Banks worry a digital dollar would threaten their ability to attract and retain deposits and undermine their ability to fund loans, according to a Federal Reserve report released this week.
In January of 2022, the Fed published a white paper on what a U.S. central bank digital currency, or CBDC, might look like and sought public comment on nearly two dozen questions about potential risks, benefits and structural considerations. On Thursday, it released a summary of the more than 2,000 responses it received from financial institutions, their trade associations, academics, members of the general public and others.
Views about the prospects for a CBDC ranged from enthusiastic to skeptical to vehemently opposed.
Banking associations at both the state and national level supported the Fed’s efforts to gather information about a digital dollar before moving forward but complained that a CBDC would not be in the best interest of the industry or the country.
“As we have evaluated the likely impacts of issuing a CBDC it has become clear that the purported benefits of a CBDC are uncertain and unlikely to be realized, while the costs are real and acute,” the American Bankers Association wrote in its comment letter. “Based on this analysis, we do not see a compelling case for a CBDC in the United States today.”
The Fed report comes as politicians and conspiracy theorists stoke fears and misconceptions about the central bank’s interest in a digital dollar.
The Fed is not actively considering creating a digital dollar, and it has noted that it would like some form of authorization from Congress and the White House before rolling one out. The responses gathered will inform the Fed’s ongoing research into CBDCs, which includes initiatives at the Federal Reserve banks of Boston and New York.
The comments were based on the assumption that a U.S. digital dollar would be intermediated, meaning customers would keep their holdings at commercial banks rather than maintain accounts directly at the Fed. Some have worried about the implications of a direct-to-consumer CBDC for privacy and implementation of monetary policy, but Fed leaders have repeatedly said they do not want to be in the retail banking business.
Still, banks worry about the specifics of this arrangement. Because they might have to hold digital dollars in custody-like accounts, banks would not be able to treat these holdings as deposits, meaning they couldn’t use them to make loans. Not only would that arrangement force banks to incur an uncompensated cost, the Bank Policy Institute noted in its letter, it also would limit banks’ ability to extend credit.
“Any transfer of a dollar deposit from a commercial bank or credit union to a CBDC is a dollar unavailable for lending to businesses or consumers,” BPI wrote in its letter. “We believe that there is a widespread popular misconception on this point, which the Federal Reserve should strive to rectify.”
In particular, banks fear a shift from traditional deposits to digital dollars would be felt most acutely in markets served by small banks, which rely on individual deposits more than their larger peers. If the Fed were to pay interest on money held in digital dollars, this could supercharge the flow of holdings from traditional bank accounts to a CBDC, several groups noted.
“As proposed, the CBDC will be a government-backed competitor to bank retail deposits, which count for 71% of bank funding today,” the Texas Bankers Association wrote. “The loss of this funding source will severely limit credit availability to businesses and consumers.”
Another drawback to the model outlined by the Fed, according to industry groups, is the burden it would put on banks to maintain cybersecurity, combat money laundering and protect customers’ individual information, all at a considerable cost.
Some say current advancements already in the works by both the government — including the Fed’s forthcoming instant-payment system FedNow — and the private sector — such as tokenization and stablecoins — already provide many of the potential benefits CBDC-proponents are seeking.
“Concurrently, the growth of open banking, open finance and the ascendency of neobanks will increase competition and support a more inclusive financial system,” Mastercard wrote in its comment letter. “Therefore, while a CBDC is one approach to reducing frictions in payments and supporting a more inclusive financial system, it is not the only means of doing so.”
Other commenters praised a CBDC’s potential to open up the digital economy to the unbanked, make banking more affordable and preserve the dollar’s standing as the preferred settlement basis for cross-border transactions and the world’s reserve currency.
Merchant groups, for example, see a digital dollar creating more competition for current payment providers and thus drive down their costs.
Phyllis Meyerson and David Walker, heads of the consulting firm Tiller Endeavors and consultants on the Fed’s faster payments advisory groups, added that a Fed-issued CBDC could help facilitate payments both domestically and across borders in ways that current payments systems cannot.
“While there are several defensive reasons to pursue CBDC, such as international and nonbank competition in digital currencies and the risk of evolving, unregulated payment options, the primary opportunity before us is the creation of a payment system to support a global economy,” they wrote. “None of our current payment systems satisfy this growing need.”