For release on delivery
9:20 a.m. EDT
October 17, 2023
Responsible Innovation in Money and Payments
Remarks by
Michelle W. Bowman
Member
Board of Governors of the Federal Reserve System
at
Roundtable on Central Bank Digital Currency
Harvard Law School Program on International Financial Systems
Washington, D.C.
October 17, 2023
Thank you for the opportunity to speak with you today on the important topic of
innovations in money and payments. These issues continue to be of primary importance
to the Federal Reserve.1 As part of its key functions, the Federal Reserve carries out a
number of different responsibilities that include
• fostering a safe and efficient payment system and providing services that support
U.S. financial markets and private-sector payment, clearing, and settlement
arrangements;
• promoting the safety and soundness of individual financial institutions and
monitoring their impact on the financial system as a whole;
• setting U.S. monetary policy; and
• helping to maintain the overall stability of the U.S. financial system and the
economy.
As a policymaker, I view responsible innovation through the lens of accomplishing these
policy goals.
Innovation in money and payments can take many forms. We have continued to
see interest in digital assets, such as crypto-assets, stablecoins, central bank digital
currency (CBDC), and programmable payment platforms, including those built on
distributed ledger technology (DLT). Alongside these innovations, we have embraced
opportunities to improve the existing payment infrastructure by adopting and developing
instant payments, planning for future technology upgrades and improvements, and
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considering other more straightforward changes like expanding operating hours for the
wholesale payment infrastructure.
Today I will share my views on several of these potential improvements,
including CBDC, other digital assets, and wholesale payments innovations. I will also
discuss the importance of determining whether the benefits of innovation flow from the
new technology itself or, rather, result from policy choices that require new technology
adoption.
Throughout, I will lay out a vision for responsible innovation, which recognizes
the important role of private-sector innovation and leverages the strengths of the U.S.
banking system supported by clear prudential supervision and regulation, and I will
discuss how policy can support the continued development of the payment system and
broader financial system.
Digital Assets
Often, discussions about the evolution of the payments landscape focus on novel
forms of payment, including CBDC, stablecoins, and other forms of digital assets.
Central Bank Digital Currency
First, I will touch on CBDC. For the purposes of this discussion, I will define
CBDC as a new, digital form of central bank money widely available to the general
public. Some refer to this as a "general purpose" or "retail" CBDC. There are
meaningful differences between this type of retail CBDC and what is commonly referred
to as a wholesale CBDC, which is a term some use to refer to digital central bank money
used to settle large-value transactions among banks. While I will return to the concept of
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a wholesale CBDC in a moment, I would like to share my thoughts on the debate about
the introduction of a retail CBDC in the United States.
As I have noted before in other venues, there are two threshold questions that a
policymaker should ask when contemplating a CBDC. First: what problem is the
policymaker trying to solve, and is there a more efficient way to solve it? Second: what
features and considerations, including unintended consequences, should a policymaker
think about before deciding to adopt a CBDC and in designing the operation of a
CBDC?2
On the first question, we have seen a range of arguments in the public debate
about issuing a CBDC, including addressing frictions within the payment system,
promoting financial inclusion, and providing the public with access to safe central bank
money. These are all important issues. I have yet to see a compelling argument that a
U.S. CBDC could solve any of these problems more effectively or efficiently than
alternatives, or with fewer downside risks for consumers and for the economy.
Yet in the United States, we have a safe and efficient payment system that
continues to evolve with responsible innovations, like the FedNow Service, which is the
Federal Reserve's new interbank system for instant payments that launched in July of this
year. Through FedNow, participating banks, businesses, and consumers can send and
receive instant payments in real time, around the clock, every day of the year, with
immediately available funds.
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FedNow, and a similar private sector service, is designed to help make everyday
payments faster and more convenient, allowing consumers to instantly receive funds with
same-day access, and enabling small businesses to more efficiently manage cash flows
without processing delays. Future innovations may further build upon these services to
more effectively address payment systems frictions and financial inclusion. It is quite
possible that other proposed solutions may address many or all of the problems that a
CBDC would address, but in a more effective and efficient way.
