Sheila Bair, Ex-chair of the United States Federal Deposit Insurance Corporation recently appealed the US Federal Reserve to study central bank-issued digital currencies (CBDCs). In her article, she claims that launch of a state-owned digital currency would minimize the possibility of financial crises and improve tools of monetary policy.
In reference to European debt crisis and economic downslide in Venezuela, Portugal, Brazil, Ukraine, and Russia, she talked about the many recent occurrences of financial emergencies. She informed that lack of trust in the banking system made Satoshi Nakamoto develop an alternative system of payments which could function without a central authority.
She added, “Unfortunately […], bitcoin has failed miserably as a method of payment” – blaming such on the “extreme volatility [that] has made it popular as a speculative investment and store of value.”
Mrs. Bair has advised central banks to develop their own digital currency giving an example of “a radical idea that […] is gaining credibility among an increasing number of mainstream economists and central bankers themselves.” She noted that a state-owned currency would be as stable as a fiat currency. Meanwhile using virtual coins in the traditional economy to save investors from huge losses.
She stated that extreme stress forces people to lose confidence in the banking institutions which makes them pull out their money resulting in an interruption in the free flow of payments. But, if consumers would be able to convert their holdings into a virtual coin backed by the Fed, they would never worry about a bank’s instability.
The former FDIC chair said that the current monetary tools applied by the Fed are incompetent which is clear by their performance in the last ten years. They have only benefitted the super-rich which eliminate the possibility of broad-based economic development.
She further claimed that a complete shift from bank accounts to CBDC would create havoc in the traditional banking system. As the banks are dependent upon deposits to fund loans, their credit availability will suffer which will lead to the destruction of the bank-dominated payment system.
She believes that CBDC would help in removing inefficiencies of the current payments system. The consumers will also get benefitted as they would not have to keep a constant check of their account while losing money in maintenance and overdraft fees.
Moreover, businesses accepting CBDC would eliminate the charges taken by banks and card networks as there would be no need of interchanging. Smaller firms would likely gain the most as they suffer from paying considerable taxes without having high profits.
Her advice comes at a time when the SEC is trying to clamp down the use of digital currencies in the country. The new crypto policies might include the reference of CBDCs for a risk-free investment zone. Many popular companies have also started to cut ties with anything in relation to digital currencies which speaks a lot about the outlook towards virtual coins. As of now, it is better to hope that SEC does not impose an outright ban over crypto trading or any rigid policies.