Fed Governor Waller Comes Out Strongly Against Central Bank Digital Currencies, Praising Alternative Currency Based Private Payment Systems Such As Stablecoins

Fed Governor Waller Comes Out Strongly Against Central Bank Digital Currencies, Praising Alternative Currency Based Private Payment Systems Such As Stablecoins

The speech reveals that as an advocate of alternative currencies, Gov. Waller is skeptical of the concept of CBDCs. The word concept is used deliberately here, since no CBDC at scale has yet been released. It is known through the Bank of International Settlement (BIS) surveys that 80 or more Central Banks are at researching the concept. The cbdc tracker shows the state of play. Some are pretty advanced, with the Chinese poised to release e-CNY soon, backed by multiple experiments at increasing scale. Waller does not see any problem which CBDC would solve. The provocative title of the speech is “CBDC: A Solution in Search of a Problem”. The main point of the speech is that there is no problem to be solved by CBDC, hence the Fed should not issue it. Gov. Waller’s speech echoes a speech made by the Fed Board Vice-chair Randall Quarles. Both governors base their arguments on what they say are the excellent state of payment systems in the United States.

In Quarles’ words “ First, the U.S. dollar payment system is very good, and it is getting better. Second, the potential benefits of a Federal Reserve CBDC are unclear. Third, developing a CBDC could, I believe, pose considerable risks.” Waller concludes “ I remain skeptical that a Federal Reserve CBDC would solve any major problem confronting the U.S. payment system. There are also potential costs and risks associated with a CBDC ...... It is my belief that government interventions into the economy should come only to address significant market failures.”

The general public in America has access to only one form of Central Bank issued currency, which is cash. Were CBDC issued by the Fed, it will be another form. The main difference being that CBDC will be digital, whereas cash is not. Both cash and CBDC would be the safest forms of currency. The form that most of us are familiar with, commercial bank demand deposits, are already digital. Commercial bank deposits are also safer because of FDIC insurance, which covers deposits up to a certain amount. FDIC, in case anyone doubted it, is a federal agency established in 1933 to restore trust in banks. Before 1933, the period of the great depression; one-third of commercial banks failed, bank-runs were also quite common. Bank failures and runs were the features of the 1893 and 1907 panics. FDIC was not approved without a struggle, a series of 150 bills were introduced into congress, before it was approved as part of the 1933 Banking Act. FDIC is insurance, paid for by the banks themselves, with a backstop of a $100 Billion credit line from the Treasury. Now it is touted as a great success. FDIC also regulates banks, all this to show that the imprimatur of the Federal Government was needed to stabilize commercial banks. Here is an example of Federally controlled infrastructure that makes private banking trustworthy.

Most of the money in the economy is generated by commercial banks, that is private money, however that private money is backed by an insurance company set up by the Fed. Also commercial bank money is convertible at par to other forms of money; namely cash, and if CBDC were introduced, it would be convertible to CBDC at par. For a par convertible instrument, the only real question is how does it efficiently function as the medium of exchange or in payments, as the other two functions of money, namely unit of account and store of value are handled automatically. In most people’s minds in the US such distinctions do not matter, they sleep peacefully without a stash of cash under their mattress.

Payment Systems

Both governors emphasize that the payment systems in the United States function well. In fact they say that a CBDC is not necessary, because payment systems run by private operators are cheap, ubiquitous and widely available. The general public and most small and medium enterprises have access only to private payment systems. The biggest (in terms of daily volume) payment system in the country is operated by the Fed, only available to account holders of the Federal Reserve. The Fed is now working on the FedNow system which will be available to payments below $25K, this will fix many weaknesses of the current payment systems. Payment systems are infrastructure, hardened by years of use, operations risk and cyber risk handled through organically grown networked systems that received lots of funding, research and resources over the years.

Cross border payments

Waller admits that current cross border payment systems are not ideal and take time to settle with complex correspondent banking. His prescription is more private innovation, pointing to the rapid growth of Stablecoins as evidence. Waller’s view is that Stablecoins are private, fully backed money that would solve the payment problem without involving the Fed is based on what he calls the division of labor between the Fed and the private sector. The Fed’s only job is to take care of market failures. Stablecoins and such innovations will take care of the gap in payment systems, especially cross border payments.


Waller raised the issue of government surveillance, were CBDC to be issued and distributed through the Fed. He suggested that the parallel would be to China, who have said that the state will monitor all transactions. Technology exists today that can shield transactions, however the tension between the authorities’ need to confirm compliance for larger transactions and the public’s need for privacy will need to be resolved for any form of money. The tradition in the US has been to outsource surveillance to the private sector, who seem to be much more aggressive and invasive on the matter, mixed into this is AI for fraud detection which has its own problems with objectivity and fairness. As long as the technical capability to surveil is built in and there are no rules against using them, surveillance by governments or the private sector can result in privacy harm to the consumer. There are technical ways of limiting this surveillance, privacy by design, including edge computing and encrypted digital vaults could be the basic components of any solution.


