The full text of the Federal Reserve's speech on CBDC: a comprehensive macro understanding of stablecoins, Bitcoin, and CBDC

Original title: "Parachute Pants and Central Bank Money"; Source: Randal K. Quarles, Vice Chairman of the Federal Reserve Supervision; Compilation: 0x29, 0x49.

In the early hours of June 29, Randal K. Quarles, vice chairman of the Federal Reserve Supervision, delivered a speech on the theme of "Parachute Pants and Central Bank Digital Currency".

"Parachute pants" is an allusion to the clothing that suddenly became popular with Americans in the 1980s. In this speech, the deputy supervisory chairman of the Federal Reserve uses this term to express his attitude towards central bank digital currency (CBDC). . In his view, he cannot see the advantages of the US dollar CBDC. On the contrary, he can see the problems that may be caused if the US dollar CBDC appears. But he is not biased against cryptocurrencies. In this speech, he spoke highly of USD stablecoins and recognized the innovation of stablecoins.

This is a macro summary of US regulators on stablecoins, Bitcoin, and CBDC. In the current period of poor market sentiment and unclear regulation, Rhythm BlockBeats hopes that this article can bring readers new perspectives. The following This is the full-text translation of Rhythm BlockBeats' speech to the Vice Chairman of the Federal Reserve Supervision:

I've been reflecting recently on the impact of America's centuries-old enthusiasm for novelty. Overall, this is good for us and the world because it makes America the home of many scientific and practical innovations that have transformed life in the 21st century. It has served us and the world well since 19th century living.

But enthusiasm for the new, when combined with an American susceptibility to demagoguery and a fear of missing out, can lead to a suspension of mass critical thinking and, occasionally, impatience, delusional fanaticism, and bandwagonism.

Sometimes many of the results are puzzling and embarrassing in hindsight, as in the 1980s when millions of Americans suddenly started wearing parachute pants. Of course, some things can have more serious consequences

Let's get into today's topic: central bank digital currency, or as it is called, CBDC.

Public interest in a “digital dollar” has reached a fever pitch in recent months. Many experts and commentators have suggested that the Federal Reserve should issue a CBDC. But before we get carried away by this novelty, I think we need a careful critical analysis of CBDCs.

The views expressed in this publication are those of the members of the Board of Governors and not of the Board of Governors itself or any other Fed policymaker.

Chairman Powell's recent announcement that the Fed is preparing a comprehensive discussion paper on this issue is the first step in a public process for critical analysis. I don't want to prejudge this event, but I will explain the problems we need to solve in this process, how I consider these problems, and my views that any proposal to create a US CBDC must have clear high standards.

The first fundamental question: what problems will a CBDC solve? Before answering this question, we first need to define the term CBDC and assess the current state of the US payment system.

What does "CBDC" mean?

The Bank for International Settlements defines a CBDC as “a digital payment instrument denominated in a national unit of account that is a direct liability of the central bank.”

My first point is that ordinary people already generally transact in digital dollars, by transferring in and out of electronic balances in commercial bank accounts. Of course, these digital dollars are not CBDCs because they are liabilities of commercial banks and not the Fed. An important point, though, is that commercial bank digital dollars are federally insured up to $250,000. This means deposits of up to $250,000 in commercial banks are as sound as central bank liabilities.

The Federal Reserve also provides digital dollars directly to commercial banks and certain other financial institutions. Federal law allows these financial institutions to open accounts with the Fed and receive payment services from the Fed. Balances in Fed accounts perform an important financial stability function by providing a safe and liquid settlement asset for the U.S. economy.

All in all, the U.S. dollar is already highly digitized. The Federal Reserve provides digital dollars to commercial banks, and commercial banks provide digital dollars and other financial services to consumers and businesses. This arrangement serves the country and the economy well: the Federal Reserve serves the public interest by promoting the health of the U.S. economy and the stability of the broader financial system, while commercial banks compete to attract and effectively serve customers.

So, given the existing digitization of the U.S. dollar, how would a CBDC differ from the digital dollar we use today?

