Federal Reserve Vice Chairman of Supervision: Stablecoins will not threaten status of the dollar. CBDC should be viewed from a critical perspective

Stablecoins will not threaten the status of the US dollar. Randal K. Quarles believes that the potential benefits of USD CBDC are unclear, but it may bring significant and specific risks. End Quote

(1888PressRelease) July 01, 2021 - Randal K. Quarles, Vice Chairman of Fed Regulation, believes that the potential benefits of USD CBDC are unclear, but it may bring significant and specific risks.

I have recently been reflecting on America’s enthusiasm for novelty for hundreds of years and connecting it with the content of this speech. In general, this enthusiasm has made the United States the birthplace of many scientific and practical innovations. These innovations have changed life in the 21st century and changed life in the 19th century, thus providing good services to us and the world. . However, especially when Americans are also sensitive to pushism and fear of missing out, it can sometimes cause a large-scale pause in our critical thinking, and occasionally lead to impetuous, self-deceiving fanaticism or fashion.

Sometimes, in hindsight, the consequences are undoubtedly puzzling or embarrassing, just like that year in the 1980s, when millions of Americans suddenly began to wear parachute pants. But these consequences may also be more serious.

Federal Reserve Vice Chairman of Supervision: Stablecoins will not threaten the status of the US dollar. CBDCRandal K. Quarles, Vice Chairman of Federal Reserve Supervision must be viewed from a critical perspective

This brings us to today's topic: central bank digital currency, or CBDC. In recent months, public interest in the "digital dollar" has reached a climax. Many experts and commentators suggest that the Federal Reserve should issue—in fact, it may need to issue—CBDC. But before we feel overwhelmed by new things, I think we need a careful critical analysis of CBDC's promise. In expressing my views on this issue and other issues related to the CBDC, I am speaking on behalf of myself as a member of the Federal Reserve Board of Governors, not on behalf of the Board of Governors or any other Federal Reserve policy makers. In fact, you have all seen Chairman Powell’s recent announcement that we are preparing a comprehensive discussion paper on this issue. This will be the first step in a thorough open procedure for this critical analysis. I don’t want to prejudge it. I really want to make some observations on the issues that I think we need to solve in this process, how I will consider these issues, and I think that any proposal to create a US CBDC must be clear and high.

So, let's start with a basic question: what problem will CBDC solve? To answer this question, we first need to define the term CBDC and assess the current state of the US payment system.

What does "CBDC" mean?
The Bank for International Settlements defines CBDC as "a digital payment tool, denominated in national accounting units, which is a direct liability of the central bank."

My first observation is that the public is already conducting transactions mainly in digital dollars-by sending and receiving electronic balances in our commercial bank accounts. These digital dollars are not CBDCs because they are liabilities of commercial banks, not the Federal Reserve. However, it is important that the digital dollars of commercial banks are up to $250,000 under federal insurance, which means that for this amount of deposits—basically all retail deposits in the United States—they are like central bank liabilities. Just as robust.

The Fed also provides digital dollars directly to commercial banks and certain other financial institutions. Federal law allows these financial institutions to maintain accounts with the Federal Reserve and receive payment services from the Federal Reserve. The balance in the Fed’s account plays an important financial stability function by providing safe and liquid settlement assets for the U.S. economy.

All in all, the U.S. dollar is highly digitized. The Federal Reserve provides digital dollars to commercial banks, and commercial banks provide digital dollars and other financial services to consumers and businesses. This arrangement serves the country and the economy well: the Federal Reserve protects the public interest by promoting the health of the US economy and the stability of the broader financial system, while commercial banks attract and effectively serve customers through competition.

So, given the current digitization of the U.S. dollar, how does CBDC differ from the digital dollar we use today? The key difference is that when most commentators speculate on the Federal Reserve CBDC, they assume that the public can obtain it directly from the central bank. CBDCs of this nature can take different forms. One is the account-based model, in which the Federal Reserve will provide personal accounts directly to the public. Just like the accounts currently provided by the Federal Reserve to financial institutions, account holders will send and receive funds to their Federal Reserve accounts through debits or credits.

Different CBDC models may involve a CBDC that is not maintained in the Fed’s account. This form of CBDC will be closer to the digital equivalent of cash. Like cash, it represents a statement of ownership of the Federal Reserve, but it may be transferred from person to person (such as banknotes) or through an intermediary.

