Federal Reserve Chairman: Central Bank Digital Currency Can Improve U.S. Payment System, But Much Work Remains

Federal Reserve Chairman Jerome Powell has acknowledged that a central bank digital currency (CBDC) could improve the broader payment system in the United States. The Federal Reserve is actively collaborating with the public and private sectors on research. However, there are still issues to be resolved before a decision on issuance is made.

The Many Benefits of CBDC

As reported yesterday, Federal Reserve Chairman Jerome Powell participated in a cross-border payments and digital currencies conference hosted by the International Monetary Fund (IMF) last night. During his speech, he stated:

"CBDC can improve the current payment systems in various ways, and this area has piqued our interest."

Jerome Powell pointed out that CBDC can help facilitate faster and cheaper transactions, modernize payment infrastructure, and provide services to the unbanked population outside traditional financial institutions. Furthermore, Jerome Powell further noted that the Federal Reserve has been collaborating with other central banks and the Bank for International Settlements in researching CBDC, with significant progress. In addition to collaboration with the public sector, Jerome Powell emphasized the importance of working with the private sector:

"The private sector can contribute through technological innovation, while the public sector can inject a broad public interest perspective into this."

The collaboration between the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT) is a good example, as seen here.

Quality Over Speed

However, despite the many benefits CBDC can bring, Jerome Powell emphasized that CBDC faces three major challenges and risks, including "preventing cyber attacks and fraud," "impacts on monetary policy and financial stability," and "balancing user privacy, security, and preventing illegal activities on the CBDC network." Jerome Powell, as usual, stated that the Federal Reserve has not yet made a decision to issue digital currency.

"There is much work to be done before making this decision, and broad public consultation with all stakeholders is necessary."

Jerome Powell mentioned that around 80% of central banks globally are exploring CBDCs, and while the Federal Reserve is interested, it is not in a rush to issue one. For the United States, achieving the best outcome is more important than being the first. Lastly, Jerome Powell stated:

"Any potential CBDC use cases will complement cash rather than replace it, as there is still strong demand for cash in the U.S."

The New Bretton Woods System

In yesterday's report, International Monetary Fund (IMF) Managing Director Kristalina Georgieva mentioned in her speech that the COVID-19 pandemic has dealt a severe blow to the global economy that is difficult to recover from quickly. She stated that the world is experiencing a "new Bretton Woods agreement." This statement has led many to speculate that the IMF may be looking to reshape the global economic order dominated by the U.S. dollar since World War II through technological innovation with CBDCs. Raoul Pal, CEO of Real Vision, explained this viewpoint in a series of tweets:

"If you don't think Central Bank Digital Currencies (CBDCs) are coming, you may be missing the current macro picture. Since the Bretton Woods system, this will be the biggest reform of the global financial system."