Governor Michelle Bowman said it is “difficult to imagine a world” where the benefits of a central bank digital currency (CBDC) can justify the “unintended consequences.”
However, she added that the U.S. should not stop considering the potential development of a CBDC and continue working with relevant international bodies like 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’s board of governors, made the comments during a speech at Georgetown University on April 18.
She defined CBDCs as digital liability issued by a central bank in the form of its national currency like the dollar or pound — but she added that this is where the baseline definition ends and not all CBDCs necessarily have to be built on a distributed ledger system.
She said the main benefits of a CBDC are often cited to be faster payments and higher financial inclusion. However, the FedNow system already allows instant domestic payments, while financial inclusion is at the highest level possible in the U.S.
She added that traditional cross-border payments are slow due to the risks it carries when it comes to money laundering and terrorism 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 via CBDCs. She said:
“In my view, the fundamental question is: what problem could a CBDC solve?”
Secondly, policymakers need to consider whether that problem can be solved by the various traits of a CBDC and if so, what unintended consequences will that have on the financial system.
Furthermore, policymakers must consider whether the potential consequences are something they are willing to deal with, according to Bowman.
She said one unintended consequence of a CBDC could be the destabilization of the U.S. banking system.
CBDCs should not replace
Bowman said that policymakers need to ensure that a CBDC will complement the U.S. banking system and won’t “cannibalize” it.
For example, if a CBDC were to offer similar or better interest rates than commercial bank deposits, it would have a devastating impact on the banking sector and lead to a shortfall in money available to lend — creating a ripple effect that could ultimately destabilize the entire financial system.
Bowman said the U.S. banking system is a “mature, well-functioning, effective, and efficient system” that supports the country’s economy and it should be protected from unintended shocks.
“It would be irresponsible to undermine the traditional banking system by introducing a CBDC without appropriate guardrails to mitigate these potential impacts on the banking sector and the financial system.”