Christopher J Waller: The US dollar and central bank digital
currencies
Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal
Reserve System, at the symposium "Digital Currencies and National Security
Tradeoffs", presented by the Harvard National Security Journal, Cambridge,
Massachusetts, 14 October 2022.
* * *
Thank you, Professor Jackson, and thank you to the Harvard National Security Journal
for the invitation to speak at this symposium. As the payment system continues to
evolve rapidly and the volume of digital assets continues to grow, it is critical to ensure
that we keep both the benefits and risks of digital assets in the policy conversation,
including the implications for America's role in the global economy and its place in the
world. My speech today focuses on exactly this issue and on an aspect of the digital
asset world that is now the center of domestic and international attention-central bank
digital currencies (CBDCs) and how they relate to the substantial international role of
the U.S. dollar.1
In January 2022, the Federal Reserve Board published a discussion paper on CBDCs
to foster a broad and transparent public dialogue, including the potential benefits and
2
risks of a U.S. CBDC. To date, no decisions have been made by the Board on whether
to move forward with a CBDC. But my views are well known. As I have said before, I
am highly skeptical of whether there is a compelling need for the Fed to create a digital
currency.3
I am not a national security expert. But one area where economics, CBDCs, and
national security dovetail is the role of the dollar. Advocates for creating a U.S. CBDC
often assert how it is important to the long-term status of the dollar, particularly if other
major jurisdictions adopt a CBDC. I disagree. As I will discuss, the underlying reasons
for why the dollar is the dominant currency have little to do with technology, and I
believe the introduction of a CBDC would not affect those underlying reasons. I offer
this view, again, in the spirit of dialogue, knowing how important these issues are, and I
am very happy to engage in vigorous debate regarding my view. I remain open to the
arguments advanced by others in this space.
The Role of the U.S. Dollar
After World War II and the creation of the Bretton Woods system, the U.S. dollar served
as the central currency for the international monetary system. Other countries agreed to
keep the exchange value of their currencies fixed to the dollar, and eventually, countries
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came to settle international balances in dollars. That role has continued long after the
Bretton Woods system dissolved.
By any measure, the dollar is the dominant global currency-for funding markets, foreign
exchange transactions, and invoicing. It also is the world's predominant reserve
currency.5
In terms of the dollar's reserve currency status, 60 percent of disclosed official foreign
reserves are held in dollars, far surpassing the shares of other currencies, with the
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majority of these dollar reserves held in safe and liquid U.S. Treasury securities. Even
in a world of largely floating exchange rates, many countries either implicitly or explicitly
anchor their currencies to the dollar; together, these countries account for about half of
world gross domestic product.7
The dollar is by far the dominant currency for international trade. Apart from
intraEuropean trade, dollar invoicing is used in more than three-fourths of global trade,
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including 96 percent of trade in the Americas. Approximately 60 percent of
international and foreign currency liabilities-international banking loans and deposits as
well as international debt securities-are denominated in dollars. And the dollar remains
the single most widely used currency in foreign exchange transactions. Why does this
matter to the United States? As indicated in the Board's CBDC discussion paper, the
dollar's international role lowers transaction and borrowing costs for U.S. households,
businesses, and government. It widens the pool of creditors and investors for U.S.
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investments. It may insulate the U.S. economy from shocks from abroad. I t also allows
the United States to influence standards for the global monetary system.10
The dollar's role doesn't only benefit the United States. The dollar serves as a safe,
stable, and dependable form of money around the world. It serves as a reliable
common denominator for global trade and a dependable settlement instrument for
cross-border payments. In the process, it reduces the cost of transferring capital and
smooths the world of global payments, including for households and businesses outside
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of America. For example, consider the dollar's role in foreign exchange markets. To
make a foreign exchange transaction between two lightly traded currencies, it is often
less expensive to trade the first currency with the dollar, and then to trade the dollar
with the second currency, rather than to trade the two currencies directly.
The factors driving the dollar's role as a reserve currency are well researched and well
demonstrated, including the depth and liquidity of U.S. financial markets, the size and
openness of the U.S. economy, and international trust in U.S. institutions and the rule of
law. We must keep these factors in mind in any debate regarding the long-term
importance of the dollar.
CBDCs and the U.S. Dollar
Threats to the U.S. dollar's international dominance are numerous, including shifting
geopolitical alliances and pressure to invoice in alternative currencies, as well as
deeper and more open foreign financial markets. My focus today is on just one
supposed threat-namely, the purported shifting payments landscape as a result of the
growth of digital assets, particularly CBDCs.
Recent years have seen a number of changes to the payments system, from instant
interbank payments to mobile payment services to a shift toward nonbank payment
providers. Some of this shift has been through the rise in digital assets and include
cryptocurrencies and other crypto-assets such as stablecoins, which have money-like
characteristics. They also include CBDCs. A CBDC is a digital instrument that is a
liability of the central bank. That is all it is-a direct liability of a central bank.