The key difference is that when most commentators speculate on a Fed CBDC, they assume that the public will have access to it directly from the central bank. A CBDC of this nature could take different forms. One is an account-based model, in which the Fed will provide individual accounts directly to the public. Just like the accounts the Fed currently offers to financial institutions, account holders will send and receive funds to and from their Fed accounts by debit or credit.

A different CBDC model could involve a CBDC that is not kept in an account at the Federal Reserve. This form of CBDC would be closer to the digital equivalent of cash. Like cash, it represents a claim on the Federal Reserve, but it may be transferred between people (like banknotes) or through intermediaries.

I doubt the Fed has the legal authority to pursue these CBDC models without legislation. However, should such legislative authority be granted, it would be necessary to explore the benefits, costs, and practicalities of implementing a CBDC in the United States.

Next let's see if the Fed's CBDC is suitable for the current US payment system.

The current state of the US payment system

Payment services between the Federal Reserve and private sector banks already offer a range of options to facilitate efficient electronic dollar payments. Some statistics related to the major USD bulk payment systems are telling. The Fed's Fedwire Funds Service processes nearly $4 trillion in payments every day. A private-sector entity (the clearing house) operates a high-value payments system that clears nearly $2 trillion in payments per day. These payments are not settled in Fed accounts, but they are backed by balances on the books of the Federal Reserve Bank.

Smaller payments tend to settle more slowly than larger payments, but various efforts to speed up settlement have been completed or are underway. For example, the clearinghouse has developed an instant payment service that focuses on micropayments. Likewise, a network of automated clearing houses (or ACH), a batch-based payment network developed in the 20th century, now enables same-day settlement of ACH payments. And the Federal Reserve is developing an instant payment service "FedNow℠" that will soon enable recipients of micropayments to instantly access funds in their commercial bank accounts.

Of course, these payment systems are not perfect, and certain types of payments should be faster and more efficient. Cross-border payments, for example, remain a key area of ​​concern, as they often involve high costs, low speed, and insufficient transparency. The Financial Stability Board, an international body that I chair, developed a roadmap last year to address these issues. Additionally, private sector stablecoins may facilitate faster and cheaper cross-border payments (more on this below).

In addition, some types of payments are not yet fully digitized, and some types of payments are long-standing debates between businesses with competing economic interests. For example, paper checks are still widely used in some areas, although the interbank check collection process is now almost entirely electronic; debit and credit card payments provide a convenient digital platform for consumers and retailers, but banks and retail There is considerable debate among merchants over who will get the economics of the fees associated with card transactions.

Finally, Americans can benefit from digital payments through the wider use of low-cost basic bank accounts that can facilitate increased use of banking services by Americans.

To sum up, the US payment system is very good, although it is not perfect, it is already improving greatly.

policy considerations

However, proponents of the Fed's CBDC argue that a CBDC could solve a number of important problems. For example, they suggest that the Fed's CBDC is necessary to defend the key role of the US dollar in the global economy. Others believe that a CBDC will address long-standing economic inequality in American society. When we the Federal Reserve began to analyze these problems, I had to guarantee and ensure that CBDC is a good tool to solve these problems. I'm skeptical about this. At the same time, I have to be particularly convinced that the potential benefits of CBDC outweigh the risks.

Let's take a look at some of the points made by CBDC proponents. The first is that the Federal Reserve should issue a CBDC, both to protect the U.S. dollar from threats posed by foreign CBDCs, and to continue the spread of private digital currencies on the other.

First, we start from the perspective of the threat of foreign CBDCs, which assumes that if digitization is achieved directly through the CBDC model rather than through the current digital payment system, there will be some foreign currencies that will suddenly challenge the US dollar. (To be clear, these foreign currencies are all highly digitized in the same way as the U.S. dollar in the current international banking system, but do not yet pose a significant challenge to international currencies). In this view, if the Fed does not provide a similar product, the dollar will lose its place in the global economy.

