CBDC Forecast: U.S. Consumers in for a Long Wait

The likelihood of the United States adopting a central bank digital currency for consumers anytime soon is nil.

Though momentum had picked up for a time, several recent signs — including comments from two Federal Reserve officials, Michelle Bowman and Michael Barr — underscore the ongoing lack of enthusiasm at the central bank.

Chairman Jerome Powell has maintained that the Fed doesn’t have any authority to issue a CBDC on its own and that executive branch support and congressional approval would be required to do so. He also has said that the Fed has yet to determine its point of view on a U.S. CBDC for consumer use.

In September, Barr, the Fed’s vice chairman for supervision, reiterated these positions at a fintech conference in Philadelphia, saying the Fed is “a long way” from any CBDC decision, and Bowman, a member of Fed’s Board of Governors, gave a speech at a separate conference in which she countered some of the arguments from those who favor a CBDC.

Congress also lacks enthusiasm, according to French Hill, the vice chairman of the House Financial Services Committee and chairman of its Subcommittee on Digital Assets, Financial Technology and Inclusion.

During the subcommittee’s hearing on CBDCs in September, the Arkansas Republican said: “There is no support for a CBDC in Congress, except from those on the fringes who think that somehow a CBDC might be an amazing solution to many unstated global problems.”

Governor Bowman Takes Aim at U.S. CBDC

Like Hill, Bowman questioned whether a central bank digital currency is needed to solve any problem.

Speaking at a Harvard University conference, Bowman said that CBDC backers see it as a solution to friction in the existing payment system, a means of both broadening financial inclusion and providing U.S. citizens with a form of safe central bank money. (Note that U.S. paper currency is issued by the Federal Reserve System’s district banks.)

But she is not convinced. “I have yet to see a compelling argument that a U.S. CBDC could solve any of these problems more effectively or efficiently than alternatives, or with fewer downside risks for consumers and for the economy,” she said.

She pointed to the Fed’s own FedNow instant payment system, launched with a group of early adopters in July, as an existing framework that provides instantaneous, final and irrevocable payments.

One idea from CBDC backers is that these “digital dollars” could be held in consumer accounts at the Fed. Another idea is that the accounts could be administered by banks or fintechs, rather than the Fed.

The banking lobby has raised concerns about this idea, in part because it would set up a two-tier system: “regular” deposits and “safer” deposits associated with the Fed, regardless of whether those deposits are housed at the Fed.

In addition, deposits at banks and other depository institutions can be loaned out, supporting economic growth. The government accounts would not be lendable and could conceivably disintermediate the private banking system of deposits, especially in a time of severe economic turmoil.

“As policymakers, we would need to carefully consider how an intermediated CBDC, with private-sector service providers, could be designed in a way that maintains financial institution involvement and minimizes, or ideally, eliminates related disruptions to the broader U.S. financial system.”

— Michelle Bowman, member, Federal Reserve Board

Interestingly, a former Biden Administration nominee for Comptroller of the Currency, Saule Omarova, had written a paper, “The People’s Ledger: How to Democratize Money and Finance the Economy,” which called for transferring most retail deposit accounts to the Federal Reserve. The paper suggests community banks could become the equivalent of Fed franchisees for deposit-taking purposes.

Omarova, a Cornell Law School professor who specializes in financial regulation, withdrew her nomination in December 2021 after a stormy confirmation process that included criticism of her paper. She insisted at the time that some of her views were misunderstood.

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Will Hanging Back Put U.S. at International Disadvantage?

Many countries are looking into the possibility of issuing a central bank digital currency. A June 2023 report from the Atlantic Council indicates that 11 countries had launched a CBDC of some type, 21 had a pilot underway, and 32 had a plan in development. Another 46 were researching the idea.

Some CBDC backers contend that if the U.S. fails to keep pace, its role as the world’s reserve currency could be at risk.

China, for example, is one of the countries where this effort is farther along than in the U.S. It was the first major economy to debut a CBDC. In mid-June, a Chinese central bank official told Reuters that total digital yuan transactions reached 950 million, with 120 million wallets being opened.

However, it’s necessary to put that in perspective, given the size of the Chinese economy. The official said that the digital yuan in circulation at that point represented only 0.16% of China’s M0 money supply, meaning the total of cash in all forms in circulation.

But Paige Paridon, senior vice president and senior associate general counsel at the Bank Policy Institute, sees little evidence to support the view that adoption of a CBDC is needed to protect the dollar’s status as the world’s reserve currency.

At the House committee hearing on CBDCs in September, Paridon testified that the strength and size of the U.S. economy, extensive trade between the U.S. and other countries, and the stability of the dollar over time are among the many factors that support its status.

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Bowman: Not All Friction Is Bad

Bowman also pushed back on the argument that a digital dollar would overcome friction in the payment system, saying not all friction is a problem.

“Some purported payment limitations or frictions exist for specific reasons related to managing key risks that policymakers may not want to change, and it is important to understand the tradeoffs of these policy decisions,” she said.

Friction that arises from anti-money-laundering and counter-terrorist financing are two examples Bowman cited.

“It is important to not only thoroughly understand what technological innovations can do,” Bowman said, “but also what these innovations should be able to do within the broader context of a robust, well-functioning banking and payments system.”

Whatever happened to Project Hamilton?
The Federal Reserve Bank has undertaken multiple research projects to better understand how new technology developments impact payments. One that attracted a lot of attention was dubbed Project Hamilton, which the Boston Fed and the Massachusetts Institute of Technology wrapped up in December 2022. The project, which Fed officials had considered to be “agnostic,” produced a theoretical blueprint for running a digital dollar.