As countries around the world deepen their exploration of central bank digital currencies (CBDC), the topic of a digital dollar was recently discussed by Federal Reserve Board governor Michelle Bowman, who spoke at Georgetown University on Tuesday, offering her perspectives on a U.S. CBDC.
“In broad terms, a CBDC is simply a new form of digital liability of a central bank,” Bowman said. “Beyond this baseline definition though, ‘what is a CBDC’ defies a simple definition. A CBDC built on distributed ledger technology offers a wide range of design and potential use options, as well as potential risks.”
As the Federal Reserve explores the possibility of issuing a digital dollar, Bowman indicated that there are two questions that need to be answered before moving forward. “First, what problem is the policymaker trying to solve, and is a CBDC a potential solution? Second, what features and considerations – including unintended consequences – may a policymaker want to consider in deciding to design and adopt a CBDC?”
In her view, “What problem could a CBDC solve?” is the fundamental question. One of the most often cited benefits of introducing a CBDC is the ability to improve payment systems, but Bowman expressed doubt that a digital dollar would be needed to achieve this goal.
“Improving the speed of payments, particularly retail payments, can be accomplished without the introduction of a CBDC,” she said. “In the United States, beginning later this year, the Federal Reserve’s FedNowSM Service will enable banks in the United States to offer their customers the ability to send and receive payments in real-time.”
Increasing financial inclusion is another regularly purported benefit of CBDCs, which Bowman also questioned. “In the United States today, over 95 percent of households have a least one member of the household with a banking relationship holding a checking or savings account,” she said. “Of the remaining 4.5 percent who are not banked, nearly three-quarters have no interest in having a bank account, and approximately one-third cited a lack of trust in banks as the reason for not having a bank account.”
“I think it is unlikely that this group would find the government somehow more trustworthy than highly regulated banks,” Bowman said. “Unbanked households are also less likely to own mobile phones or have access to the internet, which would present barriers to CBDC adoption.”
The Fed governor suggested that policymakers should consider other means of improving financial inclusion, such as “alternatives for making the distribution of government benefits more efficient and effective like promoting financial literacy.”
On the topic of the government using a CBDC to achieve a variety of policy objectives, Bowman warned that using a digital dollar to achieve goals “could lead to the politicization of the payments system and at its heart, how money is used.”
“Imagine a scenario in which fiscal spending, in the form of government benefits or payments, could be transferred via CBDC and could include a limited timeframe in which they could be spent before expiring,” she proposed.
“Enabling this type of limit through a CBDC would stand in stark contrast to the flexibility and freedom embedded in physical currency or bank deposits and could serve to control or even harm consumers and businesses. A CBDC that permitted this type of control not only has the potential to allow the government to limit certain types of private spending or limit access to banking accounts, it could also threaten the Federal Reserve’s independence.”
Circling back to the topic of improvements to the payment system, Bowman again asserted that the introduction of the FedNow system will accomplish that goal without the introduction of a digital dollar. “What could a CBDC accomplish, if anything, over and above what instant payments platforms alone can accomplish?” she questioned.
While she acknowledged that there could be some benefits offered by a wholesale digital dollar used to settle certain interbank transactions, she also noted that participants in the wholesale financial markets have already been exploring the integration of distributed ledger technology that does not require the creation of a CBDC.
“Policymakers must carefully consider the wholesale use cases, including whether there is added value of a wholesale version of CBDC in supporting new infrastructure to financial transactions over and above existing methods,” she said.
When it comes to using CBDCs for cross-border payments and other activities, Bowman noted that the biggest challenge would actually be the regulatory and legal safeguards in place for payments between countries with different legal structures, such as KYC/AML policies and sanctions screenings.
“These competing priorities are challenging to reconcile,” she said. “While cross-border payments are among the slowest and least efficient, they also raise substantial legal and regulatory compliance concerns that would apply equally to CBDCs.”
One topic where Bowman said a digital dollar could come in handy is related to the declining use of cash. “Because the Federal Reserve is committed to ensuring the continued safety and availability of cash, a CBDC could be considered as a means to expand safe payment options, not to reduce or replace them. So, an important issue for us to consider would be whether a CBDC could provide the public with a more attractive alternative to cash in a world that may be shifting away from cash-based payments.”
Transitioning to the topic of stablecoins, Bowman called them “less secure, less stable, and less regulated than traditional forms of money” with opaque structures and frameworks.
“It is important for us to continue to evaluate the evolving landscape of digital assets and understand whether and how well-regulated stablecoins or a CBDC would interact with each other and with the broader payments system,” she said.