I think it is inevitable that some foreign currencies (including some foreign CBDCs) will be used more in international transactions than they are today as the global economy and financial system continues to evolve. However, it seems unlikely that the US dollar's status as the global reserve currency, or the US dollar's dominant currency status in international financial transactions, will be threatened by foreign CBDCs. The role of the U.S. dollar in the global economy depends on a number of bases, including the strength and size of the U.S. economy, the extensive trade links between the U.S. and the rest of the world, financial markets, including U.S. Treasury bonds, the stable value of the U.S. dollar over time, the future The ease of converting dollars into foreign currencies, the American rule of law and strong property rights, and reliable monetary policy. These are unlikely to be threatened by foreign currency, and certainly not by a foreign currency CBDC.

Supporters of CBDCs also say that private digital currencies pose a threat to the dollar. There are many flavors of private digital currencies, but for this purpose I will divide them into two categories: stablecoins and non-stablecoins, or cryptoassets such as Bitcoin.

Let's start with stablecoins, whose value is tied to one or more other assets, such as sovereign currencies. There are a variety of existing and potential stablecoins pegged to the value of the U.S. dollar.

Some believe that the U.S. must issue a CBDC to compete with the U.S. dollar stablecoin. Stablecoins are an important development, important enough to trigger our thinking on many issues. For example, how would widespread adoption of stablecoins affect monetary policy or financial stability? How do stablecoins affect the commercial banking system? Do stablecoins pose a fundamental threat to the role of governments in money creation?

In my opinion, we need not be afraid of stablecoins. The Federal Reserve has historically supported responsible private sector innovation. Consistent with this tradition, I think we must fully consider the potential benefits of stablecoins, including the role that USD stablecoins may bring to support the US dollar in the global economy. For example, a global USD stablecoin network could encourage the use of USD through faster and cheaper cross-border payments, and it could be deployed more quickly and with fewer disadvantages than a CBDC. Given that our existing system involves (and indeed depends on) private companies creating money on a daily basis, those who worry that stablecoins represent unprecedented private money creation, thereby challenging our monetary sovereignty, are puzzling.

We do have a legitimate and strong regulatory interest in how stablecoins are structured and governed, particularly with regard to financial stability issues, asset pools as anchors for stablecoin value (if stablecoin usage becomes widespread enough) in the following example then There are stability risks: if investing in multiple currency denominations; if it is a fractional reserve rather than a full reserve; if the stablecoin holder has no explicit claim on the underlying asset; or if the pool of funds is invested in a and short-term sovereign bonds, which are the most liquid assets. All of these factors create "operational risk" - some trigger event may cause a large number of stablecoin holders to convert their coins into other assets at once, and the stablecoin system will not be able to meet the requirements while maintaining a reasonable stable value. this need. But these problems are clearly solvable. In fact, some stablecoins are already being used to solve these problems. When our concerns are addressed, we should be saying yes to these products instead of trying to figure out how to say no. In fact, combining imminent improvements in existing payment systems (such as various instant payment schemes) with the cross-border efficiencies of properly structured stablecoins may well make issuing a CBDC redundant.

In contrast to stablecoins, cryptoassets such as Bitcoin have no correlation to the value of assets such as sovereign currencies. Instead, they seek to create value in tokens through other means, usually some inherent mechanism that ensures scarcity, such as Bitcoin’s mining process, or features such as “anonymity” that cannot be matched by traditional payment systems. Some assert that the US must issue a CBDC to combat cryptocurrencies, which seems wrong. The mechanisms used to create the value of such cryptoassets also ensure that this value is highly volatile, similar to the fluctuating value of gold, which, like Bitcoin, derives a significant portion of its value from its scarcity. Also like Bitcoin, it will not play a significant role in today's payment and currency systems. However, unlike gold, which has industrial uses and aesthetic properties in addition to its residual financial role, Bitcoin's main added appeal is its novelty and anonymity. Anonymity would make it a target for law enforcement scrutiny, and novelty is an asset that is quickly wasted. Gold will always shine, but the novelty wears off. As such, Bitcoin and its ilk will almost certainly remain a risky speculative investment rather than a revolutionary payment method, so they are highly unlikely to affect the role of the U.S. dollar or require a CBDC to respond.

