Fed Governor: USD Pegged Stablecoins “Broaden The Reach Of US Monetary Policy Rather Than Diminish It”

While stablecoins could serve as an attractive payment instrument that could become a major challenger to banks for processing payments, Christopher J. Waller believes, “there are many legal, regulatory, and policy issues that need to be resolved before they can safely proliferate.”

Governor Christopher J. Waller remains skeptical of a Federal Reserve CBDC, which he says is a “solution in search of a problem.”

Speaking at the American Enterprise Institute, Washington, D.C., via webcast, Waller said CBDC won’t be solving any existing problems that are not already being addressed.

While many central banks are considering the adoption of a CBDC as their economies become “cashless,” Waller said eliminating currency is a policy choice and not an economic outcome. Not to mention, Fed Chair Powell has said U.S. currency is not going to be replaced by a CBDC.

The payment system already in place isn’t too limited or slow either to warrant the introduction of a CBDC, he said. While existing interbank payment services have nationwide reach, commercial banks have developed an instant payment service called the Real-Time Payment Service (RTP), and the central bank is creating its own instant payment service FedNow as well, he added.

Waller doesn't agree with CBDC improving the financial inclusion argument either. He pointed to an FDIC survey showing about 5.4% of US households being unbanked in 2019 and 75% of them were not interested in having a bank account.

“It is implausible to me that developing a CBDC is the simplest, least costly way to reach this 1 percent of households.”

In fact, a CBDC would create additional competition in the market for payment services because that would allow the general public to bypass the commercial banking system, which would then put pressure on them to lower their fees or raise the interest rate to prevent additional deposit outflows, said Waller.

And if commercial banks are earning rents from their market power, then there is a profit opportunity for nonbanks to enter the payment business and offer cheaper services as seen with stablecoins, he said.

“A stablecoin could serve as an attractive payment instrument if it is pegged one-to-one to the dollar and is backed by a safe and liquid pool of assets. If one or more stablecoin arrangements can develop a significant user base, they could become a major challenger to banks for processing payments.”

Such competition from stablecoins could pressure banks to reduce their markup, he added.

But Waller also made it clear that he is not endorsing any stablecoin, and there are many legal, regulatory, and policy issues that need to be resolved first before they can safely proliferate.

Not only is the private sector already developing payment alternatives to compete with the banking system, but innovation in the private sector is also happening quite rapidly, “faster than regulators can process.”

Waller isn't concerned about private money like stablecoin representing a threat to the Fed for conducting monetary policy either as the USD pegged stablecoins actually “broaden the reach of U.S. monetary policy rather than diminish it,” he said.

“It is well established in international economics that any country that pegs its exchange rate to the U.S. dollar surrenders its domestic monetary policy to the United States and imports U.S. monetary policy. This same logic applies to any entity that pegs its exchange rate to the U.S. dollar.”

Waller also dismissed the argument that CBDC is needed to maintain the primacy of the U.S. dollar because he sees “no reason to expect that the world will flock to a Chinese CBDC or any other.”

Non-Chinese firms, according to him, wouldn’t want to have all of their financial transactions monitored by the Chinese government. Also, the Fed does not need to create a CBDC for the same reason as China, which is to more closely monitor the economic activity of its citizens, he said.

As such, “a CBDC remains a solution in search of a problem,” concluded Waller.

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