Fed Vice Chairman for Supervision: Foreign CBDCs and Stablecoins are unlikely to threaten the dollar

Randal Quarles, the U.S. Federal Reserve’s vice chairman for financial supervision, said he believes both stablecoins pegged to the dollar and digital currencies issued by foreign central banks are unlikely to be a major source of concern about the dollar.

Quarles said in a written statement at the Utah Bankers Association's annual meeting on Monday that neither foreign fiat currencies nor digital currencies are likely to challenge the dollar's role in the global economy. He cited the size of the U.S. economy, trade relations with other countries, and "credible U.S. monetary policy" and believed that even central bank digital currencies (CBDCs) issued overseas would not pose any risks to the dollar.

“As the global economic and financial system continues to evolve, it is inevitable that some foreign currencies, including some foreign CBDCs, will be used more in international transactions than they are currently,” Quarles said. “However, it seems unlikely that the U.S. dollar’s ​​status as the global reserve currency, or its role as the dominant currency in international financial transactions, will be threatened by foreign CBDCs.”

Quarles’ comments on dollar-pegged stablecoins also seemed to lack a sense of urgency. Although the Fed vice chairman said that “regulators have a legitimate and strong interest in how stablecoins are structured and governed,” dollar stablecoins could support the fiat currency they are pegged to by making cross-border payments faster and less expensive.

According to Quarles, concerns surrounding stablecoins — one of which is that holders would be tempted to redeem large amounts of tokens at once — are “entirely solvable.” He called Bitcoin “a risky speculative investment rather than a transformative means of payment,” and given the crypto asset’s failure to become a widely accepted form of payment, it is unlikely to affect the dollar’s ​​status.

However, Quarles stopped short of pushing for the Fed to issue a CBDC, suggesting that a federally issued digital currency would hinder innovation in the private sector and could limit the availability of credit and many commercial bank services. While he did not rule out the possibility of the U.S. government eventually issuing a CBDC, he added that any launch would need to be well prepared to prevent illicit activity and justify the potential costs of expanding the size of the Federal Reserve.

“The potential benefits of a Fed CBDC are unclear [...] I believe that developing a CBDC would likely carry considerable risks.”

In May, Federal Reserve Chairman Jerome Powell said the government agency would release a discussion paper sometime this summer to explore the implementation of a CBDC. Powell has spoken several times about the potential impact of a CBDC issued by the U.S. government. He said he believes it is more important to “get it right than to be the first to do it.”