The adoption of the central bank digital currency poses many risks and challenges, including the risk that it would cannibalize rather than complement services provided by the U.S. banking system, Federal Reserve Governor Michelle Bowman said today. In a speech on CBDC policy considerations, Bowman didn’t rule out adoption of the technology, saying there is perhaps promise for wholesale CBDCs for settlement of certain financial market transactions and processing international payments. Still, given concerns about consumer privacy and the potential effects on the banking system, “it is difficult to imagine a world where the tradeoffs between benefits and unintended consequences could justify a direct-access CBDC for uses beyond interbank and wholesale transactions,” she said.
In terms of privacy, any CBDC adoption must ensure data privacy protections embedded in today’s payment systems continue and are extended into future systems, Bowman said. “We must also consider the central role that money plays in our daily lives, and the risk that a CBDC would provide not only a window into, but potentially an impediment to, the freedom Americans enjoy in choosing how money and resources are used and invested.”
Bowman said that CBDC adoption could have “unintended effects” on the nation’s banking system. “Consider the consequences of a CBDC that pays interest at comparable or better rates than commercial bank deposits and other low-risk assets,” she said. “It seems likely that such a CBDC would reduce the funds available to lend and increase the cost of capital across the economy. Likewise, we need to consider the effect on bank stability and the potential of even more rapid bank runs, in a world where there are fewer constraints on the volume and velocity of payments.”
It would be irresponsible for policymakers “to undermine the traditional banking system by introducing a CBDC without appropriate guardrails to mitigate these potential impacts on the banking sector and the financial system,” Bowman added.