ABA Comments on Federal Reserve Discussion Paper Money and Payments: The US Dollar in the Age of Digital Transformation

Ann E. Misback
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551

To Whom It May Concern

The American Bankers Association (ABA) welcomes the opportunity to comment on the Federal Reserve Board’s (Federal Reserve) discussion paper Money and Payments: The U.S. Dollar in the Age of Digital Transformation. The debate on Central Bank Digital Currency (CBDC) has significant implications for our financial system, economy, and most importantly for the American consumer.

Contrary to popular belief, a U.S. CBDC is not necessary to “digitize the dollar,” as the dollar is largely digital today. However, the issuance of a CBDC would fundamentally rewire our banking and financial system by changing the relationship between citizens and the Federal Reserve. The Federal Reserve notes this in its recent Financial Stability Report, highlighting that “[a] CBDC could fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the central bank.”

There is a growing recognition that the deployment and use of CBDCs would be weighed down by very significant real-world trade-offs. The main policy obstacle to developing, deploying, and maintaining a CBDC in the real economy is the lack of compelling use cases where CBDC delivers benefits above those available from other existing options.

Today, we use both public and private money. In developed economies, public money, which includes cash and accounts held directly at the Federal Reserve, makes up about 5% of money. The other 95% is private money—funds held as a liability of a private institution like a bank or credit union. Private money is important because it is created through productive financial intermediation by banks in the form of lending and hence represents expansion, and usually a multiplication, in real economic output. Introducing a CBDC would be a deliberate decision to shift this balance to public money. If, instead, our objective is to realize the benefit of technological innovation, we should look to leverage novel developments in private money (like real-time payments systems and well-regulated stablecoins). Private-sector innovation in banking and payments has made a significant contribution to establishing the U.S. dollar as the reserve currency of the world and is best positioned to support the dollar’s preeminent position in the years to come.

There are many proposed designs for a CBDC, and the design choices have a significant impact on the potential risks and benefits associated with each. For purposes of its discussion paper, the Federal Reserve has defined a CBDC as “a digital liability of a central bank that is widely available to the general public.” It has also suggested that any CBDC should be “privacy-protected, intermediated, widely transferable, and identity-verified.” This approach has helped focus the discussion on the intermediated CBDC model, where a CBDC would be delivered through private-sector financial institutions, but where individual holdings would sit at the Federal Reserve. Importantly, this definition would preclude “direct”6 and “wholesale” designs of CBDC. Given this focus, the majority of our analysis will evaluate the impact of this intermediated model except where explicitly stated.

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. Based on this analysis, we do not see a compelling case for a CBDC in the United States today.

Proponents of CBDC are driven by a number of laudable goals like financial inclusion and promoting the U.S. dollar’s international role as a reserve currency and a medium of exchange for international trade. ABA supports these important goals; however, we do not believe that a CBDC is well-positioned to accomplish them. In many cases, there are initiatives already underway that address these goals. There are also significant trade-offs that must be made between different design choices. These trade-offs are likely to undermine many of the key goals of a CBDC and make it essentially impossible for a CBDC to fulfill all the various purposes for which it is currently being discussed.

ABA is a strong proponent of financial inclusion and we have put significant effort into bringing unbanked families into the financial system. One such effort is our partnership with the Cities for Financial Empowerment Fund (CFE) to promote the Bank On program. A CBDC would do little to address the actual reasons why families report not having a banking relationship. Importantly, a CBDC would only address the question of a deposit account. The benefits of a banking relationship go far beyond a deposit account. The goal of financial inclusion is to build a lifelong relationship that can help families access credit that can help them build for a secure financial future. A CBDC is likely to undermine this goal by failing to promote credit availability to the communities that need it the most.

Similarly, a CBDC does not appear well-positioned to support the role of the U.S. dollar internationally. While many countries have experimented with a CBDC, many have focused on a wholesale model, something not contemplated by the Federal Reserve’s discussion paper. In addition, many have pulled these experiments back as the costs of implementation have become apparent. The Federal Reserve notes that the dollar’s status as the global reserve currency is driven by 1) the strength and openness of our economy, 2) the depth of our financial markets, and 3) the trust in our institutions and rule of law.

Recently, Acting Comptroller of the Currency Michael Hsu highlighted how a CBDC might undermine these critical factors when he noted that the lack of a CBDC was not a gap in the market. He went on to note that our current two-tier banking system is “not an accident. It is the result of a carefully architected monetary and banking system. The robustness and reliability of this architecture, combined with the strength of the rule of law in America and the dynamism of our economy, has supported the role of the U.S. dollar as the world’s reserve currency.” His speech suggests that responsible, bank-issued stablecoins or tokenized deposits may be a better alternative if we believe that a tokenized form of money is desirable for ease of payments transmission or other purposes.

The risks associated with issuing a CBDC are often downplayed but are real and likely to undermine any possible benefit that a CBDC would have. Most importantly, every construction of CBDC requires moving funds from banks to the Federal Reserve. Regardless of the model chosen, a CBDC is a direct liability of the central bank. According to the Federal Reserve, “[a] widely available CBDC could serve as a close substitute for commercial bank deposits or other low-risk assets such as government MMFs and Treasury bills. A shift away from these assets could reduce credit availability or raise credit costs for households, businesses, and governments.”

In effect, a CBDC would serve as an advantaged competitor to retail bank deposits that would move money away from banks and into accounts at the Federal Reserve where the funds cannot be lent back into the economy. These deposit accounts represent 71% of bank funding today. Losing this critical funding source would undermine the economics of the banking business model, severely restricting credit availability. ABA estimates that even a CBDC where accounts were capped at $5,000 per “end user” could result in $720 billion in deposits leaving the banking system.

Policymakers are quickly coming to the same conclusion. In June, 2021, then Vice Chair for Supervision Randal Quarles suggested that CBDCs were an unfortunate fad like “parachute pants” that would be “puzzling or embarrassing” in hindsight. Similarly, Federal Reserve Governor Christopher Waller called CBDC “a solution in search of a problem.”

Given the high stakes, it is important we get this right, which is why ABA supports the Federal Reserve’s thoughtful and considered approach. The Federal Reserve’s discussion paper takes a balanced view of the opportunities and risks associated with issuing a CBDC in the United States. The discussion paper also sets an appropriately high bar for action on a CBDC. We believe that the Federal Reserve should not move forward without a clear analysis that shows the benefits of issuing a CBDC outweigh the risks and that doing so would not create adverse impacts on consumers, markets, or the economy. This analysis must necessarily take into account whether a CBDC is the most effective way to realize these benefits. We share the Federal Reserve’s view that the introduction of any CBDC should be subject to Congressional approval in the form of an authorizing law.

The recent Executive Order on Digital Assets places an increased focus on CBDC. While much of the executive order calls on federal agencies to assess the expanding marketplace of digital assets before recommending new rules, we are concerned that it clearly directs federal agencies to begin pursuing a CBDC even before determining whether a U.S. CBDC is actually “in the national interest” as the order also requires. Secretary Yellen recently commented on this work, noting that “issuing a CBDC would likely present a major design and engineering challenge that would require years of development, not months.”

We look forward to engaging with the Federal Reserve and other policymakers as they consider the important questions raised in this discussion paper. The remainder of our response will expand on the following three themes:

• Any potential benefits of a CBDC are uncertain and unlikely to be realized.
• The costs of offering a CBDC are real and acute. The Federal Reserve’s discussion paper explores these but does not show the full extent to which they might impact our financial system and economy.
• There are better ways to achieve our shared objectives that do not put our financial system or economy at risk.

Download the comment letter to read the full text.