Powell: A CBDC Would Make Cryptocurrencies Obsolete

Federal Reserve Chairman Jerome Powell appeared before the House financial services committee Wednesday for day one of his two-dated mandated monetary policy update. He faced questions on rising inflation concerns, when tapering of bond purchases will start, and on regulations around cryptocurrencies and central bank digital currencies. 

On the same day that the European Central Bank elected to move forward with researching and developing a digital Euro, Powell also indicated an interest in exploring how a CBDC could benefit the American financial system. 

Representative Stephen Lynch (Democrat, MA) said that a more swift action from the Fed on developing a CBDC will cut down on the “hundreds, perhaps thousands” of cryptocurrencies being launched currently. 

“You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital US currency,” Powell said in agreement. “I think that’s one of the strong arguments in its favor.”

Cryptocurrency industry members were quick to respond, calling Powell’s statement broad and unfounded. 

“I believe there’s absolutely no validity to the opinion that other cryptocurrencies are irrelevant,” said David Tawil, president of ProChain Capital. “There are so many types of cryptocurrencies that are based on so many different protocols for so many different use cases, so to say that a CBDC coming out of the United States is essentially going to stop all that is ridiculous.” 

Back in May, Powell said in a statement that the Fed will be releasing a discussion paper this summer “outlining our current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the U.S. context.” On Wednesday, the chairman clarified that the paper will be issued in “early September, plus or minus that timeframe.” 

Crypto enthusiasts have long questioned the role that a digital US dollar would play in the broader blockchain landscape. Many have argued that a CBDC will function no differently than the current physical fiat currency. 

Despite the ECB’s move toward researching a CBDC, Tawil is doubtful much will change in the coming years. 

“The ECB moved toward ‘exploration,’ which, essentially, means nothing,” said Tawil. “The chances of any developed world country proactively taking a step in the direction of CBDCs, or endorsing cryptocurrencies, I find to be very, very unlikely.” 

Powell has maintained that while the US does not have to be the first country to develop a CBDC, it has an obligation to be the best. 

“The real threshold question, for us, is does the public want or need a new digital form of central bank money to complement what is already a highly efficient, reliable and innovative payments system?,” Powell said during a virtual panel at the Bank for International Settlements Innovation Summit earlier this year. 

The Bank of Canada has indicated that it is taking a similar approach. Officials have said that while they are not ready to pull the trigger on a CBDC, they understand that it is something important to watch. 

“We don’t currently see a strong case for issuing it, but the world is progressing very rapidly and probably even more so in the wake of the pandemic,” Bank of Canada Deputy Governor Timothy Lane said during a panel discussion in May.