The Bank Policy Institute responded today to a Federal Reserve discussion paper evaluating the costs and benefits of a central bank digital currency. The response supports the Fed’s position that adequate data and the consent of the legislative and executive branches are prerequisites to any decision to develop a CBDC. Despite the purported benefits cited by some advocates, evidence shows that a CBDC would present severe risks to the financial system and could permanently increase lending costs for businesses and households.
Arguments against a CBDC include:
- A CBDC would restrict credit availability and result in higher loan costs for households and businesses. Because of a CBDC’s status as a direct liability of the Fed, a CBDC would attract deposits away from banks, reducing the availability and increasing the cost of credit: one dollar held in CBDC is one less dollar a bank can lend out.
- A central government database of citizen transaction data would create cybersecurity and privacy concerns. Consolidating transaction data and account balances all in one place would create a prime target for criminals and would necessitate the Federal Reserve to implement extraordinarily robust new measures to protect consumer data.
- Zero use cases exist that suggest a CBDC will help improve financial inclusion. CBDC does not resolve the underlying reasons why some people are unbanked, including concerns about privacy, minimum balance requirements or fees and AML/KYC requirements, to name just a few.
- CBDC does not account for existing real-time payment systems and would do little to improve cross-border payment efficiency. Although The Clearing House launched a real-time payment system in 2017, Treasury elects to process payments — Social Security, tax refunds, emergency assistance, military pay — through the much slower ACH network. The speed of cross-border payments is influenced by anti-money laundering compliance laws; however, The Clearing House is currently working with other stakeholders to launch an immediate cross-border payments system this year.
- Forgoing a CBDC will not threaten the dollar’s reserve currency status. As regulators have rightfully acknowledged, the dollar remains the reserve currency due to the strength and size of the U.S. economy, rule of law and property rights, trade relationships and credible U.S. monetary policy, among other reasons.
- CBDC will not mitigate the risks posed by “unstable” stablecoins. Stablecoins that are akin to prime money market funds and backed by corporate debt and asset-backed securities are susceptible to runs and pose systemic risks. Regulation and better enforcement of existing laws are the solution to that problem, not a CBDC.
- The intermediated, account-based model would impose new costs. It would require banks to bear the cost of operating these accounts (e.g., account openings and maintenance, enforcement of AML/CFT rules and customer service), yet no one has identified who would pay the banks for providing these services.
What’s next?
This discussion paper is part of a broader review of U.S. policy on digital assets. The President’s recent Executive Order on digital assets requires the Treasury Department to lead a study on the potential costs and benefits of a CBDC and encourages the Federal Reserve to continue its research on whether a CBDC could improve the payments system, the design options for a CBDC, and implications for monetary policy. The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology completed phase 1 of an effort known as “Project Hamilton” in February 2022. Project Hamilton seeks to scope the proposed technical requirements for operating a CBDC in the U.S. U.S. policymakers are still in the early stages of determining whether a CBDC is right for the United States. The Federal Reserve is continuing its review of the policy considerations and has thus far committed to a data-driven approach to making that determination, which BPI strongly supports.