Further, the potential benefits of a U.S. CBDC remain unclear, and the
introduction of a U.S. CBDC could pose significant risks and tradeoffs for the financial
system. These risks and tradeoffs include potential unintended consequences for the U.S.
banking system and considerable consumer privacy concerns. The U.S. banking system
is a mature, well-functioning, and effective system that delivers important benefits to our
economy. Within this system, banks play a number of important roles, including
providing consumers with access to credit and other banking and payments services, all
within an established regulatory perimeter. In addition, bank compliance and reporting
programs support important public policies, like deterring criminal activity and protecting
consumer financial data. Banks also play an essential role in the transmission of
monetary policy, and they provide the foundation for a well-functioning economy and
financial system.
The U.S. intermediated banking model helps to insulate consumer financial
activities from unnecessary government overreach, and I believe this is an appropriate
model for future financial innovation. If not properly designed, a CBDC could disrupt
the banking system and lead to disintermediation, potentially harming consumers and
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businesses and presenting broader financial stability risks.3 As policymakers, we would
need to carefully consider how an intermediated CBDC, with private-sector service
providers, could be designed in a way that maintains financial institution involvement
and minimizes, or ideally, eliminates related disruptions to the broader U.S. financial
system.
I believe it is important to continue to research the possible benefits, risks, and
tradeoffs of a potential U.S. CBDC, and to follow international CBDC developments that
could have implications for the United States. However, given that we have a safe and
efficient payment system and a well-functioning banking system, the potential uses of a
U.S. CBDC remain unclear and, at the same time, could introduce significant risks and
tradeoffs. That said, recognizing the interconnected and global nature of the financial
system, I see value in continuing to research and understand the underlying technology
and associated policy implications as other jurisdictions continue to actively pursue
CBDCs. Doing so ensures we are aware of and can be responsive to any developments
and can continue to support a safe and efficient financial system into the future.
Stablecoins
But a CBDC is just one potential piece of the evolving payments landscape.
Another alternative to traditional forms of money and payment, or to a CBDC, is
stablecoins. This form of payment emerged primarily to support the trading of crypto-
assets but increasingly has been proposed as an alternative to traditional payments and as
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a store of value. Stablecoins purport to have convertibility one-for-one with the dollar,
but in practice have been less secure, less stable, and less regulated than traditional forms
of money.
Digital assets used as an alternative form of money and payment, including
stablecoins, could pose risks to consumers and the U.S. banking system. Therefore, it is
important to understand risks and tradeoffs associated with digital assets and new
arrangements used for banking and payments. While I support responsible innovation
that benefits consumers, I caution against solutions that could disrupt and disintermediate
the banking system, potentially harming consumers and contributing to broader financial
stability risks. And, where the activity happens outside the regulatory perimeter,
consumers would be left without the adequate protections that our regulated and
supervised banks provide today in the United States.
A Comprehensive Regulatory Framework
For these reasons, my vision for responsible innovation includes a clear and
sensible regulatory framework, where we incorporate what works well today in the U.S.
banking system, allowing for private sector innovations within established guardrails.
Within this framework, it is imperative that the same activities that present the same risks
are subject to the same regulations-regardless of what a product is called and by whom
it is offered. I think the desire for "new" often leads us to overlook existing success, both
in terms of regulatory approach and financial services. Rather than speculate about the
composition of alternative regimes, we should ask how these new products and providers
can be held to the same standards as banks, especially with respect to consumer
protection.
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As an example, stablecoin issuers today typically are licensed or chartered at the
state level as money service businesses or trust companies, and, in some cases, offer
bank-like services, including the ability to store funds. However, while many of these
issuers are subject to state supervision, they are not subject to the full complement of
prudential regulation applicable to banks like capital requirements and prudential
supervision. They also do not benefit from the backstops and protections available to
banks like deposit insurance coverage and access to central bank liquidity in times of
stress. In order to protect consumers, it is imperative that activities that present the same
risks are subject to the same regulations and offer the same protections. This approach
would also allow banks to compete on a level playing field in introducing products and
services to benefit consumers. This type of regulatory clarity can provide support for
responsible innovation.
Wholesale Payments Innovation
Next, I will speak to potential improvements, including technological innovations,
in wholesale payments. Wholesale payments generally refer to large-value, interbank
transactions, and not consumers sending money to other consumers. This refers to the
financial plumbing that banks use behind the scenes to settle payments.
