“The Crypto Revolution Will Not be Public”

That is the title of my latest Bloomberg column, here is one excerpt:

In a remarkably honest yet radical speech last month about stablecoins, Fed Governor Randal Quarles argued that current payments systems already incorporate a great deal of information technology — and they are improving rapidly. The implication is that a central bank digital currency, or CBDC, is a solution in search of a problem.

Quarles also suggested that the Fed tolerate stablecoins, just as central banking has coexisted and indeed thrived with numerous other private-sector innovations. Stablecoins can serve as a private-sector experiment to see if individuals and institutions truly desire a radically different payments system, in this case based on crypto and blockchains. If they do, the system can evolve by having some but not all transactions shift toward stablecoin.

There need not be any “do or die” date of transition requiring a perfectly functioning CBDC. But insofar as those stablecoins can achieve the very simple methods of funds transfer outlined above, market participants will continue to use them more.

Quarles argued that with suitable but non-extraordinary regulation of stablecoin issuers, such a system could prove stable. He even seems to prefer the private-sector alternative: “It seems to me that there has been considerable private-sector innovation in the payments industry without a CBDC, and it is conceivable that a Fed CBDC, or even plans for one, might deter private-sector innovation by effectively ‘occupying the field.’”

In essence, Quarles is willing to tolerate a system in which privately issued dollar equivalents become a major means of consummating payments outside of the Fed’s traditional institutions. Presumably capital requirements would be used to ensure solvency.

For many onlookers, even hearing of innovation in finance raises worries about systemic risk. But perhaps the U.S. would do better by letting information technology advance than trying to shut it down. And if you are afraid of instability, are you really so keen to see foreign central bank digital currencies fill up this space?

If you are still skeptical, ask yourself two final questions. First, which has been more innovative on these issues: the private sector or the public sector? Second, how realistic are the prospects that Congress takes any effective action at all?

This is now a world in which radical monetary ideas are produced and consumed like potato chips. I say, pass the bag.

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