⚖️ Waller: US Federal Reserve is exploring tokenized reserves. Criticizes digital euro 💶 🪙
Yesterday Federal Reserve Governor Waller confirmed that the US would continue to participate in Project Agorá, a cross border payment initiative involving the BIS, seven central banks and 41 institutions. It aims to make correspondent banking faster and cheaper using tokenization. While most of the central banks will be providing a wholesale CBDC, the United States will potentially allow some existing central bank reserves to be tokenized. The New York Innovation Center at the New York Fed is a participant in the project on an exploratory basis.
Stepping back, President Trump’s executive order to end work on a central bank digital currency (CBDC), was not a surprise. However, the instruction failed to clarify whether the Federal Reserve could continue working on a wholesale CBDC for interbank payments. That would not have the same privacy issues as a retail CBDC. Arguably, a wholesale CBDC is only a minor extension of the central bank’s existing role.
From a legal perspective, there are two ways a central bank can adopt tokenization. One is to legally create a new central bank liability, a wholesale CBDC. The other is to treat all central bank reserves as one liability, but allow some of them to be tokenized. Eighteen months ago, the Federal Reserve published a paper exploring this point. It distinguished between the payment rail and the settlement asset: a wholesale CBDC or a tokenized reserve. Tokenized reserves represent the same settlement asset but using a different payment rail – DLT.
◇ Governor Waller’s comments on tokenized reserves
Yesterday Governor Waller confirmed to the Atlantic Council that the Federal Reserve has “dropped this whole language”. Banks have deposited money at the Federal Reserve for decades, so using a different technology does not create a new central bank liability.
“Banks can use their reserves to settle in a better way,” said Governor Waller. “That would be tokenization or platforms or blockchains. You could think about banks trading reserves in a more efficient way. Certainly the correspondent banking system could be done better. But it doesn’t mean we create a new liability. It’s just how you take the existing liabilities, and use technology to move money faster and safer.”
Specifically talking about Project Agorá, Governor Waller said,
“That project is really not about creating a wholesale CBDC. It’s like taking bank reserves that we have now, and how can you trade these on a platform to cut out intermediate steps and make the correspondent banking system more efficient. We’re not trying to replace anything.” Regarding wholesale CBDC, he added “we have completely stopped using this word, this nomenclature as you put it.”
◇ Waller’s comments on retail CBDC and digital euro
Regarding a retail CBDC, the governor pointed to a speech he made during 2021 where he asked what problem a CBDC would solve in the United States, which has a highly developed payment system. He has yet to receive a good suggestion. That doesn’t mean a CBDC wouldn’t be useful in countries with less developed payment systems or where more people are unbanked.
Asked about the digital euro, Governor Waller described the design as people having bank accounts backed by commercial bank money or CBDC.
“One of the big reasons the ECB has announced that they are going to do this is that they want to directly compete with the private sector to drive down payment cost,” he said.
Publicly, the ECB has said it wants to bring control over retail payment systems onshore, with Visa and Mastercard currently dominating.
Governor Waller continued, “My view and what we’ve always done in the US, is the government and the central bank, we do not compete directly with the private sector. That’s not our job. We do not use taxpayer dollars to go out and directly compete with the private sector. That’s purely a philosophical point. So the ECB is free to do whatever they want, but that argument would not fly in the US.”
https://www.ledgerinsights.com/waller-us-federal-reserve-is-exploring-tokenized-reserves-criticizes-digital-euro/