What major security gap exists that a CBDC, and only a CBDC, can close? What would
be the effect of CBDCs and other digital money-like instruments on the role of the
dollar? There are many ways to approach this question, but I want to do so by using a
simple example: What is it about a CBDC that would make a non-U.S. company,
engaging in international financial transactions, more or less likely to use the dollar?
This example, of course, focuses on the reasons for why contracts are generally
invoiced in U.S. dollars, which is just one feature of the dollar's international role. To
me, however, it simplifies the overall question regarding the effect of a CBDC on the
dollar's dominance.
We can break down this question into three others: First, would a foreign CBDC affect
this non-U.S. company's decisions? Second, would a U.S. CBDC affect them? And,
third, while stablecoins are not CBDCs, how would a privately issued stablecoin have a
different effect?
Foreign CBDCs
First, I will consider the emergence of one or more foreign CBDCs in a world with no U.
S. CBDC. What would be the effect on the non-U.S. company? Let's assume the
company acts pragmatically; it would only move away from using the U.S. dollar if it is
better off by doing so. The discussion around this question usually tends to focus on the
potential technological advantages of a CBDC and doesn't grapple with the underlying
reasons for the dominance of the dollar. That is, advocates for a CBDC tend to promote
the potential for a CBDC to reduce payment frictions by lowering transaction costs,
enabling faster settlement speeds, and providing a better user experience. I am highly
skeptical that a CBDC on its own could sufficiently reduce the traditional payment
frictions to prevent things like fraud, theft, money laundering, or the financing of
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terrorism. Though CBDC systems may be able to automate a number of processes
that, in part, address these challenges, they are not unique in doing so. Meaningful
efforts are under way at the international level to improve cross-border payments in
many ways, with the vast majority of these improvements coming not from CBDCs but
improvements to existing payment systems.13
For argument's sake, though, let's suppose that this foreign CBDC is more attractive for
payments to the non-U.S. company, perhaps for technological reasons, or because the
preferences of the firm's consumers or trading partners change in response to the
introduction of the CBDC. Due to the well-known network effects in payments, the more
users the foreign CBDC acquires, the greater will be the pressure on the non-U.S.
company to also use the foreign CBDC. In this case, it is true that the appeal of the
foreign CBDC as a transactions medium-not as a unit account or store of value-might
gain at the expense of the dollar. These effects will likely only be on the margin
because they rely on a large enough number of individuals and businesses being nearly
indifferent between the dollar and the foreign currency in CBDC form.
But the broader factors underpinning the dollar's international role would not change.
Changing those factors would require large geopolitical shifts separate from CBDC
issuance, including greater availability of attractive safe assets and liquid financial
markets in other jurisdictions that are at least on par with, if not better than, those that
exist in the United States. The factors supporting the primacy of the dollar are not
technological, but include the ample supply and liquid market for U.S. Treasury
securities and other debt and the long-standing stability of the U.S. economy and
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political system. No other country is fully comparable with the United States on those
fronts, and a CBDC would not change that.
Finally, as I've noted before, it is possible that a foreign-issued CBDC could have the
opposite of its intended effect and make companies even less willing to use that
country's currency. Since digital currencies would make it easier for a government to
monitor transactions, shifting to a CBDC might make a company less willing to use that
country's currency. For example, I suspect that many companies will remain wary of
China's CBDC for just this reason.
U.S. CBDC
I am also skeptical that a U.S. CBDC would affect this hypothetical foreign company's
decisionmaking. A U.S. CBDC is unlikely to dramatically reshape the liquidity or depth
of U.S. capital markets. It is unlikely to affect the openness of the U.S. economy,
reconfigure trust in U.S. institutions, or deepen America's commitment to the rule of law.
As I have said before, the introduction of a U.S. CBDC would come with a number of
costs and risks, including cyber risk and the threat of disintermediating commercial
banks, both of which could harm, rather than help, the U.S. dollar's standing
internationally. Like a foreign CBDC, the technological advantages of a U.S. CBDC
would have a hard time overcoming long-standing payments frictions without violating
international financial integrity standards. For the non-U.S. company already conducting
its business in dollars, introducing a U.S. CBDC would not provide material benefits
over and above the current reasons for making U.S. dollar-denominated payments. For
non-U.S. companies conducting their business in currencies other than dollars, a U.S.
CBDC similarly would likely not be preferred to their current options. It could be that
individuals outside the United States would find a U.S. CBDC particularly attractive, but,
again, making a U.S. CBDC globally available would raise a number of issues, including
money laundering and international financial stability concerns. And as with a
foreignissued CBDC, the dollar's function as a unit of account and store of value is unlikely to
be affected, resulting in a limited effect on the international role of the dollar.
Stablecoins
The last scenario I want to consider is one in which a privately issued stablecoin
pegged to a sovereign currency is available for international payments. Stablecoins are
crypto-assets that aim to maintain a stable value relative to a specified asset or pool of
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assets. The reasons that stablecoins may be more attractive than existing options for
payments include their ability to provide real-time payments at lower cost between
countries that were previously poorly serviced and to provide a safe store of value for
individuals residing in or transacting with countries with weak economic fundamentals.