Cash is the ultimate anonymous peer to peer transaction mechanism. However, the physicality of cash is a challenge. The use of cash continues apace in the USA. Cash is especially favored by older people and those without bank accounts. Cash is also very useful during certain kinds of disasters, the recent floods in China exposed the weak underbelly of the digital payment systems. Some CBDC efforts try to address scenarios where the internet connectivity or even electricity is not available. Peer to peer exchange is supported as a use case in the e-CNY, the Chinese CBDC. Cash is also fraught with new problems, during a pandemic where physical contact and paper is seen as a vector for infection.

The fine print on payment systems

Contrary to claims by Waller and Quarles, the United States does not have a great payment system. It is much costlier to wire a payment than in Europe, in India and other parts of the world, instant payment systems such as Zelle are limited to amounts lower than $500. Cross border payments are even costlier and more delayed. The touted solution, namely stablecoins, as an innovation, has been a great success in DeFi for crypto-currency liquidity and price discovery. Stablecoins have to be fully backed by the safest, most liquid instruments. Audits have revealed that the issuers of stablecoins invest in longer dated instruments which yield much more and sometimes the coins are not fully backed. USDT audits show more than 50% are invested in corporate bonds, which raise the specter of contagion and systemic risk in related markets if there is a run on stablecoins. These audits are also more than a month delayed, when the month over month growth in stablecoins is more than 10%, it is time to mandate real-time audits. To be fair, Waller and Quarles raise these red flags, however that does not stop them from pointing to stablecoins as an innovation in payment systems that should stop the Fed from issuing a CBDC. The latest Polychain Network hack also revealed to cryptonauts that stablecoins are a centralized system, USDT can be frozen at will by a censoring authority, namely the issuer. Wallets can be blacklisted by the issuers, look at the audits for USDC to see the amount of frozen USDT.

The fact is that transactions are already surveilled, especially if the amounts breach the suspicious activity report thresholds in the US. Commercial banks harvest transaction data for cross selling, credit card data and other payment data end up with third party resellers. These third party resellers have lost customer specific data to hackers, some of the largest breaches have been from entities like Experian. The opposing concepts, privacy for transactions versus control against money laundering and terrorist financing is a conundrum that has to be resolved for any form of money. Even cash is subject to $10,000 limits for transaction and volume reporting. Whether the Fed does it or the private companies at the behest of the Fed does not really matter to the ordinary user. In fact some private companies have a greater geographic reach than the Fed itself.

The technical and economic architectural choices being proposed for CBDCs have much more nuance than what Waller brings up in his speech. One is the parallel to cash, the issuance is by the Fed, but some have proposed distribution through commercial banks, who will be in charge of KYC/AML if the amounts breach certain limits. Digital wallets can also be tiered, with certain limits for transactions as well as amounts being held. These wallets, fully backed up on the cloud, in a digital vault controlled by the holding entity are going to be the killer app of the new economy. For a model, the India stack which has UPI (universal payment infrastructure) has evolved through trial and error, implemented and standardized by the union government, private sector builds solutions on top. This infrastructure can be used by all entities, public and private uniting an identity layer, with a payments layer and vaults. Cash is an infrastructure created by the government and it works for all, private and public.

Reliance on private payment systems alone will not shelter the nation’s economy from shocks. From contagion risks in instruments such as corporate bonds, which are used as reserves for stablecoins; to ensuring proper and complete backing for narrow banks fall under the remit of national institutions. The Fed and other Central banks have functioned as Lenders of Last Resort (LOLR) and provide Emergency Guarantees. False narratives of the Free Banking episodes in the past are also being used to push stablecoins as a sole solution to cross-border payments. With these speeches Gov. Waller and Gov. Quarles have joined the group pushing for stablecoins as a true private sector solution which precludes CBDCs. A closer look shows that stablecoins are limited in their scope as payment rails.

Financial Inclusion

One of the arguments for CBDC is that it allows for a direct FedAccount provided at low or no cost to an unbanked person. Waller contends that America does not have a financial inclusion problem, so does Quarles. Hence the projected use of CBDC for this purpose is providing a solution for a non-existent problem. The numbers he quotes are from the 2019 FDIC unbanked survey which shows that the unbanked households have fallen to 5.4%. Further, 75% of the unbanked are not interested in having a bank account. A CBDC should not be created just to take care of 1% of households. More on that below.

