Federal Reserve governor questions need for CBDCs

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A senior official at the Federal Reserve has said he is unconvinced of the case for central bank digital currencies (CBDCs), highlighting concerns about whether CBDCs can help with financial inclusivity.

Federal Reserve Governor Randal Quarles, who also heads the Financial Stability Board, made the comments at the annual Milken Institute Global Conference, which brings together executives from private and public sector roles.

In his remarks, Quarles said he was yet to be convinced on the need for dedicating “the enormous amount of resources and the technological risk and the significant disruption to the current operation of the financial system that would come from the central bank saying we are going to provide this digital currency.”

Quarles also said he rejected the claim that CBDCs could address concerns around financial inclusivity, saying instead that this had yet to be demonstrated by proponents of central bank digital currencies, despite consistent claims to this effect.

The comments will be seen as significant given Quarles’ senior position at the Federal Reserve. Until earlier this month, Quarles was the top financial regulator at the Federal Reserve, and remains chair of the Financial Stability Board, an international body set up to track trends in global financial markets and economies.

In contrast, Quarles has previously sounded his support for stablecoins and the role they could play in the wider financial system. However, his recent comments echo similar sentiments from a speech to the Utah Bankers Association Convention back in June, where he said he was “puzzled how a Federal Reserve CBDC could promote innovation in a way that a private-sector stablecoin or other new payment mechanism could not.”

“…The potential benefits of a Federal Reserve CBDC are unclear. Conversely, a Federal Reserve CBDC could pose significant and concrete risks. First, a Federal Reserve CBDC could create considerable challenges for the structure of our banking system, which currently relies on deposits to support the credit needs of households and businesses. An arrangement where the Federal Reserve replaces commercial banks as the dominant provider of money to the general public could constrict the availability of credit, fundamentally alter the economy, and expose the public to a host of unanticipated, and undesirable, consequences.”

In the same remarks, Quarles said a CBDC would “deter private-sector innovation, would be difficult and costly to manage,” and would pose security issues as “an appealing target for cyberattacks and other security threats.”

“Bad actors might try to steal CBDC, compromise the CBDC network, or target non-public information about holders of CBDC. The architecture of a Federal Reserve CBDC would need to be extremely resistant to such threats—and would need to remain resistant as bad actors employ ever-more sophisticated methods and tactics.”

“Designing appropriate defenses for CBDC could be particularly difficult because, compared to the Federal Reserve’s existing payment systems, there could be far more entry points to a CBDC network—depending on design choices, anyone in the world could potentially access the network,” the Federal Reserve governor explained.

At the Milken Conference, Quarles suggested that “there are potential financial risks to the structure of some digital assets that need to be addressed.” However, he noted these were “addressable,” and that regulators should “address them very quickly so we have a level playing field on which that type of innovation can continue to develop.”

The comments come at a time of increasing interest in central bank digital currencies worldwide, with governments, central banks, and regulators known to be exploring the technology with a view to rolling out their own schemes in the near future.

It chimes with a trend towards greater regulation and control of digital assets and digital currencies by U.S. regulators.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

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