Fed Governor Bowman cast suspicion on the need for a U.S. digital dollar

April 19, 2023: Federal Reserve Governor Michelle Bowman expressed scepticism over the possibility of a U.S. dollar, noting the multiple risks a system could impose.

Bowman said in a speech that a central bank digital currency (CBDC) could intrude on users’ privacy and harm the banking system while providing few benefits that aren’t otherwise available is banking and unbanked consumers alike.

“We must ensure that consumer data privacy being protected embedded in today’s payment systems keep going and are extended into future systems,” she stated in prepared remarks at Georgetown University.

Bowman noted, “the risk that a CBDC would give not only a window into but an impediment to the freedom Americans enjoy in choosing the way money and resources are used and invested.”

For the previous few years, Fed officials studied whether to join a handful of different central banks to implement their type of cryptocurrency. A study released in 2022 detailed the pros and cons but didn’t take a stance.

In her remarks, Bowman addresses most of the standard arguments particularly the opportunities a CBDC could present for those without access to traditional bank activities and the importance of catching up to the Fed’s international counterparts that have already implemented digital currencies. For instance, the People’s Bank of China has its own product in place.

However, the speech mostly noted counterarguments. For instance, she said lesser than 5% of U.S. households are without a savings account, and most are voluntarily unbanked.

“Approximately one-third cite a lack of trust in banks as the reason for having a bank account,” Bowman stated. This group would find the administration somehow more trustworthy than highly regulated banks.

She noted the possibility that a CBDC would serve as a foundation for banks to build their products. Also, she cites the possible use for “certain financial market transactions and developing international payments.”

However, she stated an interest-bearing Fed digital dollar provides unhealthy competition for banks, limiting their lending ability.

She also denies the notion that a digital currency needs to support the dollar, which she stated is valued because of “the size of the U.S. economy, its liquid financial business, the strength of U.S. institutions, and its responsibility to the rule of law,” none of which would be bolstered by a central bank digital currency.

“When it comes to a few of the broader design and policy issues, particularly those near consumer privacy impacting on the banking system, it is difficulties to imagine a world where the tradeoffs between benefits and unintended consequences justifying a direct allowing CBDC for uses outside interbank and wholesale transactions,” she stated.

Like different Fed officials, Bowman stated that the looming implementation of the FedNow is paid system also would address many of the needs cited by central bank digital currency promoters. The system will launch in July.