The United States has lagged many countries in pursuing a central bank digital currency, or CBDC. At Harvard Law School, a pair of experts sparred over whether there’s an urgent need for the U.S. to catch up.
Daleep Singh, the former deputy secretary of the United States Treasury for Financial Markets, made a case for the immediate adoption of a digital dollar, while Christopher Waller, a member of the Federal Reserve Board of Governors, argued for moving more slowly. The debate was the centerpiece of the Digital Currencies and National Security Symposium held at Harvard Law School on Oct. 14, which brought to campus several experts on economics, finance, domestic and international law, foreign policy, and technology. The event was sponsored by the Harvard National Security Journal.
Opening the keynote discussion, Singh tied the CBDC to national security. A country’s ability to exert power and influence is increasingly being measured in economic terms, he said. He cited examples of U.S. innovation technology — artificial intelligence, quantum computing, robotics, hypersonic flight — which have “outsized potential to boost economic growth, but also an important nexus with national security.”
Currently, Singh said, both Russia and China have shown both the desire and the capacity to challenge the U.S.-led international order. China has become “almost a peer competitor across economic, military, and technological dimensions,” and it has become the first large economy to introduce a CBDC. While this has provided some internal benefits, it could also give China a foreign policy edge. Singh quoted a 2020 speech by Chinese President Xi who called for development of digital currency to “actively participate in the formulation of international rules to shape new competitive advantages.” China has since pursued digital currency projects with Hong Kong, Thailand, and the United Arab Emirates, and other countries have followed suit.
“CBDC’s have great potential to either enhance or erode the potency of U.S. economic statecraft,” Singh said — particularly when it comes to sanctions, such as the ones currently being imposed on Russia. “To be very clear, the potency of these financial sanctions hinge upon our ability to constrain the access, or fully exclude a rogue actor from the dollar-based financial system.”
In particular, he said, China’s Xi has criticized the international sanctions on Russia, and digital currency might give him greater ability to undercut them. Countries using CBDC’s could conceivably make financial transactions more quickly, in higher amounts, with less detection and less currency volatility than they do now.
“Put simply, the United States needs a seat at the head of this table and without a proposal of our own, reflecting our own standards, values and geopolitical interests, we’re playing a weak hand,” he said.
Finally, and most importantly, he argued, the lack of a U.S. CBDC threatens the primacy of the dollar. “Dollar primacy is nothing more than a network and all networks have tipping points, often psychological ones that are nearly impossible to identify in advance. By the time the erosion of dollar primacy shows up in the data, it may be too late to stop the process.” He described a scenario in which China gained advantage through a superior CBDC system. “Even for those of you who think there’s only a remote chance of my story being true, my response would be this: Why take a chance?”
Waller took a more cautious view. “It is critical that we keep both the benefits and risks of digital assets in the policy conversation,” he said. Waller noted that, in January 2022, the Federal Reserve Board published a discussion paper on the topic and has not yet resolved to move forward. Personally, he said, “I am highly skeptical of whether there is compelling need for the Fed to create a digital currency.”
In particular, he took issue with Singh’s view that the lack of a CBDC would threaten the dollar. “The underlying reasons for why the dollar is the dominant currency have little to do with technology, and the introduction of a CBDC would not affect those underlying reasons.”
The dollar, he said, remains the central currency of the international monetary system. Sixty percent of foreign reserves and more than half of the world’s gross domestic product is held in dollars. And it remains the single most widely used currency in foreign transactions. “Why is allowing U.S. households to have a checking account at the Fed going to make those things stronger? That’s what a CBDC is.”
While Waller allowed that there are numerous threats to the dollar’s international dominance, including shifting geopolitical alliances, he said that the CBDC is unlikely to solve them. Further, when one country introduces a CBDC, this may make others less likely to use that country’s currency, as those transactions would be monitored more easily by a central bank. “I suspect that many companies are wary of China’s CBDC for just this reason.” Non-US companies already trading in dollars would get no immediate advantages from a CBDC, he argued, nor would the introduction of one give new companies reason to come aboard.
As an alternative, he proposed a U.S. stablecoin — a cryptocurrency pegged to the dollar —which would be more flexible than a CBDC. But even here, Waller said, the advantages to trade would be minimal. “The broader factors underpinning the dollar’s international role would not change. Changing those factors would require large geopolitical shifts, separate from CBDC issues.”
Given the chance to respond, Singh took Waller’s point that the lack of a U.S. CBDC poses little obvious, immediate threat. However, he said that “[t]he biggest failures in policy are not failures of memory; they’re failures of imagination. While I will readily acknowledge that China lacks all the institutional features that gave the dollar its primacy, those features can change. And I think the geopolitical environment suggests that big shifts are happening right before us.”