Comments by a central bank governor show it is paying close attention to technological developments but sees little use for them – right now. finews.asia takes a look.
It doesn’t make payments faster, easier, or more efficient. It doesn’t get more people to use banks. It doesn’t help fiscal policy much. It won’t change the dollar’s role as an international reserve currency. But, still, despite all that, it is enough of something to warrant keeping a close eye on.
What is it? According to US Federal Reserve governor Michelle Bowman, it is a digital currency – or virtual dollar – potentially backed or issued by the American central bank.
In a wide-ranging speech held Tuesday at Georgetown University, Bowman indicated seeing little practical use for so-called central bank digital currencies (CBDCs) despite heightened interest currently being paid to the subject worldwide.
Playing its Part
Even though they are not easy to conclusively define, they have already been adopted in a small number of jurisdictions. In the US, the Fed continues to play an important role related to discussions and technical research even though, according to her, they don’t appear to solve any problems for policymakers – at least not in their current form.
Although the average dime-a-dozen fintech start-up likes to tout its ability to increase the efficiency and speed of payments, Bowman said this is not necessarily the case.
Many other frameworks can just as easily help banks send and receive payments in real-time, particularly in the retail sector.
Facilitating Large Transactions
Others maintain they facilitate larger transactions between financial institutions while improving payment flows. Here Bowman did see certain «use cases» for wholesale interbank markets, where certain transactions were «heavily resource-intensive» to both clear and settle.
She believed that market participants were considering ways to improve the situation with distributed ledger technology and share information between counterparties, although she still had doubts:
«Similar to the questions noted for a retail level 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,» Bowman said.
Across the Border
Many central bankers have also been discussing whether CBDCs can streamline cross-border payments with new tech by simplifying distribution channels and increasing cross-jurisdictional collaboration and interoperability.
Here, Bowman again begged to differ. According to her, those kinds of opportunities are clearly limited by regulatory and legal hurdles as well as anti-money laundering considerations.
«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,» she maintained.
Dollar Remains King
She also tackled the question of the dollar’s international role as a reserve currency, given that many experts have speculated whether a Fed-backed CBDC or the lack of one, would change that.
According to her, it is not likely to «meaningfully change» the incentives many individuals and companies currently have about the dollar, as its role is not because of the currency per se.
«In my view, the dollar serves this role because of the size of the U.S. economy, its deep and liquid financial markets, the strength of U.S. institutions, and its commitment to the rule of law», Bowman indicated.
Less Cash
She did note that in certain countries digital payments are replacing the use of cash and many central banks are considering issuing CBDCs to ensure public access to a government-backed currency.
Here Bowman relented slightly, saying a CBDC could be considered as one way to expand «safe» payment options, but not reduce or replace cash.
«In probing this question, we need to also consider the privacy implications, and whether a CBDC would be a better alternative than private-sector solutions» Bowman stated.
Questioning Stablecoins
She also queried the stability of stablecoins, which are used in the crypto-asset ecosystem, with many of them claiming to maintain one-for-one convertibility with the dollar.
According to her, they are «less secure, less stable, and less regulated» than more traditional forms of currency, and she will follow steps in the US Congress on the regulation of this and other digital assets.
According to Bowman, the Fed will continue to conduct independent research and technically experiment with digital innovation.
Further Analysis
That includes further policy analysis related to CBDCs as one way to anticipate potential changes to both money and payments in the future. In any case, the Fed would not be implementing a CBDC without approval from Congress first.
«With this in mind, our consideration of other potential innovations to money and payments, including a potential U.S. CBDC, must be viewed through the lens of whether and how the payment system would be improved beyond what instant payment services will achieve», Bowman indicated.
She indicated that the most important question that needed answering was what present or future problems in the payments system were out there that «only» a CBDC could solve, or failing, that «solve most efficiently».
