Federal Reserve Governor Christopher Waller negated the need for the U.S. Central Bank, the Federal Reserve, to issue a central bank digital currency (CBDC) in a speech on Thursday, adding a dissenting voice among the recent swell of excitement around CBDCs.
During an event organized by the public policy think tank, American Enterprise Institute, Waller, a member of the Fed Reserve System’s Board of Governors, dismissed the idea of a US central bank digital currency as a solution in search of a problem. He argued that innovation within the private sector is rapidly improving payments systems, without the Fed needing to issue a CBDC.
“The private sector is already developing cheaper payment alternatives to compete with the banking system,” Waller says. “Hence it seems unnecessary for the Federal Reserve to create a CBDC to drive down payment demands we see by banks.”
The majority of transactions today are carried out using digital commercial bank money, recorded as a liability of a commercial bank, rather than the Federal Reserve. In payment transactions, one hardly registers the distinction because commercial banks peg their exchange rate 1:1 with central bank money. Federal deposit insurance and rigorous regulation instill confidence in the legitimacy of this exchange rate, enabling the high-volume digital transactions denominated in US dollars every day. This system, Waller argues, means there is no need for a so-called “digital dollar” — it already exists.
But blockchain and distributed ledger technology aren’t out of the picture yet. Communist China’s central bank, The People’s Bank of China, is already testing it’s CBDC in real-world transactions, leaving many to wonder if the U.S. might be leapfrogged by the smaller, but rapidly growing economy. On the other hand, Waller pointed to stablecoins, digital assets tied to the value of one or more underlying assets, including a fiat currency, as a private sector innovation that could be on its way to challenging commercial banks’ supremacy.
“It seems to me that private sector innovations might reduce the mark-up charged by banks more effectively than a CBDC would,” Waller says. “If commercial banks are earning rents from their market power, then there is a profit opportunity for non-banks to enter the payment business and provide the general public with cheaper payment services.”
Stablecoins were designed to be digital assets that are not subject to the price volatility which has become synonymous with cryptocurrencies like bitcoin. Waller noted that a stablecoin challenger to banks for payment processing could arise if one or more stablecoin projects developed a significant user base. One advantage stablecoins have is that payments using them may not have fees attached; this, Waller says, could pressure commercial banks into cutting down their rates. He emphasized that he is not endorsing any one stablecoin project.
While stablecoins certainly have a growing following, they also carry controversy. After facing intense external pressure, leading stablecoin Tether (mkt cap $64.37 billion) released a breakdown of its reserve holdings in May. The breakdown revealed that instead of being backed 1:1 by US dollars, as the company had previously claimed, 25% of its reserves are non-cash assets.
Despite this bad press, stablecoins are quickly becoming popular means of payment. A total of 56 stablecoins tracked by markets data site, CoinGecko, are worth more than $115 billion.The world’s second-largest stablecoin, Circle’s USDC (mkt cap $27.25 billion), is seeing growing adoption from institutional and retail customers. Last month, Visa and Mastercard began accepting the stablecoin, minted on the ethereum blockchain, to settle transactions. This month, crypto brokerage Voyager acquired crypto payments firm Coinify, in part to answer demand from its business-owning clients who want to accept stablecoin payments.
“After careful consideration, I am not convinced that, as of yet, a CBDC would solve any existing problem that is not being addressed more promptly and efficiently than other initiatives,” Waller says.