Federal Reserve Gov. Christopher Waller has his doubts about the central bank’s need to create a digital currency (CBDC).
While advocates “assert how it is important [a CBDC is] to the long-term status of the dollar … the underlying reasons for why the dollar is the dominant currency have little to do with technology,” Waller said Friday at a Harvard University symposium.
The Fed has toyed for some time with the idea of creating a digital currency, and the central bank’s board published a discussion paper on CBDC’s benefits and risks in January.
But Waller said he doesn’t believe the introduction of a CBDC would affect the U.S. dollar’s position in the global economy. Instead, it could instead introduce costs and risks “including cyber risk and the threat of disintermediating commercial banks, both of which could harm, rather than help, the U.S. dollar's standing internationally.”
Some 60% of disclosed official foreign reserves are held in dollars and, apart from trade within Europe, dollar invoicing is used in more than 75% of global trade and 96% of trade in the Americas, according to the International Monetary Fund.
Waller said he is reluctant to introduce such risks as the dollar’s strong standing benefits both U.S. citizens and folks abroad.
The dollar's international role “lowers transaction and borrowing costs for U.S. households, businesses and government, … widens the pool of creditors and investors for U.S. investments, … [and] may insulate the U.S. economy from shocks from abroad,” Waller said, citing the discussion paper. “It also allows the United States to influence standards for the global monetary system.”
For global trade, the dollar “serves as a reliable common denominator” and a “dependable settlement instrument for cross-border payments,” thus “smooth[ing] the world of global payments, including for households and businesses outside of America.”
During a public comment period on January’s CBDC discussion paper, big banks pushed back on the idea of a CBDC, arguing it wouldn’t provide enough benefits to justify risks and that it could injure the financial system. Bank of America said in January that the creation of a CBDC would preserve the U.S. dollar’s international prowess but has more recently walked back that stance.
In addressing the likelihood that a foreign CBDC could overtake the U.S. dollar if the Fed doesn’t create one, Waller said, “The factors supporting the primacy of the dollar are not technological, but include the ample supply and liquid market for U.S. Treasury securities and other debt and the long-standing stability of the U.S. economy and political system.”
“No other country is fully comparable with the United States on those fronts, and a CBDC would not change that,” he said.
In the digitized world, ongoing conversations on CBDCs are “important,” Waller said Friday. Focus, however, should be shifted to CBDC-salient topics including financial stability, payment system improvements and financial inclusion, he said.
