Amidst the reports of the damage the bill in the United States Congress is going to vote up, there is a beacon of hope in another area.
Central Bank Digital Currencies (CBDCs) seem to be the rage now. Many are reporting that most Central Banks are looking into them. China obviously is already rolling one out. Venezuela is also going bring one out in October.
But what about the United States? We know Chairman Powell said they would be looking into it. Is this something they are seriously considering or is Powell playing the political game and putting forth some rhetoric?
The US Dollar is the world's reserve currency, hence it occupies a different position than the other fiat currencies, even the big four (EURO, JP, GBP, Yuan).
Many feel this is a foregone conclusion, but is it?
To me, CBDCs do not favor the Central Banks, especially one that is advanced as the Federal Reserve. While it is lacking in some areas from a technological standpoint, the payment system it has is rather advanced. Also, they have the ability to upgrade as more technology becomes available. In fact, there are already projects to speed up both domestic and international transactions.
CBDCs mostly benefit politicians and bureaucrats. They are meant to provide information about every transaction. Yet we see a variety of arguments put forth as to why the United States needs to do this.
Fed Governor Christopher Waller delivered a speech that provided a lot of insight into what some are thinking. To forewarn everyone, this is simply his opinion and he does not speak in any official capacity for the Fed. The one to listen to is Powell since he is shares the official position of the bank.
Nevertheless, this does show up what some of the thinking is among some of the members.
Waller looks at things from the standpoint of what does the Fed need to do for the market? What is in need of fixing?
What problem would a CBDC solve? Alternatively, what market failure or inefficiency demands this specific intervention? After careful consideration, I am not convinced as of yet that a CBDC would solve any existing problem that is not being addressed more promptly and efficiently by other initiatives.
His view is that the market is already providing an efficient system, especially when it comes to payments. The Fed and commercial banking system have safeguards in place to protect depositors against systemic failure. Obviously this is not true in every country but Waller feels it is within the United States.
He also disputed many of the arguments put forth as to why the Federal Reserve needs to adopt a CBDC. The biggest one is the idea that China is going to replace the USD as the reserve currency by jumping ahead with the digital YUAN.
Waller does not agree with this sentiment. Correctly, he knows that China will be very successful getting adoption within that country. The government can push it on the citizens. However, his question is how will it do outside of the country? Do foreign companies want the Chinese government seeing every transaction that takes place.
He doesn't think so.
Of late, the esteemed former law-professor-turned-Senator, Elizabeth Warren, has attacked stablecoins as being a threat to the stability of the financial system. Waller disagrees with this sentiment. In fact, he has a completely different view on it.
Private currencies are not a threat to the monetary policy of the Fed. This is where the Governor veers. It is not competition for the Fed. Instead, it is actually enhancing the ability of the Fed to impact things across the globe.
Finally, could it be that new forms of private money, such as stablecoins, represent a threat to the Federal Reserve for conducting monetary policy? Many commentators have suggested that new private monies will diminish the impact of the Federal Reserve's policy actions, since they will act as competing monetary systems. It is well established in international economics that any country that pegs its exchange rate to the U.S. dollar surrenders its domestic monetary policy to the United States and imports U.S. monetary policy. This same logic applies to any entity that pegs its exchange rate to the U.S. dollar. Consequently, commercial banks and stablecoins pegged to the U.S. dollar act as conduits for U.S. monetary policy and amplify policy actions. So, if anything, private stablecoins pegged to the dollar broaden the reach of U.S. monetary policy rather than diminish it.
A bit different viewpoint than the Senator from Massachusetts is espousing. Remember, Waller is looking for advantages of CBDCs for the Fed, not the power that comes with them. Truthfully, the Fed is not concerned with the control over individuals or companies. It operates on a larger scale, looking at the economy in totality.
What is important is that he sees how the reach of the Fed's monetary policy is actually enhanced by stablecoins pegged to the USD. In this, it appears he is correct. By default, a peg is going to enhance that policy. This means stablecoins pegged to the USD are of benefit to the Fed.
Here we see where the Senator might have gone off the rails.
What we can take away from all of this is that the implementation of a CBDC for the USD is going to take a while if it ever happens. Powell said they will discuss it and we can already see the counterargument to what is already out there.
There is also another factor in all this. The Federal Reserve is not allowed, by law, to open accounts for individuals. That is what the commercial banking system is for. Thus, it is literally going to take an act of Congress before this can happen. We know if the Fed is not on board, they will testify against it.
If there are others who view things the same way as Waller, the development that the private sector does is in alignment with what they seek. As long as technological progress is being made and the system is getting more efficient, the Fed is not going to stop that. Unlike Congress, they do not seek more power since their control of monetary policy is complete.
Politicians of course have a different view on things. They are power hungry and it is something that cannot be satisfied. Hence, they look at CBDCs as a way for them to amass more control.
Ultimately, the Fed might conclude that CBDCs truly are a solution in search of a problem.
To read the transcript of the speech, click here.
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