The Daily Update: US Central Bank Digital Currency

Later this year the US Federal Reserve will release a report on the potential creation of a digital dollar. Supporters of the central bank digital currency (CBDC) believe that a Fed backed digital dollar will speed up international payments whilst allowing those in society who do not have a bank account better access to money. There is a worry that the Fed could lose its place in the global financial system if it does not keep up in the space, with the supremacy of the U.S. dollar as the world’s reserve currency ultimately coming under threat. A US Fed Reserve digital currency would act the same as the billions of digital dollars that are exchanged every day, However, they would be guaranteed by the Fed, bypassing traditional banks.

When Fed Chairman Jerome Powell announced in May that the Fed was studying the prospect of a CBDC he said the ‘focus is on ensuring a safe and efficient payment system that provides broad benefits to American households and businesses while also embracing innovation’.

Not all are in favour though. Federal Reserve Vice Chair for Supervision Randal Quarles yesterday expressed doubt about the benefits of a digital dollar, pressing that the Fed has no need to compete against foreign competitors such as China's digital currency. ‘First, the U.S. dollar payment system is very good, and it is getting better. Second, the potential benefits of a Federal Reserve CBDC are unclear. Third, developing a CBDC could, I believe, pose considerable risks’ Quarles said. He also believes that if the public could go straight to the Fed for their digital money, this will in turn reduce traditional banking competition leading to higher costs.

Thomas Barkin, the Richmond Fed President, is also in the camp of expressing doubts about a digital dollar. ‘We already have a digital currency in this country, it’s called the dollar,” Barkin said ‘So if you’re going to enhance the digital currency, you have to decide for what reason, as yet I still haven’t heard a good story about what we’re trying to accomplish’.

As Quarles said when referring to the digital currencies, which in some quarters (not here at SSC I hasten to add) have been compared to gold as a hedge against inflation and instability ‘Gold will always glitter, but novelty, by definition, fades,” he said. “Bitcoin and its ilk will, accordingly, almost certainly remain a risky and speculative investment rather than a revolutionary means of payment, and they are therefore highly unlikely to affect the role of the U.S. dollar or require a response with a CBDC’.