FRB Governor Waller Challenges Purported Benefits of U.S. CBDC

Federal Reserve Board ("FRB") Governor Christopher J. Waller questioned whether the Federal Reserve should "'get in the game' and issue a central bank digital currency that the general public could use."

In a speech before the American Enterprise Institute, Mr. Waller argued that a CBDC would not "solve any existing problem that is not being addressed more promptly and efficiently by other initiatives," and asked "what market failure or inefficiency demands this specific intervention?"

Mr. Waller considered and rejected justifications recently advanced for the issuance of a U.S. CBDC, including:

• the possibility that physical currency will disappear - Mr. Waller noted FRB Chair Jerome Powell's assertion that a U.S. CBDC will not replace U.S. currency;

• that the current payment system will become limited with respect to customer reach - Mr. Waller stated that current interbank payment services enable an account-holder at one commercial bank to make a payment to an account-holder at any other U.S. or foreign bank;

• existing payment services were too slow - Mr. Waller pointed out that (i) several commercial banks have recently developed an instant payment service, (ii) the Federal Reserve is developing its own instant payment service, FedNowSM, and (iii) efforts are being made to increase the efficiency of cross-border payments;

• that a CBDC would increase access to payment services for the unbanked - Mr. Waller cited the results of a 2019 FDIC survey that found that the majority of the unbanked population was "not at all interested" or "not very interested" in opening a bank account, indicating that a very small minority of such individuals would be interested in having a bank account;

• that existing payment services had high expenses - Mr. Waller argued that there is little reason to believe that the Federal Reserve would be able to process CBDC payments at a lower cost than existing private-sector payment services;

• the potential of a CBDC to prompt private-sector innovation - Mr. Waller pointed to stablecoins as an existing payment instrument that could be "free" in the sense that no fees would be required to initiate or receive a stablecoin payment, suggesting that stablecoin use could put pressure on banks to decrease fees imposed for their payment services;

• that a CBDC would help to maintain the primacy of the U.S. dollar, particularly as a Chinese CBDC becomes available - Mr. Waller questioned whether (i) non-Chinese firms would choose to allow the Chinese government to monitor all of their financial transactions, (ii) the use of a Federal CBDC by U.S. households would significantly help maintain U.S. dollar global supremacy and (iii) the global availability of Federal Reserve CBDC accounts would promote the use of the dollar without raising substantial issues concerning, among other things, money laundering; and

• that a CBDC would counter the threat posed by new forms of private money to Federal Reserve monetary policy - Mr. Waller stated that commercial banks, stablecoins and any entity that pegs its exchange rate to the U.S. dollar act as a conduit for U.S. monetary policy.

Mr. Waller argued that the Federal Reserve was not created by Congress to provide the general public with banking accounts. He asserted that the division of operations between the Federal Reserve and commercial banks (i) facilitates private-sector competition, which enables the market to operate efficiently, and (ii) provides consumers and businesses with the best quality products at the lowest cost possible. Mr. Waller concluded that (i) the division of labor between the Federal Reserve and commercial banks, as mandated by Congress, is reflective of the notion that the U.S. government should be in competition with the private sector only if required to address "significant market failures"; and (ii) the introduction of a Federal Reserve CBDC could "disintermediate commercial banks" and would also raise cybersecurity concerns.