Key Points

  • ‘Official’ plans for a U.S. digital dollar still not introduced as research remains underway.
  • Treasury’s Graham Steele expresses concerns about the validity of a CBDC in the U.S.
  • Steele is concerned that a CBDC could trigger a bank run as people rush to withdraw their currencies from banks.

A digital dollar is still not sitting well with treasury Official Graham Steele on worries that it could very well trigger bank runs. Steele thinks that the in-research digital dollar could encourage further withdrawals from banks, weakening an already shaken system.

A digital dollar could be a thorn in the banking system. 

While talking at a payments conference in Austin, Texas, on June 13, 2023, Graham Steele said that the U.S. has not yet decided on whether to pursue a central bank digital currency. However, an interagency working group is already in place that is researching the implications of such a currency.

He expressed his thoughts, saying that a retail CBDC will drive out further deposits from banks instead of a wholesale CBDC that is only available to institutional investors. The retail CBDC would allow individuals and businesses to conduct normal day-to-day activities, gradually replacing the common notes and coins.

In his words, Steele said 

“A retail CBDC could contribute to a more competitive and innovative payment system; support financial inclusion; and help preserve the face value redemption of the currency. ” He added, “There were caveats: design decisions — such as the range of intermediaries acting as CBDC service providers — would impact those potential effects.”

Steele noted how we had seen banks such as Silicon Valley Bank and First Republic fall due to increased withdrawals than the available deposits. He said that other banks could follow if a retail CBDC gets offered and investors seize the opportunity to hold their money digitally.

“As we have seen in the recent episodes of banking turmoil, a combination of technology, highly concentrated depositor base, and access to non-deposit alternatives outside of the banking system may have changed the nature and speed of bank runs,” 

“With the technology enabling the movement of deposits only getting faster, there could be additional risks associated with the introduction of CBDC.”

But a digital dollar is already in the works, Steele?

A digital dollar is not new in the U.S. as it has had a green light to be researched and explored. Last March, President Biden signed an executive order encouraging Federal Reserve to explore a digital dollar that abides by national interests. 

In November 2022, information surfaced that nine major banks were working hand in hand with the Federal Reserve Bank of New York to test the feasibility of a digital dollar. The CBDC would be based on distributed ledger technology. 

The banks involved in the pilot phase of the digital dollar include Citibank, Wells Fargo, Mastercard, PNC Bank, T.D. Bank, Truist, BNY Mellon, HSBC, Wells Fargo, and U.S. Bank. 

The U.S. digital dollar will be in the form of tokens like what is happening in the crypto industry, only that it will be settled and simulated via Central Bank Reserves on a shared multi-entity distributed ledger. Keep watching Fintech Express for more updates on Finance, Banking, and other Fintech-related developments.