Development of a U.S. central bank digital currency (CBDC) could pose more risks than benefits, and may not be within the legal authority of the Federal Reserve, Board Governor Randal Quarles said in a Monday speech.

"The potential benefits of a Federal Reserve CBDC are unclear," Quarles told the Utah Bankers Association’s annual convention, noting that he was speaking only for himself and not for the board. "Conversely, a Federal Reserve CBDC could pose significant and concrete risks."The U.S. dollar payment system is very good, and it is getting better," he added.

Quarles’s comments come as Federal Reserve Chair Jerome Powell has shifted his stance on CBDCs against a backdrop in which several other countries — most notably, China — have moved closer to issuing such digital currencies on a mass scale. They also land amid fears that the dollar may lose its primacy among world currencies as central banks in other countries pursue digital efforts.

Powell said in May that the Fed will issue a white paper this summer on the possibility of developing a CBDC. It will be aimed at soliciting public input and designed to “stimulate broad conversation” about the possibility. A spokeswoman for the Fed said there isn't any additional information on the timing of that white paper release.

Richmond Fed President Thomas Barkin also expressed skepticism about development of a CBDC in remarks he made Monday to the Rotary Club of Atlanta, suggesting the U.S. ought to have a clearer goal before proceeding, according to a report by Reuters. The comments from Barkin and Quarles make clear that the central bank’s leaders are far from decided on whether the Fed will proceed with development of a CBDC.

Quarles posited two forms a CBDC might take, but said the Fed would likely require a congressional sign-off to accomplish the effort. "I am skeptical that the Federal Reserve has legal authority to pursue either of these CBDC models without legislation," he said in the speech.

Arguments for CBDC

Proponents argue that central bank digital currencies may increase financial inclusion. People who don’t have bank accounts because they don’t trust the banking system or find accounts cost-prohibitive could use the Fed system to transfer money back and forth, they say.

Quarles, who is also the Federal Reserve’s vice chair for supervision, countered that the proportion of households in the U.S. that are unbanked dropped from 8.2% to 5.4% between 2011 and 2019. He also said banks and regulators are working to further lower that number through efforts such as the promotion of accounts through the Cities for Financial Empowerment Fund.

"I believe we can promote financial inclusion more efficiently by taking steps to make cheap, basic commercial bank accounts more available to people for whom the current cost is burdensome," he said.

Creating the infrastructure to support a Fed-backed digital currency also would be expensive, and may duplicate the systems already in use by commercial banks, Quarles said.

"An arrangement where the Federal Reserve replaces commercial banks as the dominant provider of money to the general public could constrict the availability of credit, fundamentally alter the economy and expose the public to a host of unanticipated, and undesirable, consequences," he said, including making the Fed a target for money laundering.

Cryptos are like parachute pants

Generally, he indicated that he thought the current preoccupation with digital currencies may be a passing fad. Americans’ "enthusiasm for novelty" has sometimes led "to a mass suspension of our critical thinking and to occasionally impetuous, deluded crazes or fads," Quarles said. "Sometimes the consequences are, in hindsight, merely puzzling or embarrassing, like that year in the 1980s when millions of Americans suddenly started wearing parachute pants. But the consequences can also be more serious."

Quarles blasted the notion that the development of a CBDC might spur commercial innovation, countering that the Fed’s effort, if it progresses, may in fact stifle creativity.

"It seems to me that there has been considerable private-sector innovation in the payments industry without a CBDC, and it is conceivable that a Fed CBDC, or even plans for one, might deter private-sector innovation by effectively 'occupying the field,'" Quarles said. "A dominant CBDC could undermine the consumer and other economic benefits that accrue when commercial banks compete to attract customers."

Powell track record on CBDCs

Powell long held a "wait-and-see" approach on CBDCs. He told a panel at the International Monetary Fund in October he’d rather "get it right" than "be first" in researching and developing a Fed-backed digital coin. In March, he told a virtual panel held by the Bank for International Settlements (BIS) the U.S. has "an obligation to be on the cutting edge of understanding the technological challenges, as well as the potential costs and benefits, of issuing a CBDC" but "because we’re the world’s principal reserve currency, we don't need to rush this project."

But Powell shifted last month, teasing the upcoming Fed paper on CBDC development. At the same time, another Fed governor, Lael Brainard, is leading the effort to develop CBDC prototypes, alongside Massachusetts Institute of Technology (MIT) researchers, indicated he could unveil some of their work as early as next month.

Despite that momentum, Quarles said, it shouldn’t be a foregone conclusion that the Fed would issue a CBDC — noting he has a "high bar" for any proposal to issue a CBDC.

"Our work is cut out for us as we proceed to rigorously evaluate the case [for development]," Quarles said. "Even if other central banks issue successful CBDCs, we cannot assume that the Federal Reserve should."

Two organizations tied to central banks issued reports assailing the proliferation of digital tokens. The Basel Committee on Banking Supervision, which includes the Federal Reserve and the European Central Bank, this month recommended the highest possible risk weighting — 1,250% — be applied to banks’ exposure to Bitcoin and other cryptocurrencies. 

The BIS then issued a report last week asserting that "innovations such as cryptocurrencies, stablecoins and the walled garden ecosystems of big techs all tend to work against the public good element that underpins the payment system."

Stablecoins raise no threat

Quarles said Monday that there is no "need to fear stablecoins."

"A global U.S. dollar stablecoin network could encourage use of the dollar by making cross-border payments faster and cheaper, and it potentially could be deployed much faster and with fewer downsides than a CBDC," he said. "And the concern that stablecoins represent the unprecedented creation of private money and thus challenge our monetary sovereignty is puzzling, given that our existing system involves — indeed depends on — private firms creating money every day."

He was less kind to cryptocurrencies.

"Gold will always glitter, but novelty, by definition, fades," Quarles said. "Bitcoin and its ilk will, accordingly, almost certainly remain a risky and speculative investment rather than a revolutionary means of payment, and they are therefore highly unlikely to affect the role of the U.S. dollar or require a response with a CBDC."

As for the dollar’s primacy, he said, it "rests on a number of foundations," including the U.S. economy’s strength, its trade ties and monetary policy writ large.

"None of these are likely to be threatened by a foreign currency, and certainly not because that foreign currency is a CBDC," Quarles said.