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 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.”
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,” Waterhouse added. “It’s driven more by a political objective or perception of what politicians want.”
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.
With those constraints and issues in place, there are a few ways a CBDC might become a reality, they said. In one case, the Fed would issue the digital fiat and become a consumer bank itself, building the necessary infrastructure.
That infrastructure would underpin the consumer-facing CBDC, and thus the Fed would compete openly with banks and credit unions. Such an initiative would be a “massive risk and lift” on the part of the Fed.