US Fed Governor Bowman: CBDC Benefits Remain Unclear, Could Pose Significant Risks

October 17, 2023

On October 17, 2023, Federal Reserve Governor Michelle Bowman recently gave an in-depth speech on responsible innovation in money and payments at a roundtable organized by the Harvard Law School Program on International Financial Systems. Focusing primarily on digital assets such as Central Bank Digital Currencies (CBDCs), Bowman spelled out her vision for the future of financial technology, underlining the importance of a clear regulatory framework and careful examination of the benefits and drawbacks of novel financial innovations, while also noting that CBDC benefits remain unclear, and “could pose significant risks and tradeoffs for the financial system.”

CBDCs, digital forms of a nation’s currency issued and regulated by the central bank, have gained significant attention in recent years. Bowman defined a retail CBDC as a new, digital form of central bank money widely accessible to the general public, different from a “wholesale CBDC”, which is used for settling large-value transactions between banks. Discussing the prospect of a retail CBDC in the U.S., Bowman underscored the importance of addressing two key questions: what problem is being solved and if there are more efficient ways to solve it, and what features, considerations, including unintended consequences, should be taken into account.

Bowman acknowledged the varying arguments in favor of issuing a U.S. CBDC, such as enhancing the payment system, promoting financial inclusion, and providing the public with safe central bank money access. Despite this, she stated that she hasn’t yet seen a persuasive argument indicating that a U.S. CBDC could solve any of these issues more effectively or efficiently than alternatives. Moreover, Bowman voiced concerns over the potential risks and tradeoffs, especially those pertaining to disrupting the mature, well-functioning U.S. banking system.

With regard to stablecoins, Bowman noted this increasingly popular digital currency type, primarily developed for trading crypto assets, is being seen as a promising alternative to conventional payments. However, she emphasized that they’ve demonstrated to be less safe, stable, and regulated than traditional monetary forms, posing potential risks to consumers and the banking system. Therefore, the full understanding of risks and tradeoffs associated with such digital assets is pivotal.

When it comes to innovation and regulation, Bowman underlined the vision for responsible innovation within an unambiguous and logical regulatory framework. She focused on recognizing existing successes within the U.S. banking system and encouraging private sector innovations within established parameters. Stressing the principle that activities presenting the same risks should be subject to the same regulations, she calls for equal conditions for banks to compete, without compromising consumer protection.

In discussing potential advances in wholesale payments, Bowman indicated that policymakers should be cautious of the specific features that innovative wholesale platforms might comprise. Recent interest has been pointed towards platforms enabling “tokenized” forms of money, patents, and facilitation of payments through “smart contracts”. These infrastructures could ameliorate the efficiency of payment, clearing, and settlement of certain financial transactions, including cross-border transactions.

Bowman emphasized on a key question often overlooked in these conversations: where do the potential benefits derive from – new technology or changes to existing policy? While technology solutions may presuppose policy change, Bowman argued that alternatively, instead of relying on decentralized infrastructures to circumvent problems like speed and cost of payments, payments limitations can sometimes be best addressed by policy alterations rather than mere technology upgrades.

Bowman closed her address by asserting the importance of continuous research by the Federal Reserve to explore multiple options for improving payment landscapes, which include understanding technological innovations with their associated benefits, risks, and tradeoffs. Given the global nature of the financial system, international cooperation in research and careful tracking of other jurisdictions’ evolution of CBDC developments is seen as a necessity.

In conclusion, Bowman’s vision for responsible innovation aligns with the understanding of a myriad of options accessible for the enhancement of payments, including technology, the improvement of the existing payment infrastructure, and potential policy options and their implications.

The full text of US Federal Reserve Governor Bowman’s remarks can be found here.

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