Payments Execs Say Fed Has Yet to Make Compelling Case for CBDC

Would a central bank digital currency (CBDC) issued by the Federal Reserve Bank be a solution in search of a problem?

Russ Waterhouse, executive vice president of product development at The Clearing House, and Rob Hunter, the company’s deputy general counsel, told PYMNTS that the most basic questions beg to be answered as to just what a CBDC would, should, can and won’t do.

The conversation came against the background where the Federal Reserve’s recent comments on the digital dollar were cited as “the first step in a public discussion between the Federal Reserve and stakeholders about central bank digital currencies.”

Related: Fed’s Digital Dollar Report Finally Drops, With More Questions Than Answers

It should be noted that the report itself was inconclusive — and as Hunter said, “There’s a whole lot more analysis and work that needs to be done before anyone should determine that a CBDC is right for the United States.”

Among those fundamental questions: Why do we need a CBDC — and are there other ways to achieve the desired objectives? What limiting effects will design choices have on the likelihood of achieving those objectives? As Hunter stated, design choices affect whether a CBDC can be used in some use cases and not others.

A Case for Specificity

Being more specific about what a CBDC should do and how it should be crafted is no easy task, the panelists agreed. The discussions to date have been largely theoretical, without a fundamental grounding in what’s possible now and real-life technical considerations.

As Waterhouse said, “The Fed, at the end of the day, does not have a definitive point of view, which is why they came out [with the paper] they did.” However, the Fed alone will not determine the ultimate evolution of a CBDC.

Getting a CBDC into the field, so to speak, requires the political will to do it, Waterhouse said.

“That creates additional complexity because a lot of what is driving this conversation really is not based on the merits of what’s needed technically by the market,” he added. “It’s driven more by political perceptions.”

While politicians are keen on keeping the dollar’s status as the reserve currency in the world, the public also needs to be willing to embrace CBDCs and put them to work in the private sector.

One of the proposals that has been discussed has the Fed issuing CBDC directly to members of the public and potentially issuing Fed accounts directly to the public for holding CBDC. That would require the Fed to become a retail bank, building the necessary infrastructure, and would radically change its composition and mission. It would also put the Fed in direct competition with banks and credit unions and could attract capital away from the private sector, especially in times of stress. Such an initiative would be a “massive risk and lift” on the part of the Fed and it has signaled that an intermediated model would be preferable. But even in an intermediated model if CBDC remains an obligation of the Fed and exists on its balance sheet, it still has the ability to tie up capital in a way that would affect lending and the overall economy, since CBDC deposits would be on the Fed’s balance sheet and not on the banks.

No Need to Get ‘More Digital’ 

Fundamentally, however, there is an existential question confronting CBDC: whether it is a solution in search of a problem. Waterhouse and Hunter noted that we’re already a highly digital economy with most payments already being made digitally. In addition, commercial bank deposits are covered by FDIC insurance, and coupled with bank supervision, closely approximate the safety and soundness that a CBDC would offer. It’s really hard to see what the additive value of a CBDC would be.

“There really isn’t any kind of great need to move and become more digital than we already are,” Waterhouse said. Even the call for 24/7 functionality is well-served by real-time payments, he stated.

Hunter added that the U.S. has some markedly different attributes than might be seen in other economies that are relatively further ahead on the road to CBDC development.

“We have a highly diverse, highly competitive, highly functioning payment system,” Hunter said. “A lot of other countries don’t have that.” And other jurisdictions, like China, like CBDC because it facilitates central economic planning and control. That isn’t the model in the U.S.

Some would argue that the U.S. needs a CBDC to protect the international role of the dollar. But the dollar’s dominance has very little to do with the technology itself and more to do with other qualities associated with our economy, such as the rule of law, well-regulated and highly functioning markets, a relatively stable system of governance, and other attributes. The dollar’s pre-eminence, he said, is not threatened by the introduction of another country’s CBDC.

Another oft cited reason for a CBDC is the need to combat the rise of cryptocurrencies, including stablecoins, Hunter and Waterhouse noted. Facebook’s (now-defunct) Libra/Diem project was an effective wake-up call to many stakeholders within the traditional financial services ecosystem and those in government. But it is unclear that a CBDC would have the qualities that make cryptocurrency attractive for many users (i.e., anonymity). Further, the answer may be as simple as effectively regulating cryptocurrencies, something that the U.S. needs to do in any event.

Looking ahead, the panelists told PYMNTS that the debate over CBDCs makes payments firms and entities, TCH among them, take stock and reflect on their offerings and services — and whether traditional payments systems and innovations are meeting end markets’ needs.

The Fed will continue through its consultative process for some time. There will doubtless be meetings and hearings on the Hill, and commentary will undoubtedly be coming from the private sector.

But as Hunter said, “it’s clear that a CBDC is not going to be a panacea — it’s not going to be a cure for all the ills for which it is being proferred and, indeed, may not be an effective and efficient cure for any one of them.”