: Digital dollar would put Fed in direct competition with banks, Fed’s Waller says

Federal Reserve Governor Chris Waller, a professed skeptic when it comes to the Fed launching a central bank digital currency, thinks the public is confused about the issue.

During a moderated discussion hosted by OMFIF, a forum for central bank policy, Waller said on Thursday that, at its core, a decision to by the Fed to issue a central bank digital dollar would put the central bank in direct competition with banks and their payment systems. This is akin to the federal government deciding to compete with Tesla to make cheaper electric cars, he said.

For a century, the Fed had generally stepped back and let private banks conduct retail payments for households and firms. The Fed’s main job has been in the back room, making sure that payments flow smoothly, Waller explained.

“With a central bank digital currency, you’re asking a very direct question. Should the central bank be more involved in processing payments for households and firms in a way that allows them to circumvent the banking system. That is what a CBDC account is doing,” Waller said.

“So, should you compete with the banking system or not,” he asked.

Waller said he thought the question was so fundamental that the Congress should make the decision, not the seven-member Fed board of governors.

At the moment, the general view of the U.S. economy is that the government does not compete with the private sector, he noted.

“As noble as it is wanting everybody to have an electric car – electric cars are expensive. I don’t hear anyone saying the government should be building electric car plants and competing directly with Tesla or any other electric vehicle,” he added.

The Fed has indicated it will soon release an eagerly-awaited discussion draft dealing with the issue of central bank digital currencies.

Waller said the public is confused and thinks a central bank digital currency is something like bitcoin

that can be traded anonymously.

Proponents of a digital currency say the U.S. risks falling behind China, which has already unveiled a digital yuan. This may erode the U.S. dollar’s role as the global reserve currency, they warn.

Waller pushed back on this argument, saying that a digital yuan simply means that Chinese citizens can pay their electricity and other bills through the central bank of the country – known as the People’s Bank of China – instead of a private bank.

There are limits on the amounts in these private accounts at the Chinese central bank that diminish their practicality for companies, Waller said.

“Why that would be a threat to the dollar as a reserve currency of the world, I have no idea,” Waller said.

“The dollar is the reserve currency because we have well-functioning laws, credible monetary policy, non-political interference in monetary policy and a good, stable financial system,” he said.

The ICE U.S. Dollar Index
a measure of the currency against a basket of six major rivals, was slightly higher on Thursday.

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