarles said, however, that given their relatively stable value, continued prominence in global financial markets, and the depth and systemic importance of US Treasuries and the dollar, it appeared “unlikely” that a real threat to the US currency could arise.

“None of these are likely to be threatened by a foreign currency, and certainly not because that foreign currency is a CBDC,” he said.

Quarles also said he sees little threat from cryptocurrencies like Bitcoin, which are compared to gold for safe havens against instability and inflation.

“Gold will always shine, but novelty by definition fades,” he said. “Bitcoin and its ilk will therefore almost certainly remain a risky and speculative investment rather than a revolutionary currency and are therefore very unlikely to affect the US dollar’s role or require a response with a CBDC.”

Quarles said he saw the Fed’s research process as “really open” and “no foregone conclusion”, even though he said “the bar for establishing a US CBDC is high”.

“As we begin our Fed analysis of these issues, I need to believe that a CBDC is a particularly good tool to address one of those issues that I am skeptical about, and in particular I need to be convinced that the potential Benefits “of developing a Federal Reserve CBDC outweigh the potential risks,” he said.

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