The Federal Reserve continues to speak to a broad range of stakeholders and
conduct research regarding emerging technologies, including those that could enable or
be supported by future Federal Reserve-operated payment infrastructures. The goal is to
better understand potential opportunities and risks of new wholesale payment platforms,
including those built on DLT, as well as the associated risks and benefits of depository
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institutions transacting on these platforms with "tokenized" forms of digital central bank
money, sometimes called wholesale CBDC.
In my view, the term "wholesale CBDC," despite its wide use, is generally a
misnomer that leads to confusion since we already have central bank money in digital
form that is available to banks for wholesale transactions.4 Today, banks and other
eligible entities hold central bank money as digital balances at the Federal Reserve-
frequently referred to as reserves. These reserves are held for a number of purposes,
including settling large-value interbank payments. Interbank payment services, like the
Fedwire Funds Service and other private sector services, are critical to the functioning
and stability of the financial system, and the economy more broadly, as they enable
important financial market functions.5
Wholesale payment infrastructures operated by the central bank tend to underpin
domestic and international financial activities by serving as a foundation for payments
and the broader financial system. This infrastructure allows payments to flow safely
between consumers and businesses within the United States and internationally. Since
this infrastructure is so critical to the payments system, it is necessary that we investigate
and understand the potential opportunities, risks, and tradeoffs for wholesale payments
innovation to support a safe and efficient U.S. payment system. These wholesale systems
4
Fabio Panetta, member of the Executive Board of the European Central Bank, has argued that wholesale
CBDC has existed for decades. See Fabio Panetta, "Demystifying wholesale central bank digital currency"
(speech at the Deutsche Bundesbank Symposium on Payments and Securities Settlement in Europe,
Frankfurt, Germany, September 26, 2022), https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp
220926~5f9b85685a.en.html.
5
For additional discussion on wholesale CBDC versus reserves on a wholesale payment platform, see Jon
Durfee, Jesse Leigh Maniff, and Priyanka Slattery, "Examining CBDC and Wholesale Payments"
(Washington: Board of Governors of the Federal Reserve System, September 8, 2023),
https://www.federalreserve.gov/econres/notes/feds-notes/examining-cbdc-and-wholesale-payments20230908.html.
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function safely and efficiently today, but we have seen new payment platforms built on
innovative technologies that have generated interest in new capabilities. This includes
transacting "tokenized" forms of money and assets and enhancing the programmability of
payments through the transfer of money using so-called smart contracts. These platforms
are also being explored as a way to improve the efficiency of payment, clearing, and
settlement of certain financial transactions, including for cross-border purposes.
Policymakers should be mindful of the specific features innovative wholesale
platforms could include, and the risks, tradeoffs, and other considerations they could
entail. For example, one potential model under consideration is the concept of a common
platform or shared ledger that could facilitate digital asset transactions, including
commercial bank and central bank liabilities.6 This type of ledger could be specific to
one jurisdiction (such as U.S. dollar transactions only among regulated financial
institutions) or across jurisdictions and containing multiple currencies.
While there is interest in new capabilities and efficiencies that a shared ledger
could offer, transacting central bank money on a shared ledger may introduce additional
risks and operational complexities. This would depend on how a platform would be
governed, and which entities would be allowed to participate. In the United States for
example, this technology would introduce risks and complexities that do not exist today
because a shared ledger might allow central bank money to circulate on a platform that is
not owned and operated by the central bank. Important legal, policy, and operational
questions would need to be thoroughly considered alongside an assessment of potential
benefits.
Another potential model is one where central banks maintain their own ledgers-
just as they do today-and use DLT as a bridge between distinct ledgers to achieve
interoperability and facilitate cross-border, cross-currency payments.7 Still other models
exist across both wholesale and retail payments that would leverage existing
infrastructure. Examples include experiments that look at interlinking faster domestic
payment systems to facilitate cross-border payments, or even exploring how existing
domestic payment infrastructures could be incrementally improved.8 Each model
contains its own set of potential features and tradeoffs. While my vision for responsible
innovation includes a broad understanding of different options, I continue to emphasize
that to help focus efforts, we must begin by asking "What specific problem are we trying
to solve?"
