Anyone hoping the Federal Reserve Board would shed light on the future of the digital dollar in its highly anticipated white paper in January was disappointed.
The Fed’s “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” offered little direction on any potential launch of a central bank digital currency (CBDC). Instead, the 35-page report concluded the Fed will not proceed without clear support from the White House and Congress.
At least one academic was optimistic the Fed would at least answer basic questions about CBDCs.
In an interview with PYMNTS, Darrell Duffie, professor of management and finance at Stanford University’s Graduate School of Business, said among the questions that remain unanswered is: Does the United States need digital currency?
“I was one of those who was hoping for maybe a little bit more guidance,” he said. “The Fed has danced around the topic and that has ignited debate among the top officials at the Fed, as other central banks have begun exploring CBDCs more robustly.”
The Space Race
For China and Russia to embrace digital currency before the United States has reminded some of the race to the moon, Duffie said. In a 1961 speech, President John F. Kennedy announced the ambitious goal of sending an American safely to the moon before the end of the decade.
“I don’t view it in those terms; the United States needs to move ahead, get the technology right, and make a decision later about whether to use a central bank digital currency,” Duffie said. “Federal Reserve Chairman Jerome Powell said more than a year ago that it’s better to get it right than to be first.”
To adopt an efficient CBDC, the Fed must answer questions such as how to protect privacy, maintain security, and check for money laundering, he noted. If all those concerns are met, he said, it would improve the payment system.
“But you can create a lot of benefits without a CBDC by improving the bank railed payment system, and maybe by adding stablecoins,” Duffie said. “So everything is up for grabs.”
On stablecoins, the private sector’s answer to cryptocurrencies, Duffie said while they would have important uses in the economy. But they also introduce additional risks that would be mitigated with a central bank digital currency. The introduction of stablecoins, he added, would encourage the faster development of a CBDC.
“The most likely path forward in the United States is that the authorities will allow stablecoins to enter the economy under controlled conditions,” he said. “If the controlled conditions are too narrow, but there’s a big demand for better digital payments, then CBDC may eventually be introduced.”
No matter which direction, the Biden administration or lawmakers on Capitol Hill choose, high interchange fees are high barriers to entry whether it’s by a CBDC or a private stable coin, he added.
Reducing Loan Pools
While some have argued that the adoption of cryptocurrency would remove as much as $1 trillion from the pool for loans, Duffie disagrees.
“Some commentary has suggested that if somebody puts $1 into CBDC, then that’s $1 less that the bank is able to lend,” he said. “That’s simply not true. That’s not how banking works.”
It would be true, he said, if CBDCs become very popular. In that case, it would likely force banks to pay more for their funds. As a result, lending could be reduced.
Nearly a decade ago, as New York regulators explored ways to control bitcoin, executives at nation’s largest banks worried that regulating cryptocurrencies would legitimize digital currency and threaten the finance sector. They did their best to discourage it.
Banks Reluctantly Embrace Crypto
Fast forward to January and a PYMNTS study sponsored by Circle found 93% of financial institutions (FIs) said they expect their business clients to eventually use digital currencies and 96% of FIs said they would use stablecoins for investing and transactions.
The dramatic change was the result of FIs realizing the inevitability of crypto.
The Crypto Timetable
Still, Duffie said it will be years before any decision is made to deploy a CBDC in the U.S.
“There’s no blueprint that you can just take off the shelf and say, OK, let’s go ahead,” he said. “It’s going to be at least a few years before there’s even a decision, and more years after that before the technology is ready for prime time.”
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