Very little sparks terror in the cryptocurrency community like the words Central Bank Digital Currency (CBDC). This quickly gets people thinking about "1984" and, with social credit scores starting to arise, who can blame them?
Many seem convinced that CBDCs are a given. To me, I view them at potentially being some of the biggest failures ever seen in the world of finance and money.
Leaving that aside, many countries are traveling down the path. The Fed is not one that is pursuing this end. In fact, it really is the only one that matters.
We were once again reminded by Chairman Powell of what the bank's stance is on this.
In this article we will delve into it and why it isn't going to happen.
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There are many reasons they the Fed will not issue a CBDC.
Governor Waller is one to follow on this. He started talking about this a few years ago and basically asked the question "what is the point". His assertion is a CBDC does not solve any problem.
He is correct.
There is, however, a great deal more to this.
To start, the Fed doesn't even have the authority to do this. It is legally barred. Even Powell admitted that in questioning.
Here is what was said:
Senator Cynthia Lummis claimed there were concerns “about the Fed creating a CBDC without legislative authorization.”
“Do you still agree that the Federal Reserve cannot introduce a U.S. Central Bank Digital Currency) without congressional authorization?” Lummis asked Powell.
“Yes, I do,” Powell responded.
Of course, a new Fed chair might take another stance but the reality is the Fed cannot simply alter the Federal Reserve Act. It is authorized to issue banknotes as legal tender. That is the only Fed liability that qualifies. To create a CBDC, the law would require altering which means Congress is involved.
It is worthy of mentioning that it appears the major ones to benefit from a CBDC would be politicians and bureaucrats. Remember, these are the same people messing up fiscal policy and now they want control over the money.
The U.S dollar is different from all other [currency](@leoglossary/leoglossary-currency.
One important facet of this discussion is the fact that, according to the most recent H.6 by the Fed, there are $2.3 trillion in banknotes circulating.
This is a drop in the bucket compared to the global financial system. That said, there is an important component to this.
It is estimated that over 70% of the banknotes reside outside the United States. This is the currency for millions of people who live in nations where the native currency is unstable. In other words, the physical USD is protection against their own governments.
We have a role for the currency that is overlooked yet is extremely important. It is also enhances the reach of the Fed, at least in theory, giving them greater power (although I believe it is mostly propaganda).
Another major component in this is who owns the Fed?
The reason this is crucial is what Powell said:
“The last thing we would want — we, the Federal Reserve, would want — would be to have individual accounts for all Americans, or any Americans for that matter,” he said.
“Only banks have accounts at the Fed, and that’s the way we’re going to keep it,” Powell asserted. “People don’t need to worry about a central bank digital currency, nothing like that is remotely close to happening anytime soon.”
Here is where we have to inject the part about reserves being "printed" by the Fed having no impact. People talk about money printing when it is impossible for what the Fed creates to get into [the general economy.
As Powell stated, only banks (and the U.S Treasury) have accounts with the Fed. Individuals and business have accounts with the commercial banks. This is the two-tiered system we see in operation, mostly as it pertains to settlement.
It also points to the ability to legally create a CBDC since it would require the Fed having personal (and business) accounts.
More importantly, a CBDC is a threat to the commercial banking system. Here is where the ownership of the Fed enters.
The FOMC is an independent body, similar to a homeowner's organization. What is not independent is the Federal Reserve's balance sheet.
This is not owned by the FOMC. Rather, it is a totaling of the balance sheets from the 12 Fed banks. Hence, when we talk "Fed's balance sheet" that is really what it is.
It would stand to reason the next question is "who owned the 12 regional banks?".
Here is where we get the reason why no CBDC. Each regional bank is owned by the commercial banks that operate within that region. Those are the stockholders. Hence, the Fed is "owned" by the banks themselves.
Thus, it might be worthwhile to consider whether the commercial banks would allow an entity that they own to create something that will negatively affect their business?
We can guess at the answer with a great deal of certainty.
When people talk about CBDCs, they are mostly referring to the retail variety.
There could be a valid reason for creating a wholesale version however. The problem with this is the Fed already has one.
Think about it this way:
People would call this a stablecoin. The difference is, in this instance, we just described the reserves the Fed prints.
A reserve is a bank instrument, or a digital token, that is on the balance sheet of a commercial bank and can be redeemed for $1. The catch it that is can only be swapped for a banknote. The digital dollar we are accustomed to using are liabilities on the commercial bank balance sheets.
Therefore, why would the Fed create a CBDC when it already has a token that serves that purpose? Obviously, when most are referring to this, they mean the retail version.
Here is where the banks have no interest. Leaving that aside, it would take an act of Congress, literally, something that is already receiving pushback.
Naturally, the political winds can always change. For now, the Fed is on the sideline. That means the industry has time to keep building and providing another alternative.
This means getting the infrastructure in place and start building the financial services that is needed.
