Fed and Bundesbank in no hurry to implement CBDCs

Central banks are taking a cautious approach with central bank digital currencies (CBDC) as their implementation could have major consequences for financial stability.

“Most central banks are not approaching this as a race. CBDC is something that has tremendous complexity. It cannot fail. It cannot fail at any particular point in time,” said Agustín Carstens, general manager for the Bank for International Settlements (BIS) who was speaking during the organisation’s innovation summit.

Around 30 percent of central bankers indicated that retail CBDCs would be likely or possible in the short term (1-3 years) according to a report conducted by the BIS. This percentage grows to slightly below 60 percent when asked about CBDC’s retail prospects in the medium term (1-6 years).

The major issue that central bankers face when implementing a CBDC is disintermediation and the ‘softening’ of the two-tier banking system.

“CBDC would become a very close substitute for bank deposits and in times of stress, the attractiveness of CBDCs versus a bank deposit will even increase. This could mean that the danger of a bank run increases,” said Jens Weidmann, president of Deutsche Bundesbank.

“It also means that we will have stronger reliance on refinancing through the central bank. It means that the footprint of the central bank increases, our balance sheet increases in size and also the risks of our balance sheet might become larger.”

US Federal Reserve Chair Jerome Powell said the Fed needed to be at the forefront of technology while being mindful of the implications of a digital US dollar.

“We have 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.

“Because we’re the world’s principal reserve currency, we don’t need to rush this project and we don’t need to be first to market. A US dollar CBDC would have potentially large implications here and around the world.”

Another major issue that was touched upon was the legality of CBDCs. In the same BIS report, a majority of respondents were either unsure of or had no legal authority in issuing a CBDC.

Weidmann said that before the implementation of any eurozone CBDC, the “legal basis will be sound.”

Powell said the Fed would ask for the expressed consent of Congress before issuing a CBDC.

“We would not proceed with [a CBDC] without support from Congress. That would ideally come in the form of an authorising law rather than us trying to interpret the law to enable this.”

Crypto and stablecoins

Overall, panelists were dismissive of crypto currencies such as Bitcoin and also of stablecoins as useful digital currencies.

“Crypto assets are highly volatile – see Bitcoin – and therefore not really useful as a store of value. They’re not backed by anything,” said Powell.  “They’re more of an asset for speculation.”

“Stability is a precondition”, said Weidmann. “You cannot have a useful means of payment or store value, if the underlying asset is wildly fluctuating in value.

Bitcoin’s 52-week range is $5,800 to just over $61,680.

“Sometimes this discussion conveys the impression that Bitcoin is widely used to transform transactions, but that’s not the case,” Weidmann added.

On stablecoins, panelists were equally as pessimistic of their future use.

“[Stablecoin] needs to import value from a third party, another type of asset,” said Carstens. How could that be superior to the original asset that is providing value?”

Powell agreed and added, “Private stablecoins are not going to be an appropriate substitute for a sound monetary system based in central bank money.”

Though dismissive of stablecoins, Carstens did note that the technology behind it is worth incorporating into central bank initiatives.

“There are ideas there that should be rescued and that’s why I like to speak about public private partnerships. Where we bring together what central banks can put on the table and also we are able to exploit the innovations that drive the private sector”

“That’s the way we can have a modern, top notch payment systems with the most security.”