Quarles: U.S. doesn't need CBDC to compete with China

Just because China is developing a central bank digital currency, doesn’t mean the U.S. needs one too, former Federal Reserve Gov. Randal Quarles said.

Speaking on IntraFi Network's "Banking with Interest" podcast this week, Quarles pushed back against the notion that the central bank should develop its own digital currency to protect the U.S. dollar’s status as the world’s reserve currency. 

More pointedly, the Fed’s former vice chair for supervision said the threat to U.S. financial dominance posed by China, which launched a pilot program for a digital renminbi last year, has been overstated.

“The fact that China is making its currency a CBDC does not make the renminbi really in any way more attractive than the dollar currently,” he told host Rob Blackwell, former editor-in-chief of American Banker. “They're doing that in order to increase their ability to surveil their populace. Why would that make the renminbi more attractive? Why would it be more attractive, in international transactions, to be using a currency that China could delete by pushing F4 on a computer?”

Quarles, who was a CBDC skeptic during his time at the Fed, argued that one is not necessary for the U.S. to remain the linchpin of global commerce and would have a dubious impact on economic inclusion, undermining the two benefits most often lauded by proponents. 

Meanwhile, developing a digital currency, especially one made directly available to the general public, poses risks to the banking industry as well as the financial system as a whole, he said, adding that it would have a chilling effect on private-sector innovation for products such as currency-backed stablecoins.

“As you go through each of the benefits that are supposedly positive for a CBDC, they all just sort of disappear under close analysis,” Quarles said. “But, the drawback of disintermediating the private-sector financial system and the attendant politicization of the allocation of credit, is very real, in my view.”

Despite these risks, the progress of geopolitical rivals in the CBDC space could elicit an overzealous response from lawmakers, Quarles warned.

“You have a coterie of politicians, the national-security politicians, I call them, many of them conservative Republicans who you would expect might be concerned about this issue, but they're more concerned that we're falling behind China,” he said. 

Fed Chair Jerome Powell has said repeatedly that he will leave decision of whether the Fed issues its own CBDC up to Congress. That stance was reiterated in a 40-page report the Fed issued on the topic in January.

Quarles said legislative action is likely a prerequisite to any movement toward a CBDC, maintaining that the Fed lacks the legal authority to act on its own, and the current gridlock in Congress makes that prospect unlikely, he said.

Still, Quarles acknowledges that others within the Fed system see the issue differently. For many proponents, the argument for pursuing a CBDC boils down to one “you expect from a 17-year-old, but not from a central bank,” he said.

“Increasingly, I'm hearing ... one of the first arguments put forward, 'Well, everyone's doing it, so we're going to have to,’ ” Quarles said. “I didn't accept that argument from my son, and I'm not going to accept it from you.”