The Fine Print On Financial Inclusion

A close reading of the 2019 FDIC survey shows the limitations of Gov. Waller’s argument. It is a household survey, even if one person in the house has a bank account they are not counted among the unbanked. 5.4% of households work out to be about 7.1 million households. This is not a small number. They are also among the poorest. There are nuances to the figure of 75% who are not interested in the having bank accounts. 29% say it is because they do not have enough money to meet minimum balance requirements, various other factors including high fees, not trusting banks and credit problems bring up the total to around 75%, the same number who said that they are not interested. The financially excluded are interested in having a bank account, but they are not interested in having an account with its current limitations. Covid specific predictions are available in a postscript. These indicate challenges in using a paper instrument (like cash) and increase in the unbanked percentages. It is telling that a Fed Governor or his speechwriter or researcher cherry pick the results to advance their theses. The Fed’s main job is not inflation targeting nor reducing unemployment. It is to provide a safe, flexible and stable monetary and financial system for the nation. In that spirit a true evaluation of the unbanked and underbanked are in order. Private enterprise can be innovative, however they are not inclusive and the services available to the poor skim off huge transaction fees. A check cashing services charges a huge fixed cost compared to the value of the check cashed. Being poor in America is very costly, starting with a bank account, private banking services, credit, the rental market, you name it. The poor pay more in fixed cost, and much more in percentage terms than others for each one of these services.

There is also the , which were not included because the FDIC dropped credit specific questions in the 2019 survey. If you don't look for the underbanked you will not find them. It takes them 6 months to collate the results. The results of June 2021 survey will be available 2022. The June 2021 survey will probably show a huge jump in the unbanked, as the economic maelstrom unleashed by the pandemic pushed more people into poverty.

Market Failures

Nowhere do the CBDC rollouts call for the elimination of cash or the provision of only direct Fed Accounts. Most of them propose CBDC as an alternative. Waller says that the Fed should only address market failures. A digital version of cash would take a lot of effort to get right, when markets fail, it happens without warning. Without preparation, without a readymade alternative, researched, tested and already in production, a mechanism to address a catastrophic market failure cannot be whistled up on cue. It is then entities like the Fed resort to mechanisms such as QE, Operation twist and repo operations which are the only available pathways for them and the transmission of monetary policy stops short on Wall Street and does not reach Main Street. CBDC and direct Fed Accounts can provide direct payments of Universal Income, of Unemployment Insurance, of support payments, of Pandemic relief. These payments from the central government can flow uncensored to direct beneficiaries. Entities like the Swedish Central Bank as well as the Chinese Central Bank have proposed CBDCs, their position is that payment systems are highly concentrated. Central Banks have to provide an alternative and plan for a scenario when market failures affect payment systems concentrated in one or two private entities. In China two payment systems dominate the payment landscape, Alipay and Wechatpay, 70% plus of all payments are made through those systems. The Chinese pursuit of e-CNY has to do with the possibility of stress related failures or dominance of payment systems by one or two entities.


Risks associated with CBDC are large. National infrastructure for issuing and distributing currency is vulnerable, witness the steps and protocols associated with the issuance, printing and distribution of currency bills. With a digital currency, these are highly magnified. Nation states and private hackers will probably try to disrupt the smooth functioning and trust associated with a national currency that will have disastrous consequences on the economic stability of the nation. Add to this the risk of bugs in software.

Payment systems have been run by the Fed for decades, they also collaborate with federal agencies like the mint to print and distribute cash. This indicates that the Fed is very competent in managing physical and cyber risks. There are no risk free systems, continuous monitoring, rapid upgrades and other well recognized risk mitigation methods can be used to limit the radius and extent of damage wrought by deliberate or accidental breaches. If risk is the only criterion used, no significant project can be executed.

Dollarization & Dedollarization

Dollarization is the phenomenon by which a sovereign nation pegs its currency to the dollar. This term is used broadly to mean the use of USD as a reserve currency and most importantly to denominate the prices of commodities like oil and the debts of small and large enterprises as well as sovereign debt in many countries. In effect, the use of the dollar as an exogenous unit for the internal or international affairs of a country. Many countries struggle against this phenomenon, some actively embrace it through currency boards, through the Eurodollar market, many countries with weak currencies do not have a choice. A view of this “exorbitant privilege” conferred to the US by the phenomenon has also redoubled efforts by countries to dedollarize. China’s e-CNY project is an example of a CBDC that has dedollarization as an explicit aim. The US establishment including national institutions and projects like the Digital Dollar Project have a stated aim to retain the “exorbitant privilege”.

It is true that dollarization is based on various factors and not just the technological underpinnings of a digital digital dollar. To echo Waller’s words, the vast resources of the United States and the stability of its financial, economic and political systems to withstand shocks is what sustains the USD as the world’s reserve currency. However this primacy will not be for ever. It is in the US’ best interest to keep technologically abreast of the developments in Central Bank money, as it is one more way of ensuring that the US is keeping up with the rest of the world. The division of duties implies that government supplies the foundation and financial infrastructure for the private sector to innovate on. Innovation should not be delegated to the private sector alone.