US CBDC will take years, some benefits sooner

Anyone hoping the Federal Reserve Board will shed some light on the future of the digital dollar in its highly anticipated white paper in January was disappointed.

The Fed’s article “Currency and Payments: The US Dollar in the Age of Digital Transformation” offered little guidance on the potential launch of a central bank digital currency (CBDC). Instead, the 35-page report concludes that the Fed will not proceed without clear support from the White House and Congress.

At least one academic was optimistic that the Fed would at least answer basic questions about CBDCs.

In an interview with PYMNTS, Darrell Duffieprofessor of management and finance at the Stanford University Graduate School of Business, said that among the questions that remain unanswered are: does the United States need digital currency?

“I was one of those who was hoping for maybe a little more guidance,” he said. “The Fed danced around the subject and it sparked a debate among senior Fed officials, as other central banks began to explore CBDCs in a more robust way.”

The space race

Let China and Russia embrace digital currency before the United States reminds some of the moon race, Duffie said. In a 1961 speech, President John F. Kennedy announced the ambitious goal of landing an American safely on the moon before the end of the decade.

“I don’t see it in those terms; the United States needs to move forward, develop the right technology and decide later whether or not to use a central bank digital currency,” Duffie said. “Federal Reserve Chairman Jerome Powell said more than a year ago that it was better to get it right than to be first.”

To adopt an effective CBDC, the Fed must address issues such as protecting privacy, maintaining security and verifying money laundering, he noted. If all of these concerns are addressed, he said, it would improve the payment system.

“But you can create a lot of benefits without CBDC by improving the bank payment system, and maybe adding stablecoins,” Duffie said. “So everything is up for grabs.”

On stablecoins, the private sector’s response to cryptocurrencies, Duffie said while they would have important uses in the economy. But they also introduce additional risks that would be mitigated with a central bank digital currency. The introduction of stablecoins, he added, would encourage the faster development of a CBDC.

“The most likely path in the United States is for authorities to allow stablecoins to enter the economy under controlled conditions,” he said. “If the controlled conditions are too narrow, but there is a strong demand for better digital payments, then the CBDC could possibly be introduced.”

Whichever direction the Biden administration or Capitol Hill lawmakers choose, high interchange fees are significant barriers to entry, whether through a CBDC or a private stablecoin, he said. added.

Reduce loan pools

While some have argued that adopting cryptocurrency would remove up to $1 trillion from the lending pool, Duffie disagrees.

“Some comments have suggested that if someone puts $1 into the CBDC, that’s $1 less than the bank is able to lend,” he said. “That’s just not true. That’s not how banking works.

That would be true, he said, if CBDCs became very popular. In this case, it would probably force the banks to pay more for their funds. As a result, loans could be reduced.

Almost a decade ago, as New York regulators explored ways to control bitcoin, executives of the country’s largest banks feared that cryptocurrency regulation would legitimize digital currency and threaten the financial industry. . They did their best to discourage him.

Banks Reluctantly Embrace Crypto

Fast forward to January and a Circle-sponsored PYMNTS study found that 93% of financial institutions (FIs) said they expect their business customers to eventually use digital currencies and 96% of FIs said they would use stablecoins to invest and transact.

The dramatic shift is the result of FIs realizing the inevitability of crypto.

The Crypto Schedule

Still, Duffie said it will be years before any decision is made to deploy a CBDC in the United States.

“There’s no plan that you can just pull off the shelf and say, OK, let’s go,” he said. “It will be at least a few years before there is even a decision, and more years after that before the technology is ready for prime time.”



On: Seventy percent of BNPL users say they would prefer to use the installment plans offered by their banks – if only they were made available. PYMNTS’ Banking On Buy Now, Pay Later: Installment Payments and the Untapped Opportunity of FIssurveyed over 2,200 US consumers to better understand how consumers view banks as BNPL providers in a sea of ​​BNPL pure-players.

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