Fed Vice Chairman: The Fed's creation of a central bank digital currency could pose significant risks

The Federal Reserve will release a much-anticipated report on the possible creation of a central bank digital currency (CBDC) this summer, but Fed Vice Chairman for Supervision Quarles said on Monday that he has serious doubts about the idea. "The potential benefits of a central bank digital currency from the Federal Reserve are unclear, and to the contrary, it could pose significant and specific risks," Quarles said.

Among the downsides he cited were challenges if the public could bypass traditional banks and get digital dollars directly from the Fed. Likewise, if the Fed gets more involved in the space, the benefits consumers get from interbank competition could be reduced. He also worried that a system that was difficult to design for security could be vulnerable to cyberattacks.

Supporters of central bank digital currencies say they could speed up payment systems, especially internationally. They also cite benefits for the unbanked or underbanked who are unable to use existing payment systems.

Essentially, the Fed digital currency would work the same way as the digital dollars that are exchanged every day, except that instead of being guaranteed by a bank, they would be backed by the Federal Reserve. Those without bank accounts could use the Federal Reserve system to move money back and forth. Supporters say it would be easier to get stimulus checks to people in a crisis like the coronavirus pandemic through a central bank digital currency system.

But Quarles noted that such a system could be difficult and expensive to design, would likely require an act of Congress, and would be redundant with the system that already exists. "First, the U.S. dollar payments system is very good, and it's getting better. Second, the potential benefits of a Fed digital currency are unclear. And third, I think developing a digital currency could carry considerable risks."

Quarles' comments come as the Federal Reserve is set to release a study this summer to further explore the issue of a U.S. digital currency. When announcing the study in May, Fed Chairman Jerome Powell said: "The focus is on ensuring a safe and efficient payment system that provides broad benefits to American families and businesses, while also embracing innovation."

Quarles believes that any real threat to the dollar "seems unlikely" to emerge given its relatively stable value, its continued importance in global financial markets, and the depth and systemic importance of U.S. Treasuries and the dollar.

He also sees little threat from cryptocurrencies such as Bitcoin. Quarles said: "Bitcoin and its ilk will almost certainly remain a risky speculative investment rather than a revolutionary payment method, and it is extremely unlikely that they will affect the role of the dollar or require the launch of a digital currency in response."

Quarles said he believed the process involved in the Fed's research was "really open" and "not conclusive," and in his view, the threshold for establishing a U.S. digital currency is high.