Fed Governor Bowman casts doubt on the need for a U.S. digital dollar

Federal Reserve Governor Michelle Bowman expressed skepticism over the possibility of a digital U.S. dollar, noting Tuesday the multiple risks such a system could impose.

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

“We must ensure that consumer data privacy protections embedded in today’s payment systems continue and are extended into future systems,” she said in prepared remarks at Georgetown University.

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

For the past few years, Fed officials have been studying whether to join a handful of other central banks to implement its own type of cryptocurrency. A study released in 2022 detailed the various pros and cons but didn’t take a stance.

In her remarks, Bowman addressed most of the common arguments — in particular, the opportunities a CBDC could present for those without access to traditional banking activities, and the importance of catching up to the Fed’s global counterparts that have already implemented digital currencies. The People’s Bank of China, for instance, has its own product in place.

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

“Approximately one-third cited a lack of trust in banks as the reason for not having a bank account,” Bowman said. “I think it is unlikely that this group would find the government somehow more trustworthy than highly regulated banks.”

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

However, she said an interest-bearing Fed digital dollar could provide harmful competition for banks, limiting their ability to lend.

She also rejected the notion that a digital currency is needed to support the dollar, which she said is valued because of “the size of the U.S. economy, its deep and liquid financial markets, the strength of U.S. institutions, and its commitment to the rule of law,” none of which would be buttressed by a central bank digital currency.

“When it comes to some of the broader design and policy issues, particularly those around consumer privacy and impacts on the banking system, it is difficult to imagine a world where the tradeoffs between benefits and unintended consequences could justify a direct access CBDC for uses beyond interbank and wholesale transactions,” she said.

Like other Fed officials, Bowman said the looming implementation of the FedNow payments system also will address many of the needs cited by central bank digital currency promoters. The system will launch in July.

Perhaps the CBDC’s biggest Fed advocate has since left the central bank: Former Governor Lael Brainard is now director of the National Economic Council.