The banking industry had its say about the Federal Reserve’s ongoing investigation of a digital dollar last week, and it’s fair to say that it fell somewhere between opposition and outrage.
In a conversation with PYMNTS’ Karen Webster, Rob Hunter, director of Regulatory and Legislative Affairs and deputy general counsel of The Clearing House (TCH), the bank-owned operator of the RTP network, made it clear that the industry’s arguments come down to three things.
First, a central bank digital currency (CBDC) will badly damage the core underpinnings of not only the banking industry, but in many ways, the economy itself.
Second, a digital dollar would add nothing that the banking industry doesn’t already do or is working on doing. Third, the entire issue is based not on economics or financial services, but on unnecessary fear that the dollar faces competition or will become obsolete.
The opposition, Hunter noted, cuts across all segments of the industry, with solidarity among the large banks behind TCH, the smallest community banks, credit unions and minority-owned banks all “aligned in opposition to a CBDC.”
“Fundamentally,” he said, “it has to do with the characteristics that are inherent in a central bank digital currency … foundationally, it has to be a liability of the central bank and unlike deposits, it couldn’t be leveraged for lending.”
A CBDC would also likely exacerbate runs on banks, particularly during economic downturns and crises, when people would be inclined to move savings into the safety of a guaranteed Federal Reserve liability, which cannot fail due to a run.
A CBDC, in the Bank Policy Institute’s words, “likely would undermine the commercial banking system in the United States, and severely constrict the availability and cost of credit.”
Central Bank Deposits Will Steamroll Private Banks
Funds held in CBDCs would become “a net drain on deposits” in commercial banks for several reasons, Hunter said. Notably, even if “managed and distributed by financial institutions,” CBDCs would have to be held in digital wallets in a custodial relationship, rather than comingled with regular deposit accounts.
That in turn means CBDCs would not be available to lend, which is how many banks make most of their revenue — and how they help stimulate the economy.
It’s “the worst of both worlds,” Hunter added. Banks “get saddled with all the KYC [know your customer], OFAC [Office of Foreign Assets Control sanctions list] screening, customer due diligence, and anti-money laundering screening obligations without a viable revenue stream. And it’s a net drain on their deposits.”
That is bad for banks, bad for consumers and bad for the economy.
While some at the Fed have suggested that CBDCs could be non-interest bearing to help ameliorate competition with commercial bank deposits, this would have little impact on consumers in times of crisis, Hunter argued, when safety would be paramount over potential economic return.
Another proposal, which is to limit the amount of CBDCs that can be held, would have to be so low as to render CBDCs virtually useless, he said.
The Current System Can Do It All and More
With The Clearing House’s RTP network and the Federal Reserve’s own FedNow instant payment services coming online soon, the need for (generic) real-time payments — cited as a key benefit of a CBDC — is unnecessary, Hunter said.
TCH is already working on linking its system with other real-time payments systems around the world, he added, which will greatly facilitate the speed and efficiency of cross-border payments.
“We don’t need a central bank digital currency to solve that problem,” he said.
Take a Deep Breath
There are two main forces driving CBDC development in the U.S. One is the fear that stablecoins could compete with the dollar in payments — something Hunter said is best handled by carefully regulating stablecoins, not by going to the enormous expense and effort of building a digital dollar.
“And once you have a well-regulated, supervised and examined stablecoin market, why again do you need a CBDC?” he asked.
Then there’s fear that China’s CBDC, the digital yuan, and others like it could undermine the dollar’s position as the world’s reserve currency and primary means of payment in international trade.
“I don’t think that’s really true,” Hunter said. “The dollar plays that role because of reasons other than technology, because we’ve got stable, well-regulated markets, we’ve got a sound financial system, we have respect for the rule of law and we have relatively stable government. All of those things make the U.S. dollar the world’s reserve currency and let it play the role that it does in international trade.”
Hunter added, “We have a very well-functioning international payment system today that handles U.S. dollars quite well. We don’t need a U.S. central bank digital currency to solve any problem that the financial system can’t already solve.”