The argument against the Fed creating a central bank digital currency

Last week Federal Reserve Vice Chair Lael Brainard warned House lawmakers about the risks of moving too slowly to issue a central bank digital currency, or a so-called “digital dollar,” saying that failure to act could jeopardize the dollar’s status as the world’s dominant currency.

Not everyone thinks a central bank digital currency, or CBDC, would be a boon for the U.S., including Chris Hughes, senior fellow at the New School, co-founder and co-chair of the Economic Security Project and senior advisor at the Roosevelt Institute, who just put out a report on the issue.

“I came to this excited about the idea of a central bank digital currency. I saw all the positives and everything that felt like it was worth exploration,” he said in an interview with Marketplace’s David Brancaccio.

Worth exploring, yes. In doing so, Hughes arrived at the opinion that creating a U.S. CBDC wouldn’t solve any of the existing problems of the financial system — and could create new ones.

“We can solve all of these very real problems with other public policy interventions, and creating a CBDC is mostly just hype,” he said.

The following is an edited transcript of the interview.

Chris Hughes: There are real problems in our financial system, and I think we can address them through better public policy solutions. A lot of the proponents of a central bank digital currency talk about how it’ll improve payment systems’ settlement and clearing. The Fed already has a plan for that — next year it’ll be debuting a system called FedNow that’ll provide for instantaneous clearing. So in my own research I kept waiting to find the clear, perfect reason why we needed a CBDC — because my background is in technology, I generally believe technology is making the world and more prosperous kind of place. But it’s hard to find a clear reason to have it. And, in fact, there are a lot of reasons not to.

David Brancaccio: I’ll try one of the arguments on you: The idea is the U.S. is the world’s reserve currency, and wonderful things do flow from that for Americans. And the idea would be if we don’t grab this newfangled digital approach, then China will, and the yuan will become the world’s reserve currency.

Hughes: First off, I don’t think there’s a real challenge to the U.S. dollar status as the global reserve currency. And what’s more, a lot of the folks who say we need our own CBDC to counter China, I don’t think have really thought through the consequences of it. In that kind of scenario, where you have an American central bank digital currency and a Chinese one floating about in the international financial system, you would need to have uncapped holdings on how much American CBDC you could own. The only issue is with uncapped holdings [is] you could see a wholesale move outside of commercial banking accounts — that would be a massive disruption of our financial and banking system.

Brancaccio: Well, Chris, is that your big beef? That we don’t have, in your view, a strong argument for doing the central bank-backed digital currency. And the downside would be if we did, it could be, you worry, fundamentally destabilizing to the existing banking system?

Hughes: If you were to design a CBDC so that it was uncapped, there’s no question it would have significant consequences. You’d see a significant shift out of dollars and deposit accounts at private banks and into accounts that are entirely backed by the Federal Reserve. Why? Because people prefer safety. And without deposits in the banking system, that would be a significantly different system.

Brancaccio: It does read as a kind of Sputnik moment — in 1957, the Russians were seen to capture the high ground of space with the first artificial satellite, “if the Chinese got one, why don’t we got one?” — and you’re saying that’s not a good enough argument?

Hughes: I’m saying two things. I’m saying that the promise of having it in the first place is significantly more efficient financial transactions and we can solve that problem in other ways. And then secondly, even if we were to develop one, they have a lot more to gain than we do — we could see the significant disruption of the financial and banking sector, in a way that I think few would welcome. So in other words, if folks are concerned about countering the rising financial power of China, we can and should develop the systems and frameworks to make the international financial system work more efficiently. It’s just a CBDC need not be at the core of how we do that.

Brancaccio: It may be that, over time, individuals want to hold a digital currency and they might do it in all sorts of different ways. There might be this kind of balkanization of the money system if I use “brand X” stable coin and my mother uses another way of having a digital currency. Is there no argument for a central bank standard one?

Hughes: We have that, we have digital dollars. Most of the deposits in the United States are, in fact, digital. Only a small fraction of our money is in paper currency or coin. And I think, by all accounts, Americans have many issues with the economy these days, but a dollar is a dollar and you know what that is. So the world that you paint, where a lot of folks are using different stable coins, I suppose, is theoretically possible. But even in that world, you could have direct accounts at the Fed, they’re often called Fed accounts. Or you could have postal banking. You could have accounts where the Fed is holding money. But those dollars in those accounts would be interchangeable with the dollars in the commercial banking sector. So what I’m trying to make clear is that the best and most efficient currency is the one that we have. And that doesn’t mean that we shouldn’t improve the financial system and ensure that it’s more stable. It’s just that creating a new kind of dollar that would sit alongside of existing dollars is more likely to lead to confusion and other issues than it is to be anything more efficient or more effective.

Brancaccio: And I’m not really hearing you make the argument that one might from the conservative point of view, that would be: The government shouldn’t be taking such a strong role in an area, digital currency, that the private sector might want to try its hand at. That’s not your argument?

Hughes: Listen, I think that the stable coin arena is full of innovation, and it’s exciting to a lot of folks. Despite the meltdown of some of these stable coins a few weeks ago, like the Terra coin, for instance, there remains a lot of excitement about that world. And for listeners who aren’t familiar with it, it’s the part of the cryptocurrency world where the cryptocurrency is, in theory, pegged to a financial asset — so it could be the dollar or it could be a basket of currencies. And these stable coins, the promise of them is that they are immediately transferable, and yet, they do not fluctuate in value like bitcoin or ethereum or some of these other things do. Now, of course, they’re not regulated in any kind of meaningful way. There are many on Capitol Hill who are calling for their regulation. And they are subject to runs, as we’re seeing. If a lot of people want to cash out their stable coins, that can become a real problem. So that’s a very good reason for additional regulation in that sector, but it’s not an argument for the Fed using blockchain or any other technology to create a cryptocurrency or a central bank digital currency of its own.

Brancaccio: It sounds like the irony is not lost on you — you helped co-found Facebook and you’re comfortable around technology — but you’re sounding like somebody’s grandpa here, “Be careful of this newfangled stuff.”

Hughes: Well, I came to this excited about the idea of a central bank digital currency. I saw all the positives and everything that felt like it was worth exploration. And then, after spending a year talking to lots of experts researching it, reading everything I could get my hands on, thinking about the political dynamics of all of it, I had a day when I was whiteboarding it out and I just took a step back and said, “This is really a solution in search of a problem.” We can solve all of these very real problems with other public policy interventions, and creating a CBDC is mostly just hype.

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