This is different than an intermediated U.S. CBDC, for which access in developing
economies would depend on banks' incentives to provide such access. Stablecoins,
however, may be held directly in any country that allows its citizens to do so. To
improve payments, especially for jurisdictions that are not well served under the current
global payments ecosystem, stablecoins must be risk-managed and subject to a robust
supervisory and regulatory framework.
Could such an asset affect the role of the U.S. dollar? Once again, I am unsure whether
even a large issuance of a stablecoin could have anything more than a marginal effect.
It has often been suggested by commentators that private money-like instruments such
as stablecoins threaten the effectiveness of monetary policy. I don't believe that to be
the case, and it should be noted that nearly all the major stablecoins to date are
denominated in dollars, and therefore U.S. monetary policy should affect the decision to
hold stablecoins similar to the decision to hold currency. This follows from a vast body
of evidence in international economics showing how countries pegging their exchange
rates effectively import monetary policy from the country to which their currency is
pegged.16
Also, because stablecoins are pegged to the dollar, they may increase rather than
reduce the primacy of the dollar abroad, since demand for stablecoins increases
demand for dollar-denominated reserve assets held by the stablecoin issuer.
Conclusion
The ongoing debate over the risks and benefits of a CBDC is important, and I am happy
to continue to engage with both advocates and skeptics of CBDCs. But, for the reasons
I have laid out, I don't think there are implications here for the role of the United States
in the global economy and financial system. We should instead focus and debate the
salient CBDC-related topics, like its effects on financial stability, payment system
improvements, and financial inclusion. Thank you again for having me to participate in
this fantastic event.
1
These views are my own and do not represent any position of the Board of Governors
or other Federal Reserve policymakers.
2
See Board of Governors of the Federal Reserve System (2022), "Money and
Payments: The U.S. Dollar in the Age of Digital Transformation" (PDF) (Washington:
Board of Governors, January).
3
See Christopher J. Waller (2021), "CBDC: A Solution in Search of a Problem?"
speech delivered at the American Enterprise Institute, Washington (via webcast),
August 5.
4
See Federal Reserve Bank of St. Louis (2013), "Federal Reserve History: Creation of
the Bretton Woods System," webpage.
5
See Committee on the Global Financial System (2020), "U.S. Dollar Funding: An
International Perspective," (PDF) CGFS Papers 65 (Basel, Switzerland: CGFS, June).
These figures are taken from Carol Bertaut, Bastian von Beschwitz, and Stephanie
Curcuru (2021), "The International Role of the U.S. Dollar," FEDS Notes (Washington:
Board of Governors of the Federal Reserve System, Oct. 6).
7
See Ethan Ilzetzki, Carmen M. Reinhart, and Kenneth S. Rogoff (2019), "Exchange
Arrangements Entering the Twenty-First Century: Which Anchor Will Hold?" Quarterly
Journal of Economics, vol. 134 (May), pp. 599-646.
8
See Bertaut, von Beschwitz, and Curcuru "International Role of the U.S. Dollar," in
note 6; and Emine Boz, Camila Casas, Georgios, Georgiadis, Gita Gopinath, Helena Le
Mezo, Arnaud Mehl, and Tra Nguyen (2020), "Patterns in Invoicing Currency in Global
Trade" IMF Working Paper WP/20/126 (Washington: International Monetary Fund, July).
9
For example, pass-throughs of exchange rate changes to U.S. inflation are reduced
materially when the overwhelming majority of U.S. imports are invoiced in U.S. dollars.
10
See Board of Governors, "Money and Payments," p. 15, in note 2.
11
See Committee on the Global Financial System, "U.S. Dollar Funding," in note 5.
12
The legal and reputational risks associated with noncompliance with requirements on
anti-money laundering and countering the financing of terrorism often result in financial
institutions choosing to be very cautious, including by requiring manual intervention in
cases of uncertainty, which decreases speed and increases costs of cross-border
payments. See Financial Action Task Force (2021), Cross Border Payments: Survey
Results on Implementation of the FATF Standards (PDF)(Paris: FATF, October).
13
See Financial Stability Board (2020), Enhancing Cross-border Payments: Stage 3
Roadmap
(PDF)(Basel, Switzerland: FSB, October).
14
Several recent studies set forth similar perspectives, including the following: U.S.
The Future of Money and Payments: Report
Department of the Treasury (2022),
Pursuant to Section 4(b) of Executive Order 14067 (PDF)(Washington: Department of
the Treasury, September); and Bertaut, von Beschwitz, and Curcuru, "International
Role of the U.S. Dollar," in note 6.
15
See Christopher J. Waller (2021), "Reflections on Stablecoins and Payments
Innovations," speech delivered at "Planning for Surprises, Learning from Crises," 2021
Financial Stability Conference, Cleveland (via webcast).
16
See, for instance, Maurice Obstfeld and Alan M. Taylor (2004), Global Capital
Markets: Integration, Crisis, and Growth (New York: Cambridge University Press).