The Importance of Policy Choices
This brings me to the question of whether the potential benefits from innovation
come from new technology or from changes to existing policy. While conversations on
payments innovation often focus on the technological capabilities, policymakers must
apply a critical lens to understand whether changes to regulations or policies would be
necessary to address specific concerns. Some potential technology solutions assume-or
even require-policy change, such as issues related to operating hours and account
access. In these cases, a new technology alone cannot solve the issue. Some point to a
decentralized infrastructure to support digital assets as a solution to address current
frictions in cross-border payments, like speed and cost of payments. However, these
perceived payment limitations do not always stem from problems with existing
technology, but rather from existing policies, laws, and even consumer and business
preferences. And within the international context, some changes may require greater
alignment across jurisdictions.
Some purported payment limitations or frictions exist for specific reasons related
to managing key risks that policymakers may not want to change, and it is important to
understand the tradeoffs of these policy decisions. Let's use the example of compliance
requirements that deter financial crimes and counter the financing of terrorism. These
policies exist to accomplish specific policy goals and are implemented by banks that
balance the need for transparency to deter crime and the protection of consumer financial
information from government overreach. In these cases, the perceived barriers in existing
payment systems are established for important public policy reasons and are not
limitations resulting from the existing technology itself. It is important to not only
thoroughly understand what technological innovations can do, but also what these
innovations should be able to do within the broader context of a robust, well-functioning
banking and payments system.
My vision for responsible innovation requires that we continue to distinguish
which specific payment frictions can benefit from technological innovation itself and
which are questions of policy and exist for good reasons, as well as the recognition that
we should not compromise vital public policies in the name of innovation.
The Importance of Continued Research
The Federal Reserve remains open to multiple options to improve the payments
landscape. We continue to conduct research to fully understand technological
innovations and their associated benefits, risks, and tradeoffs. We must also fully
understand any related implications for Federal Reserve payment infrastructure and
policy outcomes.
Researchers cover a wide range of policy areas, including payments policy,
privacy considerations, financial inclusion, financial stability, and monetary policy
implications. Because new digital assets are currently focused on tokenization of certain
traditional or even new types of money, tokenization is a research theme for the Federal
Reserve and for central banks globally. While this topic is relevant to CBDC research
work, it will also inform other issue areas-including discussions about stablecoin
regulation, novel banking activities supervision, and efforts to improve the current
payment system.
Technologists at the Board and the Reserve Banks have been conducting focused
research and experimentation to provide insight into technical capabilities and risks
associated with digital assets, including CBDC, and the programmable platforms that
could support payment infrastructure improvements. These experiments give the
researchers hands-on experience with new technologies and allow the Federal Reserve to
examine the application of emerging technologies in retail, wholesale, and cross-border
use cases.
The Federal Reserve Board continues to collaborate closely with international
counterparts on issues related to digital payments. This includes engagement with
multilateral institutions, such as the Bank for International Settlements, G7, Financial
Stability Board, and bilateral engagements with other central banks. This work reflects
the interconnectedness of the global financial system and allows us to follow actions
taken by other jurisdictions and understand any related implications for the United States.
Conclusion
As the money and payments landscape evolves, I continue to stress the
importance of looking ahead and analyzing potential changes that may emerge well into
the future. This can be done most effectively by understanding the broad range of
options that could be leveraged to improve payments, including technology,
improvements to existing payment infrastructure, and policy options and their
implications. Given the breadth of activity in this space, I believe that policymakers must
specify the problems they are trying to solve, understand the range of alternatives that
could address any problems, including policy and technology options, and thoroughly
analyze the associated risks and tradeoffs.
For all of the Federal Reserve's involvement in this work, I support a responsible
approach to innovation that recognizes the role of private sector innovations, benefits
from the strengths of the U.S. banking system, and focuses policymakers on thinking
about payment and financial system infrastructure and effective policy. To achieve this, I
support a clear regulatory framework that provides for responsible innovation while
building upon what works well today and preventing disruption of the U.S. banking and
payment system.
Thank you for the opportunity to share my views on these important issues.