Sheila Bair Says Fed Should ‘Get Serious’ About Central Bank Digital Currency

FDIC Chair Says CBDC is Dangerous for Traditional Banking Systems, has Major Potential

Sheila Bair, the previous United States Federal Deposit Insurance Corporation (FDIC) recently compiled an extensive document detailing her belief that the United States Federal Reserve should work to explore the possibility of issuing its own digital currencies known as Central Bank-Issued Digital Currencies, or CBDCs.

While the article mentioned a host of benefits which could arise from shaking up the traditional financial model in the U.S. by offering the digital currencies minted by the federal government, the document also spelled out several negative impacts which could arise from the new move, especially if it is done without the requisite care necessary for responsible integration into the existing financial model of the United States.

Bair’s choice to bring the CBDC debate to the forefront of American economy politics is not unexpected. Several other countries all over the world have considered the prospect of having their own government-issued digital currencies. Successful integration would help to legitimize the alternative forms of currency in the eyes of both the government and the public, and would be a major move for any country looking to capitalize on the unique financial revolution happening all over the world.

The Bair-compiled analysis is nothing if not honest. It includes analysis from several professionals in the financial sector, many of which do not look at cryptocurrencies as the wave of the future, but instead view the new trend as a dangerous wrecking ball with its sights aimed at the central bank within the United States.

A Hopeful Perspective

The former chair of the FDIC started her analysis by outlining the problematic financial situation facing much of the European Union. She remarks that the “European sovereign debt crisis” in countries such as Russia, Portugal, and Brazil poses a unique issue that requires a unique solution.

Next, a brief history of cryptocurrency technology provided by the author outlines that it was originally founded because of mass distrust in the traditional banking structures. She isn’t far from the truth; Satoshi Nakamoto continually stated that they were founding the blockchain technology behind Bitcoin in an effort to revolt against the old structure of finance, one characterized by centralization of wealth and a clear lack of transparency.

She then takes the interesting stance that the issuing of digital currencies by fiat, traditional banking systems could be an easy way for the economic powers of governments in Europe to gain credibility, “improving monetary tools,” and potential “reducing the risks” associated with the traditional model in many countries.

Major Opportunities

Bair then elaborates that these financial crises within many countries could be given a greater sense of financial stability through the issuance of their own digital currencies by respected authorities governing the general banking system. The main reason for this possibility is that the usage of secure digital currencies could help to restore much-needed trust in the banking system.

She explains that there is a sense of instability within the current market for many European investors, and that a general distrust and panic has prevented many from putting their funds into banks. They pull their money out of the system, which helps to disrupt the “free flow of payments.” However, she poses the key questions: what if citizens were able to turn their deposits into digitized currencies that were both issued and supported/backed by the federal banking system?

If this were the case, Bair feels that the federal bank would be much more effective at creating tools and addressing monetary concerns within their own economy. In addition to becoming the catalyst for a variety of new tools for the financial sector and its participants, CBDCs could be a valuable tools for the Fed in its work to regulate and manipulate money supplies within the United States.

A “Creative Destruction”

But Bair was clear that there are downsides to the integration of CBDCs into any modern federal bank. She terms it with a “creative destruction.” This means that the CBDC would drastically change the nature of the banking system in the United States. It would tear many things down within the existing structure, and it would have to by its very nature.

Bair asserts that there would be a “wholesale shift” if the Fed were to adopt Central Bank issued Digital Currencies into their existing infrastructure. The impact of this shift will be that banks will experience “severely negative consequences,” especially for banks who rely on deposits in order to fund the loans essential to maintaining the availability of credit within their own institution.

The former FDIC chair also asserted that the current system could stand to experience a significant increase to efficiency and a severe decrease to price, following the creative destruction brought forth by CBDC integration. She argues that banks would no longer need to put work in to maintain accounts, extoll fees, and to expedite payment processes. Instead, these problems would be addressed by technology on the blockchain, and many of them would go away entirely when decentralized and autonomous currencies are introduced as the norm in a changing market.

Former FDIC Chair Bair has been realistic in her approach to advocating for digital currency integration into the existing financial system of the United States. While acknowledging the massive opportunities allotted to the financial sector, she also understands that progress in the new system will require a creative kind of destruction to the existing structures which, for many years, have been the cornerstone of American economic policy.

Only time will tell how the United States Fed will choose to respond to the increasing popularity of CBDCs on the international stage. Depending on the path the government chooses to take, a variety of different outcomes could result. In any case, the digital currencies which have dominated their own economic sector in the past decade could represent the key to a host of challenges within the economic sector.

A creative destruction could lead to changing financial situation for banks and their customers alike.