I am skeptical about whether the Federal Reserve has the legal power to pursue any of these two CBDC models without legislation. Nevertheless, if such legislative authorization is granted, recent discussions on CBDC make it appropriate to explore the benefits, costs, and practicality of implementing CBDC in the United States. Let us first look at the current US payment system that the Federal Reserve CBDC needs to adapt to.

The current state of the U.S. payment system
The Federal Reserve and private sector interbank payment services have provided a range of options to facilitate efficient electronic dollar payments. Some statistics related to the major U.S. dollar large payment systems are illustrative. The Fedwire Funds Service processes nearly $4 trillion in payments every day. These payments are immediately settled in the Fed’s bank account. A private sector entity (clearing house) operates a large-value payment system that settles nearly $2 trillion in payments every day. These payments are not settled in the Fed’s accounts, but the Reserve Bank is backed by balances in the Fed’s books.

Small payments are usually slower than large payments, but various efforts to speed up the settlement have been completed or are in progress. For example, the clearing house has developed an instant payment service that focuses on small payments. Similarly, the automated clearinghouse (or ACH) network-a batch-based payment network first developed long ago in the 20th century-now enables same-day settlement of ACH payments. The Federal Reserve is developing an instant payment service-FedNow℠-which will soon allow recipients of micropayments to have immediate access to the funds in their commercial bank accounts.

The payment system is not perfect-certain types of payments should be faster and more efficient. For example, cross-border payments are still a key area worthy of attention, as they usually involve high cost, low speed, and insufficient transparency. The Financial Stability Board, an international organization under my chairmanship, formulated a road map to address these issues last year. In addition, private sector stablecoins (which I will discuss in more detail later) may facilitate faster and cheaper cross-border payments.

In addition, certain types of payments are not yet fully digitized, or are affected by continued competition between companies with competing economic interests. For example, paper checks are still widely used for certain types of payments (although the inter-bank check collection process is now almost entirely electronic). Debit and credit card payments provide consumers and retailers with a convenient digital platform, but there is considerable controversy between the two. The economics of banks and retailers who will get the fees associated with card transactions.

Finally, more Americans can benefit from digital payments by increasing their use of banking services, and this can be facilitated by the wider use of low-cost basic bank accounts.

In summary, the U.S. payment system is very good. Although it is not perfect, significant improvements are already underway.

Policy considerations
However, supporters of the Federal Reserve CBDC believe that CBDC will solve many major problems. For example, they suggested that the Federal Reserve CBDC may be necessary to defend the key role of the U.S. dollar in the global economy. Others say that CBDC will overcome the long-standing economic inequality in American society. When we begin to conduct Fed analysis on these issues, I must be convinced that CBDC is a particularly good tool for solving any of these issues. I am skeptical about this, and I must be particularly convinced that the potential benefits of developing a Federal Reserve CBDC outweigh the potential risks. .

Let's take a look at some of the points raised by CBDC supporters. The first argument is that the Federal Reserve should develop a CBDC to protect the U.S. dollar from the threat posed by foreign CBDCs on the one hand, and to resist the continued spread of private digital currencies on the other.

Starting from the threat of foreign CBDCs, this argument assumes that there are at least some foreign currencies-all of which are already highly digitized in our current international banking system in the same way as the US dollar, but have not yet posed a major challenge to international currencies. The role of the US dollar-If digitization is achieved through direct central bank digital currency rather than through the current digital payment system, the US dollar will suddenly face greater challenges. According to this view, if the Fed does not provide similar products, the U.S. dollar will lose its position in the global economy.

I think that with the continuous development of the global economy and financial system, some foreign currencies (including some foreign CBDCs) will be used more in international transactions than they are currently. This is inevitable. However, the status of the U.S. dollar as a global reserve currency, or the U.S. dollar's dominant currency status in international financial transactions, seems unlikely to be threatened by foreign CBDCs. The role of the U.S. dollar in the global economy depends on multiple foundations, including the strength and size of the U.S. economy; extensive trade links between the U.S. and the rest of the world; deep financial markets, including U.S. Treasury bonds; and the stability of the U.S. dollar over time Value; the ease of converting dollars into foreign currencies; the rule of law and strong property rights in the United States; last but not least, reliable US monetary policy. These are unlikely to be threatened by foreign currencies, and certainly not because the foreign currency is CBDC.

from coinclud.com .

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