September 28, 2023

Randal K. Quarles, the Federal Reserve’s vice chairman of oversight, suggested Monday that the global rush to research and develop central bank digital currencies – often referred to as CBDCs – reminds him of another four-letter acronym. Afraid of missing out, or better known, FOMO.

Citing America’s “susceptibility to boosterism and a fear of missing out,” Mr. Quarles warned that the nation has a habit of falling victim to “mass exposure to critical thinking and the occasional boisterous, deluded madness or fads.” He cited the parachute pants of the 1980s as a parallel to the current currency craze and stated that fads are sometimes just silly.

“But the consequences can also be more serious,” said Quarles from prepared remarks. “That brings us today to my topic: digital central bank currencies.”

Mr Quarles’ extremely skeptical attitude towards the need – and wisdom – of a possible digital version of the dollar made it clear that Fed chairman Jerome H. Powell announced in May that the central bank would examine the possibility of such issuing a currency which does not meet with unanimous enthusiasm among his colleagues. The Fed is expected to publish a paper on the potential of a digital currency this summer.

Mr Quarles said he did not want to anticipate the process but believed that there was a “high bar” for digital money issued by the central bank.

Currently, the Fed issues physical dollars and digital bank reserves directly, but the money you spend when swiping a credit card or making a Venmo transaction comes from the private banking sector. A digital currency would be like an electronic version of physical cash as it goes straight back to the Fed. Proponents say it could improve financial inclusion and cross-border payments while protecting the dollar’s status as the leading currency. Opponents, including banks, warn that this could be a destabilizing development that would not bring benefits that the private sector alone could not achieve.

His remarks come as other central banks, and China in particular, begin to discuss or establish their own digital currencies. That has sparked interest in a Fed version, as lawmakers and fiscal policy experts fear America may fall behind.

Mr. Quarles said he needed to be “convinced” that the use case outweighs the risks. He said it “seems unlikely” that the dollar’s status as the dominant global currency will be threatened by a foreign central bank digital currency, given that its power is based on trade relationships, deep financial markets, the rule of law in the United States, and credible monetary policies of the Fed itself.

“None of these are likely to be threatened by a foreign currency, and certainly not because that foreign currency is a CBDC,” Quarles said.

Mr Quarles also opposed the idea advocated by some of his peers that the Fed should be concerned about the emergence of stablecoins, which are digital currencies that get their value from a bundle of underlying commodities or currencies.

“In my opinion, we don’t need to fear stablecoins,” said Quarles. He argued that the Fed has historically encouraged innovation in the private sector and “a global US dollar stablecoin network could encourage the use of the dollar by making cross-border payments faster and cheaper. And it could potentially be used much faster and with fewer drawbacks than a central bank version.

That view is in stark contrast to the concerns of some of his colleagues about stablecoins, which caught their attention after Facebook announced it might try to introduce one through a project called Libra.

“If they are widespread, stablecoins could serve as the basis for an alternative payment system based on new private forms of money,” said Lael Brainard, a Fed governor, in a recent speech. She added that “there is a risk that the widespread use of private funds for consumer payments could fragment parts of the US payments system in a way that burdens households and businesses and increases costs.”