CBDC Weekly: Fed Promises Digital Dollar Won’t Cut Out Banks; PayPal Would Support CBDC

Fed: Digital dollar won’t cut out banks

The Federal Reserve’s new vice chair, Lael Brainard, told Congress that a federally issued digital dollar will not cut banks out of the banking system.

While the Fed has been non-committal at best about the need for a digital dollar, Brainard was careful to make very clear that commercial banks will remain a vital part of the U.S. banking system even if it does issue a CBDC — something that’s a bare minimum of five years off, she added.

See more: Fed’s Vice Chair Tells Banks: Digital Dollar Won’t Cut You Out

“It’s very important to consider the risk of bank intermediation,” Brainard said. “A vibrant, healthy banking system with banks of all sizes is very important to the economy and to the Federal Reserve.”

That has been a key concern of the banking lobby, which aggressively opposed a U.S. CBDC earlier last week.

“By attracting deposits away from banks, particularly during a period of economic stress, a CBDC likely would undermine the commercial banking system in the United States, and severely constrict the availability of credit to the economy,” the Bank Policy Institute wrote in a May 20 letter in response to the Fed’s January CBDC report, “Money and Payments: The US Dollar in the Age of Digital Transformation.”

Read here: Heyday or Doomsday? Regulators, Banks at Odds Over CBDCs

CBDCs like a digital dollar “could present serious risks to financial stability and may provide few, if any, benefits,” in Bank Policy Institute’s (BPI’s) words.

Arguing that a CBDC would “undermine the commercial banking system in the United States and severely constrict the availability of credit to the economy,” the group added that many of the potential benefits of a CBDC are available from other tools ranging from existing real-time payments networks to well regulated — and bank issued — stablecoins.

To ensure this doesn’t happen, the Fed would, among other things, offer no interest on deposits, Brainard said, adding that the Federal Reserve would “make holdings of central bank digital currency really only for payments in a way that wouldn’t compete with deposits … It would confine their use to payments and not impede [the] important functions of a vibrant banking system,” like home loans.

“All of our payment infrastructure is kind of a neutral infrastructure that allows interoperability between private sector solutions,” she said. “And that’s how I would continue to see the role of the Federal Reserve in the future.”

Mastercard CEO questions SWIFT’s future

Mastercard CEO Michael Miebach raised some eyebrows, and a few gasps, when he told a panel that he did not believe that the global interbank payments messaging system SWIFT would be around in five years.

Speaking at a panel on the future of central bank digital currencies (CBDC) and cross-border payments, hosted by the Global Blockchain Business Council at the World Economic Forum’s (WEF) annual meeting in Davos, Switzerland, last week, his answer was a fairly succinct, “No.”

Now, Miebach may or may not have been speaking with his tongue in his cheek — he said it with a smile and a Mastercard spokesperson walked back the prediction somewhat, saying that SWIFT is evolving and there really isn’t a “yes and no” answer to the question, according to reports.

See also: SWIFT’s End No Sure Thing, and It Won’t Be Swift

But Miebach’s point was that the current system that makes cross-border payments a days-long and expensive process won’t survive the onslaught of challenges including cryptocurrency-based alternatives like Ripple, potential CBDCs, and the company’s own efforts to keep ahead of the competition.

“If you can get a payment with all the data attached that you need as a company … the cost savings of that in addition to a payment cost that is lowered, and the overall productivity boost, we can expect if we do this well, that’s the real goal here,” he said.

Central bankers call for speed, caution

Speaking at the WEF, governors of the Bank of Thailand and the Banque de France agreed that cross-border payments using CBDCs could well become a reality within five years.

Both banks have been big boosters, with France having pushed ahead of the EU and European Central Bank to experiment with the technology in hopes of speeding the creation of a digital euro.

Thailand has been working with the Hong Kong Monetary Authority, Bank of China, Central Bank of the UAE and the Bank for International Settlements on mBridge, a cross-border CBDC payments pilot.

Read more: CBDCs Lower Costs and Settlement Times for X-Border Payments

While warning of potential difficulties such as anonymity and scalability, Bank of Thailand Governor Sethaput Suthiwartnarueput said CBDCs could cut the price of such transfers in half and the time by two-thirds, Cointelegraph reported. But the CBDCs must have a strong and well-tested design, he added.

PayPal jumps in

PayPal vice president Richard Nash said the company is working to expand its capabilities to support both digital currencies and CBDCs.

Pay Pal is working “to embrace everything we can, whether it be the coins that we have today in PayPal digital wallets, whether it be private digital currencies, whether it be CBDCs in the future,” he said at the WEF, according to Cointelegraph.

The company announced support for user to buy, sell and hold bitcoin, ether, bitcoin cash and litecoin in their PayPal wallets in October 2020, and on March 30 the next year added Checkout with Crypto, allowing U.S. PayPal wallet holders to pay with those cryptocurrencies at its 32 million-strong PayPal merchants network.