Fed Plans for Central Bank Digital Currency Pose Big Risk to Financial Sector, Economy
The US Federal Reserve today published a discussion paper on central bank digital currencies or CBDCs, signaling policymakers’ ambitions to start one. CEI expert Paul Jossey, author of a forthcoming report on CBDCs, explains why this is a terrible idea:
“Today the Federal Reserve published a discussion paper and asked for public comment about a possible Central Bank Digital Currency (CBDC), a matter Chair Jerome Powell previously called ‘high priority’ for the U.S. central bank.
“Unfortunately, a CBDC will not solve any problems it purports to. CBDCs would have little effect on financial inclusion, easing cross border payments, or curbing illegal activity.
“Worse, a CBDC would pose big risks to the financial sector, commercial banks, and the overall economy. It would, depending on how it’s designed, threaten the fractional reserve lending system, pose systemic risks in the form of digital bank runs during times of economic stress, and potentially force the Fed to arbitrate contentious social and political issues for which it is ill equipped. Instead, the Fed should encourage the proliferation of stablecoins, which are already solving the problems a CBDC aims at without the attendant risks.”
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