Randal Quarles on the dangers of a central bank digital currency

This is an excerpt of remarks delivered by U.S. Federal Reserve Governor Randal Quarles at the Milken Institute’s Global Conference in Beverly Hills, California, on October 20, 2021, in response to a question by Michael Piwowar, executive director of the Milken Institute Center for Financial Markets.

Facebook catalyzed the Fed’s CBDC conversation

When we think about central bank digital currency, we have to begin thinking really hard about what problem are we really trying to solve. And the international enthusiasm for central bank digital currencies really began when Facebook proposed developing a stablecoin, that because of the breadth of Facebook’s platform, could potentially have taken off quite rapidly. So up to then, the international attitude had been, and the domestic attitude had been, “Digital currency, that’s things like Bitcoin. That’s actually not very big, relative to the overall financial sector, and it’s not going to get very big relative to the overall financial sector because it’s so volatile, it can’t be used in payments. It would be a speculative asset for some period of time.”

But, this notion of the potential for the rapid scalability of a stable value digital currency, the initial reaction of a lot of countries was, “This is a threat to our monetary sovereignty. We can’t have private companies issuing money.” But, everyone in this room, is in this room because you know that all of our money is issued by private companies, except these tiny pieces of paper we have in our pocket, which I usually don’t even have enough anymore to pay tips.

So, I mean, private companies issue money every day. That is money. So, that’s not a coherent objection to me, to say, “Well, you know, it threatens our monetary sovereignty for a private company to issue money.” All of our money is in deposits at a bank, those are claims on a bank, they aren’t claims on the Federal Reserve. That is what money is. Again, except in the case of the United States, for these little pieces of paper that we have in our pocket. And, for kind of wholesale level, for the accounts that those financial institutions them themselves have an effect. So, that doesn’t seem to me to be apparent reason for saying, “We’ve got to go to central bank digital currency to keep, because monetary sovereignty is a direct threat.”

A CBDC does not promote inclusion

And then, you talk with folks who say, “Okay, particularly in the international sector, so why am I moving to central bank digital currency?” Well, maybe financial inclusion. Okay, financial inclusion, that is a good thing. I’m all in favor of financial inclusion. How is this central bank digital currency going to increase financial inclusion?

Well, there’d be two ways. One, we could have an account, for every person in the United States, at the Federal Reserve, so that all of your money, kind of free accounts for everyone, the same way that your dollar bills are sort of free. And then you would have electronic money with the Federal Reserve, and everybody would have one.

Okay. But that’s going to completely disintermediate the system that we have currently for extending credit, for providing financial services, all of the deposits now are going to be at the Federal Reserve. So, who’s going to do the lending? Well, that’s going to ultimately have to be the Federal Reserve. And the politicization of the allocation of credit that would come from having the government basically provide all of that, is I think extraordinarily risky.

Technological risks

So, then recently, I’ve had a couple of really smart people, although, I’m not at all persuaded by these arguments, and I don’t think these have been their finest moments, say, “Well, but if we move into a world of private digital currencies, where these pieces of paper are obsolete, then… The citizenry won’t feel the same connection to their government, to their central bank. There’s something important in people feeling that they have an anchor.” I can’t really go on with the argument, because it stops making sense kind of in the middle there, it’s very “woo woo,” and plus, it describes the world that I don’t live in. I mean, I work at the Federal Reserve, and I don’t feel this mystical communion with the central bank. So, I don’t understand that point either.

So fundamentally, the question is, until somebody answers to me the question of why, I don’t understand why we would devote the enormous amount of resources, and the technological risk, and the significant disruption to the current operation of financial system that would come from the central bank saying, “We are going to provide this digital currency.” And the one other thing I would say is, so if you… So many people will say, Christine Lagarde, for example, would say, “No, I’m absolutely not in favor of this intermediated financial system. So, we will do this, in a way that doesn’t disintermediate the financial system. We will constrain this central bank digital currency through the financial sector.

A non-consumer CBDC would be of little use

Well, in which case… So, you’re saying that I’ll still need a bank account, in order to use my central bank digital currency, which I need a bank account anyway, so how is this helping financial inclusion? Except that now, in addition to a bank account, I need a smart phone or a smart card, and I need an internet connection. I mean, all of this is… At that point is, how is what you’re doing significantly different from what we’ve got, if it has to be intermediated through the private sector financial system? Which, many people, the Europeans who want a central bank digital currency say, “Yes, that would be a dystopia, to sort of centralize, and politicize the allocation of credit that we found from this intermediated, the banks.” So, we’re not going to do that. But then again, I lose the thread a little bit as to, so what are you going to do? And if it’s just providing a current backing to the banks, through a form of central bank digital currency, then, how is that different than our current account system? Which is easily managed, or we have electronic accounts for the banks, for the banks themselves, and the Fed.

And, if you’re sort of saying, “Well, we’ll simply take the deposits, but then, we’ll fund the private sector financial system, right?” Every estimate that I’ve read of kind of a coexisting system, where the central bank does issue a central bank digital currency, it takes a very, very big chunk of deposits out of the system, even if you are doing your very best to not disintermediate the banks. And you then run into the same question of, “So what happens to that?” The Fed’s going to have to put that money back into the private sector system, and the political constraints that would come with that funding, even if you haven’t completely, effectively nationalized the banking system, will be severe.