Waller At Odds With Powell Over CBDC | States Concern Over USD Stabilization Claim

3 min read

In September a hearing was held for the US House Committee on Financial Services. Five members voted for the US developing their own stablecoin or CBDC. They noted the US needs to stay competitive with China and the progress it is making regarding digital currency.

What is CBDC?

CBDC is an acronym for Central Bank Digital Currency, which is a digital version of a country’s fiat currency. CBDCs typically exist on blockchain networks but are centralized and regulated by the issuing country.

Guam House Representative Michael San Nicolas called for an “on-the-record” vote among the panel of witnesses in an effort to gauge the level of necessity for the U.S. government to establish some kind of digital currency.

All five speakers agreed that there was a “unanimous need.”

The panel’s unanimity doesn’t guarantee that a U.S.-based CBDC is in the cards.

But while the vote was simply to clarify the panel’s position on some form of state-backed digital currency—whether a stablecoin or an official CBDC—the hearing suggested that there is a chance a CBDC is on the horizon.

Jerome Powell

Just a few months ago, Federal Reserve Chair Jerome Powell said such an invention would be “a very important financial innovation” and is “something we really need to explore as a country.”

Why should the U.S. government consider its own CBDC? The committee cited international sanctions, a desire to protect the value of the U.S. Dollar, and threats to national security.

Specifically, Republican Congressman French Hill of Arkansas said that the U.S. must take measures to ensure the U.S. Dollar “remains the reserve currency of the world.”

“Spending money like drunken sailors puts the dollar far more at risk than this debate about digital currency,” Hill argued. “But I urge our bill to be marked up and passed into law so that we can have a definitive all-of-government review of how we maintain a 21st Century competitive U.S. Dollar.”

Democratic Representative Jake Auchincloss of Massachusetts said the hearing was “encouraging” because the group had meanwhile made progress on bipartisan stablecoin legislation—a sign that stablecoins might be just about the only thing both sides of the aisle can agree on as midterm elections near.

Speakers at the hearing expressed concerns around the threat of China’s growing financial presence as a rival to the U.S. economy.

Democratic Congressman Jim Himes of Connecticut asked the panelists how the U.S. might be able to counter China without bringing “economic apocalypse” upon the world.

In response, Levin said the U.S. must continue to uphold both property and privacy rights when developing a financial solution. TRM Labs’ Redbord seconded Levin’s sentiment that the U.S. needs “a digital asset that holds our values” so that potential investors have the option of buying into an American CBDC instead of a Chinese one.

And according to Professor Norrlof, China is developing its own CBDC precisely in an effort to compete with the U.S. Dollar.

“China is trying to catch up [to the United States], and they are using various methods to try to catch up,” Norrlof said, adding that for China, it’s “crucial” to create a CBDC in order to get “anywhere close” to where the U.S. Dollar is today.

Christopher J Waller

One Federal Reserve governor isn’t convinced it is worth it for the US to develop a central bank digital currency (CBDC).

Christopher J. Waller, one of the seven members of the Fed’s Board of Governors, says in a new speech at a Harvard National Security Journal symposium that he believes developing a CBDC will have little impact on securing the long-term dominance of the US dollar.

“Advocates for a CBDC tend to promote the potential for a CBDC to reduce payment frictions by lowering transaction costs, enabling faster settlement speeds, and providing a better user experience. I am highly skeptical that a CBDC on its own could sufficiently reduce the traditional payment frictions to prevent things like fraud, theft, money laundering, or the financing of terrorism.

Though CBDC systems may be able to automate a number of processes that, in part, address these challenges, they are not unique in doing so. Meaningful efforts are under way at the international level to improve cross-border payments in many ways, with the vast majority of these improvements coming not from CBDCs but improvements to existing payment systems.”

Even if non-US companies find a foreign CBDC efficient from a technological perspective, Waller notes it would not undermine the broader factors behind the US dollar’s international role as a reserve currency.

“Changing those factors would require large geopolitical shifts separate from CBDC issuance, including greater availability of attractive safe assets and liquid financial markets in other jurisdictions that are at least on par with, if not better than, those that exist in the United States.

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 US economy and political system. No other country is fully comparable with the United States on those fronts, and a CBDC would not change that.”

Because CBDCs will be easier to monitor, Waller argues that companies might actually be less likely to use a currency of a government that has developed a CBDC.

The Fed governor doesn’t think a US CBDC would offer foreign companies any “material benefits,” and he believes the introduction of a digital dollar could present money laundering and international financial stability concerns.

Waller is similarly doubtful that stablecoins could undermine the supremacy of the dollar.

“I am unsure whether even a large issuance of a stablecoin could have anything more than a marginal effect. It has often been suggested by commentators that private money-like instruments such as stablecoins threaten the effectiveness of monetary policy. I don’t believe that to be the case, and it should be noted that nearly all the major stablecoins to date are denominated in dollars, and therefore US monetary policy should affect the decision to hold stablecoins similar to the decision to hold currency.”

Read Waller’s full speech here.

Featured Image: Shutterstock/mapichai

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