In a recent speech for an event hosted by Georgetown University, Federal Reserve Governor Michelle Bowman expressed her concerns about the possible risks of a retail-focused central bank digital currency (CBDC). She stated that it is difficult to imagine a world where the tradeoffs between benefits and unintended consequences could justify a direct access CBDC for uses beyond interbank and wholesale transactions.
Bowman cited several possible risks of a retail-focused CBDC, including possible impacts on consumer privacy and disruptions to traditional banking if it ends up draining deposits from that sector. These are concerns that have been mirrored by some lawmakers and bank lobbyists. She emphasized that the Fed would need to address those issues if it decides to move forward with such a CBDC, and it wouldn’t push forward without Congress’ approval.
However, Bowman did acknowledge that there could be some promise for a “wholesale” CBDC to settle certain financial market transactions, such as interbank transfers, and to process international payments. These are transactions that are currently slow and resource-intensive. She stated that there are potential use cases in the context of certain interbank transactions in wholesale markets, where some transactions are slow and heavily resource-intensive to clear and settle.
Participants in the wholesale financial markets have been considering innovative ways to address these frictions with newer technologies such as distributed ledger technology in which shared information across counterparties could be leveraged to increase speed and reduce back-office costs to reconcile transactions before they settle. Bowman believes that a wholesale CBDC could be a solution to these challenges.
It is important to note that the Federal Reserve’s FedNow, which will be operational later this year, will allow US banks to offer their customers real-time payments services, addressing the desire for faster payments that has been cited as one of the benefits of a CBDC.
Overall, Bowman’s speech suggests that the Federal Reserve is taking a cautious approach to the development of a CBDC. While acknowledging the potential benefits of a wholesale CBDC, she is also mindful of the risks and challenges associated with a retail-focused CBDC. The Fed will need to carefully consider these issues and seek input from Congress and other stakeholders before making any decisions about the future of digital currency in the United States.