Once dismissed out of hand, the prospect of a Federal Reserve-issued digital currency is beginning to gain traction with Washington policymakers.
Officials from Congress, the Federal Reserve and the Office of Financial Research have made a case in recent weeks for the development of a U.S. central bank digital currency, or CBDC, through public remarks and discussion papers.
Fed Vice Chair Lael Brainard called CBDCs a “natural evolution” in the payments arena in a speech earlier this month. She added that digital fiat could stabilize crypto markets by providing a neutral settlement layer.
Similarly, a report from the OFR found that a CBDC would be a net positive to financial stability. By providing transparency about capital flows, the working paper notes, a digital currency could reduce the likelihood of a bank run by depositors worried about liquidity and also give regulators insights into budding crises in real time.
The most emphatic endorsement for a CBDC came in a late June white paper from Rep. Jim Himes, D-Conn., who sits on the House Financial Services Committee. In it, he urges Congress to authorize the Fed to design and implement its own digital currency. Doing so, Himes argued, would be essential to the dollar maintaining its status as the world’s reserve currency.
These arguments, coupled with the volatility in the private stablecoin market, have made the case for a CBDC more compelling, Himes said.
“The focus of my office and a number of other people in Congress and the Fed, plus the devastation that we’re witnessing in the stablecoin market right now, has given the idea momentum,” Himes told American Banker. “I wouldn’t go so far as to call it a turning point … and it’s not unopposed, but I think it’s picking up momentum.”
The findings by the Fed, OFR and Himes are incremental and the push for a digital dollar is in its nascency, but the fact that government officials are discussing the benefits of a CBDC, if not endorsing them, stands out to those who track the matter closely.
“We do see a shift,” Kelly Mathieson, an executive with the payments network developer Digital Asset, said.
To date, the strongest voices advocating for a digital dollar have come from the academic world. Some from those circles view a U.S. CBDC as an inevitability.
Meanwhile, government officials have largely dismissed the idea. In 2019, then-Treasury Secretary Steven Mnuchin said there was “no need” for a digital dollar, at least for the coming five years. Last summer, then-Fed Vice Chair for Supervision Randal Quarles questioned whether the benefits of a CBDC would outweigh its costs. He doubled down earlier this year, saying a digital dollar is not necessary for the U.S. to maintain its global financial hegemony.
Some are less sanguine about the U.S. position in the evolving world of digital currencies as more than 100 central banks — including those in China, Russia and the eurozone — are researching, developing or launching their own CBDCs. In a February 2020 Senate Banking Committee hearing, Sen. Tom Cotton, R-Ark., argued that digitization might be needed for the dollar to maintain its primacy over the yuan. China launched a digital pilot program earlier this year.
Despite his early endorsement, Cotton has done little to further the cause of a U.S. CBDC during the past two years, focusing instead on stifling China’s advancement. Earlier this year, he introduced a bill, along with Sen. Mike Braun, R-Ind., and Sen. Marco Rubio, R-Fla., that would bar U.S. applications from hosting payments with digital yuan.
A handful of other bills related to CBDCs have been put forth since last year. Two — one from Sen. Ted Cruz, R-Texas, the other from Rep. Tom Emmer, R-Minn. — focus on prohibiting the Fed from issuing digital currency directly to individual consumers. Another, introduced by Reps. French Hill, R-Ark., and Bill Foster, D-Ill., in 2021, directed the Fed to study the potential impacts of a CBDC.
Mathieson, whose firm has consulted with other central banks on the establishment of digital currencies, said the case for CBDCs has become self-evident in recent years and it was only a matter of time before policy makers took notice.
“The passage of time has caused people to look into the topic and become more familiar with the specific details and the structural implications of CBDC that have enabled this dialogue,” she said. “What’s notable about the conversations and publications that we’ve seen recently is the openness or willingness to assume the participation of the private banking sector, in a technical and a structural solution.”
Communications from the Fed, Himes and OFR all forecast an intermediated digital currency system, one that flows through banks like the current two-tiered system of reserves and deposits. They also address other common concerns about a CBDC, including the fear that it could increase fragility in the financial sector and that it would do so for no clear benefit.
Himes dismisses the skepticism about the use case for a CBDC by comparing the digital currency ecosystem of today to the internet of the 1990s, which was born out of the military research agency DARPA.
“With innovation, oftentimes the amazing uses are not not immediately visible,” Himes told American Banker. “The tradition of the public sector, the government, doing what it does best, and letting the private sector build on top of it, I actually think is a really good model for CBDC.”
The Fed has remained neutral on whether it would prefer to see a CBDC implemented. Even Brainard’s most recent comments — in which she warned that not creating a government-backed digital currency runs the risk of digital payments being cornered by private entities — stopped short of a full endorsement. Other Fed officials are opposed to the idea — Gov. Christopher Waller called a CBDC a “solution in search of a problem.”
Still, the Fed has continued to study the implications of a digital dollar through its Project Hamilton initiative, a joint effort between the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology.
Himes said the Fed is wise to stay up to speed on the topic of CBDCs without getting ahead of Congress. He noted that it could take an exogenous event to motivate his colleagues to pass authorizing legislation on the matter — which he said he is working on drafting — but he noted that sentiments on this matter are evolving rapidly.
“If the U.K. or the EU or Japan suddenly announces a CBDC with all kinds of investment innovation happening, that would be a kick in the pants for the Congress,” Himes said. “But in the meantime, remember that five years ago, very few people in Congress had any idea what a cryptocurrency was. We’ve made a lot of progress, and I think we need to continue to educate and contemplate these issues.”