Federal Reserve Governor Michelle Bowman expressed skepticism about retail CBDCs while acknowledging potential benefits of wholesale CBDCs for large transactions and international payments.
On April 18, Michelle Bowman, a governor of the United States Federal Reserve Board, offered her insights on the potential development and implementation of a central bank digital currency (CBDC) during a speech at Georgetown University. As a key figure in the Federal Reserve, Bowman plays a vital role in guiding discussions surrounding the future of CBDCs in the US.
During her speech, Bowman assessed the challenges that a CBDC might address and examined the design and policy implications associated with its introduction. Overall, her analysis conveyed limited optimism for the concept of a CBDC. Bowman questioned whether a CBDC would truly enhance the existing payment system or promote financial inclusion in the United States. She argued that a CBDC would need to surpass the performance of the newly launched FedNow system to warrant consideration.
Speech by Governor Bowman on the considerations for a central bank digital currency: https://t.co/WLK1vp7hlb
Watch live: https://t.co/nurl0Ods5G
— Federal Reserve (@federalreserve) April 18, 2023
Doubts About CBDC Improving Payment System and Financial Inclusion
Bowman highlighted that the 4.5% of the American population without bank accounts might not show interest in using a CBDC. She emphasized that these unbanked households often lack mobile phones or internet access, which would create barriers to adopting a CBDC.
Furthermore, Bowman cast doubt on the effectiveness of CBDCs as policy tools. She asserted that the programmable nature of a CBDC starkly contrasts with the flexibility and autonomy inherent in physical currency or bank deposits. This programmability could be exploited and lead to the politicization of payment systems, ultimately undermining the Federal Reserve’s independence.
Several of Bowman’s concerns stemmed from the uncertainty surrounding CBDC implementation. She pointed out that enabling cross-border payments with a CBDC would require the establishment of a new regulatory framework. Additionally, she mentioned that stablecoins might serve as a viable alternative to CBDCs. That would depend on future legislation, although user privacy might be compromised. The recently proposed US stablecoin legislation would give the Federal Reserve oversight of non-bank stablecoin issuers.
CBDC’s Impact on the US Dollar’s International Role
Reiterating the perspective of her colleague Christopher Waller, Bowman dismissed the notion that a CBDC would consolidate the US dollar’s prominence in the global economy. She stressed that factors like the magnitude of the US economy and the robustness of its institutions determine the dollar’s international role, and a CBDC would not influence these factors.
Bowman urged decision-makers to identify the specific payment system frictions that a CBDC could uniquely resolve or address most effectively. In her assessment, the case for a retail CBDC is weak due to the trade-offs between potential benefits and unintended consequences. She found it challenging to envision circumstances where a direct access CBDC for uses beyond interbank and wholesale transactions would be warranted.
Wholesale CBDC Shows Promise for Large Transactions and International Payments
While Bowman expressed reservations about the prospect of a retail CBDC, she acknowledged that a wholesale CBDC might hold promise in certain situations. She recognized its potential value for facilitating large-scale transactions and streamlining international payments processing.
In conclusion, Michelle Bowman, a governor of the US Federal Reserve Board, expressed a cautious stance on the necessity of a retail CBDC in the United States. Although she acknowledged the potential merits of a wholesale CBDC for specific applications, she remained wary of the broader ramifications of introducing a CBDC on the payment system and the independence of the Federal Reserve.