A second argument for CBDC proponents is that a Fed CBDC would provide a way for those currently unbanked due to expenses, lack of trust in banks, or other reasons to obtain digital payments. This is actually valuable, however, I believe we can promote financial inclusion more effectively by taking steps to provide these people with cheaper basic business bank accounts, such as the one developed in partnership with the Financial Empowerment Cities Fund. Between 2011 and 2019, the estimated proportion of households without bank accounts fell from 8.2% to 5.4%. Banks and regulators are working to shrink that ratio even further. I strongly do not believe that a CBDC is the best way to increase financial inclusion, and probably won't even be effective.

Finally, some believe that a Fed CBDC will stimulate and facilitate innovation in the private sector. This is interesting and deserves further study. What baffles me, however, is how a Fed CBDC could foster innovation in a way that private sector stablecoins or other new payment mechanisms cannot. In my view, there has been quite a bit of private sector innovation in the payments industry without a CBDC, and it is conceivable that a Fed CBDC, or even a CBDC plan, could prevent private sector innovation.

In short, the potential benefits of a Fed CBDC are unclear. In contrast, the risks that a Fed CBDC could pose are very specific. First, a Fed CBDC could pose considerable challenges to the structure of our banking system, which currently relies on deposits to support the credit needs of households and businesses. An arrangement in which the Federal Reserve replaces commercial banks as the primary provider of funds to the public could limit the availability of credit, fundamentally alter the economy, and expose the public to a host of unintended and undesirable consequences.

Among other potential problems, a dominant CBDC could undermine consumer and other economic benefits as commercial banks compete to attract customers.

The Fed CBDC could also become the target of cyberattacks and other security threats. Someone may try to steal CBDC, or even destroy the CBDC network or obtain non-public information about CBDC holders. The architecture of the Fed's CBDC would need to be extremely resistant to such threats and would need to remain so as attackers employ increasingly sophisticated methods and tactics.

Designing appropriate defenses for a CBDC could be particularly difficult because there could be far more access points to a CBDC network than the Fed's existing payment system. Because by design choice, anyone in the world can potentially access the network.

It is also very important that we also need to ensure that CBDC does not facilitate illegal activities. The Bank Secrecy Act currently requires commercial banks to take steps to prevent money laundering. Policymakers will need to consider whether a similar AML regime is feasible for the Fed's CBDC. Designing a CBDC that respects personal privacy and appropriately reduces the risk of money laundering may currently be difficult.

At the extreme, we could design a CBDC that requires CBDC holders to provide the Fed with detailed information about themselves and their transactions. This approach will minimize money laundering risks, but raises significant privacy concerns. At the other extreme, we could design a CBDC that allows parties to transact on a completely anonymous basis. This approach would address privacy concerns, but could add significant money laundering risks.

A final risk is that issuing a Fed CBDC could be very costly and difficult for the Fed to manage. The Federal Reserve CBDC can essentially treat the Federal Reserve as a retail bank for the public. This would mean introducing large-scale, resource-intensive central banking infrastructure. We will need to consider whether potential use cases for CBDC justify this cost and expansion of the Fed's mandate into unfamiliar activities, and whether such expansion would risk politicizing the Fed's mandate.

Finally, I emphasize three points. First, the USD payment system is very good and getting better. Second, the potential benefits of a Fed CBDC are unclear. Third, I think that issuing a CBDC could entail considerable risks.

So our work is done as we continue to seriously evaluate issuing a Fed CBDC. Even if other central banks succeed in issuing CBDCs, we cannot assume that the Fed should issue CBDCs. The process that Chairman Powell recently announced is a really open process, inconclusive, although obviously I think the bar for a US CBDC is high. The forthcoming Discussion Paper constitutes the first step in this process, and it is important to seek public comment. I look forward to reviewing public comments on the discussion paper, which will inform the Fed's final assessment of a potential CBDC.