Although it didn’t grab headlines, Chair Powell’s announcement last week essentially introduced an informal US dollar central bank digital currency (CBDC) by assuring the safety of depositors’ savings.
While he didn’t explicitly mention CBDCs, his statement implies that digital bank deposits are now liabilities of the US central bank. This informal CBDC, however, is not yet legally recognized.
Formal CBDCs seem to be gaining popularity, as central banks worldwide actively explore the concept. The timing is interesting, as the banking system’s reliance on deposits has become apparent. If CBDCs were widely adopted, it’s estimated that global banks could lose $2.1 trillion in annual revenue, nearly a third of the $6.5 trillion earned in 2022.
Different central banks have varying motivations for exploring CBDCs, including financial innovation, financial inclusion, replacing SWIFT, maintaining monetary sovereignty, combating cryptocurrencies, and more. But the main concern for many is preserving control over currency usage.
As cash usage declines and fintech alternatives like PayPal and Venmo gain traction, central banks worry about losing influence. CBDCs could be a way to reestablish their monetary anchor.
For the US Federal Reserve, the primary concern is not falling behind other countries. However, fully adopting CBDCs might be risky due to potential deposit losses for commercial banks and privacy issues. Instead, hybrid options like tokenized bank deposits or collaborating with fintech companies could be more viable.
For now, the informal CBDC introduced by Chair Powell serves as a preliminary step in this evolving monetary landscape.