The Federal Reserve’s chief of supervision has recently addressed the topic of Central Bank Digital Currencies (CBDCs), likening them to the parachute pants popularized by MC Hammer in the 1980s—a trend that may eventually appear embarrassing.
As some countries, most notably China, advance their CBDC initiatives, Fed Chairman Jerome Powell sparked discussions about the potential for a digital dollar in May, promising a “thoughtful and deliberative process.”
In a recent speech, Randal Quarles, the Fed’s vice chair for supervision, emphasized the need for any U.S. CBDC proposal to demonstrate clear value. He opened his remarks by referencing America’s tendency to embrace novelty and the short-lived popularity of baggy trousers before addressing the concept of a digital dollar.
Quarles outlined three main concerns: first, the existing U.S. dollar payment system is already effective and continually improving; second, the advantages of a Federal Reserve-issued CBDC remain ambiguous; and third, the development of a CBDC might entail significant risks.
He noted that the dollar is already “highly digitized,” with the Fed supplying digital dollars to commercial banks, which, in turn, serve consumers and businesses. While acknowledging that the U.S. payment system has its imperfections, Quarles pointed out that improvements are being made, particularly through initiatives aimed at faster payments.
He expressed skepticism about the necessity of a CBDC for maintaining the dollar’s global status and indicated that he does not believe a foreign CBDC could replace the dollar. Quarles supports stablecoins for their innovative potential but remains dismissive of cryptocurrencies like Bitcoin.
Quarles questioned claims that a CBDC would enhance financial inclusion, arguing that alternative methods—such as making low-cost basic commercial bank accounts more accessible—could be more effective.
Regarding the risks of a digital dollar, he warned that if the Federal Reserve were to take over as the main provider of money to the public, it could limit credit availability, fundamentally change the economy, and lead to unforeseen negative consequences. He also highlighted that a CBDC could create more opportunities for cyberattacks, complicating security measures in comparison to the current payment system.
In addition, Quarles cautioned that managing a CBDC could prove costly and complex, potentially politicizing the Federal Reserve’s responsibilities.
He concluded, stating, “Our work is cut out for us as we proceed to rigorously evaluate the case for developing a Federal Reserve CBDC. Even if other central banks successfully issue CBDCs, we cannot take for granted that the Federal Reserve should do the same. The process announced by Chair Powell is genuinely open, with no predetermined outcomes, but clearly, the bar for establishing a U.S. CBDC is set high.”