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Fed's Bowman expresses skepticism over CBDCs, highlights risks of stablecoins

EditorAmbhini Aishwarya
Published 2023/10/18, 07:24
© Reuters.

Federal Reserve Governor Michelle Bowman has voiced her skepticism over the implementation of a central bank digital currency (CBDC) in the U.S., citing potential risks to the country's economic structure. Speaking at a Harvard Law School event on Tuesday, Bowman argued there were no compelling reasons to suggest a CBDC could better address financial frictions than existing solutions such as FedNow. Launched by the Federal Reserve, FedNow facilitates instant transactions and expedites daily payments, providing users with same-day fund access and notably aiding small businesses in managing cash flows without delays.

Bowman also highlighted the risks posed by stablecoins to investors and the broader banking system due to their deficits in security, stability, and regulation compared to traditional money forms. Her views echo those of Federal Reserve board member Christopher Waller who, at a separate Brookings Institution event, labeled CBDCs as "nothing revolutionary" compared to the existing banking system. He emphasized that the perceived benefits of a digital dollar remain unclear and would necessitate changes in U.S. law and Congressional approval.

Bowman stressed that not all payment delays should be technologically addressed due to policy reasons such as preventing financial crime and militant financing. She advocated for innovative payment solutions but underlined the necessity to comprehend their implications on the robust banking system. Discussing categories like retail CBDCs and unregulated stablecoins, she found no clear application for retail CBDCs and cautioned about potential instability from unregulated stablecoins.

Regarding wholesale payments, also a topic of interest to Fed Chair Jerome Powell, she acknowledged room for innovation but discouraged the term "wholesale CBDCs" due to ensuing confusion. Banks and other entities currently hold "reserves" in digital balances at the Federal Reserve for wholesale transactions. The transition of these reserves onto a blockchain not operated by the Fed could introduce operational complexities and jeopardize financial system stability. Bowman insisted that any payment innovations should rectify specific system shortcomings while ensuring benefits outweigh potential risks and tradeoffs.

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