Governor Michelle Bowman said it is “hard to imagine a world” where the benefits of a central bank digital currency (CBDC) can justify the “unintended consequences.”
However, he added that the US should not stop considering the potential development of a CBDC and continue to work with relevant international bodies such as the Bank for International Settlements, the Financial Stability Board and the G7 to determine the best course of action.
Bowman, who is a member of the Federal Reserve Board of Governors, made the comments during a speech at Georgetown University on April 18.
She defined CBDCs as digital obligations issued by a central bank in the form of its national currency, such as the dollar or the pound, but added that this is where the baseline definition ends and that not all CBDCs necessarily have to be built on a distributed ledger system.
She said that the main benefits of a CBDC are often cited as faster payments and greater financial inclusion. However, the FedNow system already allows for instant home payments, while financial inclusion is at the highest possible level in the US.
He added that traditional cross-border payments are slow due to the risks involved when it comes to money laundering and terrorist financing and CBDCs would be subject to the same regulation.
Bowman said that policymakers need to consider two main “threshold questions” when considering the implementation of a CBDC: the first of which is what problem are they trying to solve through CBDCs. She said:
“From my point of view, the fundamental question is: what problem could a CBDC solve?”
Second, policymakers need to consider whether that problem can be solved by the various features of a CBDC, and if so, what unintended consequences that will have on the financial system.
Also, policymakers need to consider whether the potential consequences are something they are willing to deal with, according to Bowman.
He said that an unintended consequence of a CBDC could be the destabilization of the US banking system.
CBDCs should not replace
Bowman said that policymakers need to ensure that a CBDC complements the US banking system and does not “cannibalize” it.
For example, if a CBDC offered interest rates similar to or better than commercial bank deposits, it would have a devastating impact on the banking sector and lead to a shortfall of money available for lending, creating a ripple effect that ultimately it could destabilize the entire sector. Finance system.
Bowman said the US banking system is a “mature, well-functioning, effective and efficient system” that supports the US economy and must be protected from unwanted shocks.
“It would be irresponsible to undermine the traditional banking system by introducing a CBDC without adequate protection measures to mitigate these potential impacts on the banking sector and the financial system.”
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