SUN VALLEY, Idaho–The vice chair of the Federal Reserve has compared plans for any central bank digital currency (CBDC) to “parachute pants.”
Randal Quarles, the Fed board vice chair for supervision, told a Utah Bankers Association in Sun Valley, Idaho, he is skeptical of any plans for the Federal Reserve to back a CBDC, providing three reasons for his skepticism:
- The U.S. dollar payment system is very good and getting better
- The potential benefits of a Federal Reserve CBDC remain unclear
- The development of a CBDC could pose considerable risks
Despite his cautious view, Quarles told the group the Federal Reserve is working to “rigorously evaluate the case” for development of a Fed CDBC, while also noting “we have our work cut out for us.”
“Even if other central banks issue successful CBDCs, we cannot assume that the Federal Reserve should issue a CBDC,” Quarles said. “The process that Chair (Jerome) Powell recently announced is a genuinely open process without a foregone conclusion, although obviously I think the bar to establishing a U.S. CBDC is a high one.”
As CUToday.info reported earlier, Powell announced in May that the Fed was working on a “discussion paper” about a CBDC that is set to be released this summer.
According to Quarles, the paper will seek input from the public.
Long Enthusiasm, But…
When it comes to CBDCs, Quarles said the U.S. has a long enthusiasm for novelty. And while that enthusiasm has served the country well, he believes there are limits.
“Especially when coupled with an equally American susceptibility to boosterism and the fear of missing out, (novelty) has also sometimes led to a mass suspension of our critical thinking and to occasionally impetuous, deluded crazes or fads,” he said.
Quarles compared the current interest in CBDCs to the fashion craze during part of the 1980s “when millions of Americans suddenly started wearing parachute pants. Fashions can be changed; the consequences of a CBDC are far more serious,” he stressed.
‘Before We Get Carried Away…’
Quarles noted public interest in what he called the “digital dollar” has reached new peaks, but he added, “Before we get carried away with the novelty, I think we need to subject the promises of a CBDC to a careful critical analysis.”
Part of that analysis, according to Quarles, needs to examine whether the Fed even has the legal authority without legislation to issue CBDCs in either an account-based model (in which the Federal Reserve would provide individual accounts directly to the general public), or a non-account-based model (which would represent a digital claim against the Fed, but could be potentially transferred from person to person like a banknote or through intermediaries).
Quarles doubts the Fed has the authority.
The Cost Issue
Beyond the risks, there is also the issue of costs. To establish a Fed CBDC, Quarles said it would require setting up the central bank as a retail bank to the general public.
“That would mean introducing large-scale, resource-intensive central bank infrastructure,” he said. “We will need to consider whether the potential use cases for a CBDC justify such costs and expansion of the Federal Reserve’s responsibilities into unfamiliar activities, together with the risk of politicization of the Fed’s mandate that would come with such an expansion.”