A digital dollar is a solution in search of a problem. Well, at least in the US, according to Jerome Powell, chair of the US Federal Reserve. While central-bank digital currencies may provide benefits in some cases around the world, it’s not clear that those potential benefits are “relevant in the US context,” Powell argued this week in a letter to two US congressmen.
“Overall, we observe that the characteristics that make the development of central-bank digital currency more immediately compelling for some countries differ from those of the US,” he said. Powell was responding to a letter the two lawmakers had sent him last month, in which they had asked a number of questions, including whether the Fed is considering issuing such a currency.
What are those characteristics? Some countries, notes Powell, may be considering issuing central-bank digital currencies because they have seen a “rapid migration by consumers away from cash.” That concerns central bankers because it is through the provision of banknotes and coins that governments maintain a direct presence in the consumer payments market. The fear is that leaving this area completely up to private companies could introduce new risks to individuals and the economy.
But in the US, reports Powell, demand for physical cash “remains robust.” In 2018, consumers used cash for 26% of payments, dropping four percentage points from the previous year. (Debit and credit card payments made up 28% and 23%, respectively.)
Another reason some countries are considering central-bank digital currencies is that they lack “otherwise fast and reliable digital payment services,” says Powell. But “the US payments landscape is highly innovative and competitive, with many such options available for consumers.”
It’s fair to take some issue with Powell’s argument here. Indeed, his own bank arguably already has. Unlike many countries around the world, the US lacks a broadly accessible real-time bank-to-bank payment system. The Fed’s current system can take several days to settle payments, and it closes on the weekends. Although a group of big commercial banks has built a real-time payment platform, many smaller banks around the country still don’t have access to the service. That’s why the Fed has decided to build a new public platform, Fed governor Lael Brainard said when the project was revealed in August. Called FedNow, it’s not expected to be ready until 2023 or 2024.
Things change fast in the world of financial technology; it’s plausible that in four years the cutting-edge payment technology will look a lot like today’s digital currencies. But even if the Fed wanted to issue a digital currency at some point, some important questions must be addressed first, says Powell: Would retailers be obligated to accept it? How will it affect financial stability? What are the security risks? If the system is designed to catch illicit activity, how private can it be? Should the central bank open accounts for millions of regular consumers?
One thing that was notably absent from Powell’s letter was any mention of China. The private digital payment platforms WeChat Pay and AliPay have become ubiquitous there, and have expanded into many other countries too. China also says it is “close” to launching a sovereign digital currency, which would make it the first major economy to do so. Officials from the People’s Bank of China have said that the currency will be compatible with WeChat Pay and AliPay, and some expect China to promote its digital yuan as an international reserve currency. Currently the US dollar is the world’s primary reserve currency.
A digital dollar may not be coming anytime soon, but the Fed is clearly paying close attention to the digital currency scene. Powell says the bank is closely scrutinizing Facebook’s proposed digital currency, called Libra. “We also continue to conduct our own research ... including conducting small-scale research-oriented technology experiments aimed at giving us hands-on experience,” says Powell. “These efforts position the Federal Reserve to be able to react more expeditiously to rapid developments in this arena.”
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