The vice chair for supervision at the US Federal Reserve has said that central bank digital currencies (CBDCs) are risky and comparable to the fad of parachute trousers in the 1980s.

In a speech at an annual Utah Bankers Association Convention, vice chair Randal K. Quarles said he had been “reflecting on America’s centuries-long enthusiasm for novelty” and that when coupled with the country’s fear of missing out, this has sometimes led to a mass suspension of critical thinking and “deluded crazes or fads.”

At the Idaho-based event, Quarles explained that the US central bank offers an array of options that facilitate electronic US dollar payments and that the dollar is already “highly digitised.”

The chair highlighted two versions for a CBDC, an account-based model in which the central bank would provide individual accounts directly to the general public and a model that is not maintained in Federal Reserve accounts, which would be closer to a digital equivalent of cash.

He added that he was sceptical that the US central bank has legal authority to pursue either of the models without legislation.

“First, the U.S. dollar payment system is very good, and it is getting better,” said Quarles, emphasising his three key considerations when it comes to CBDCs. “Second, the potential benefits of a Federal Reserve CBDC are unclear. Third, developing a CBDC could, I believe, pose considerable risks.”

Additionally, he said that he does not agree with supporters of a Federal Reserve CBDC that believe a digital currency is necessary to defend the role the US dollar plays in the global economy.

“I think it's inevitable that, as the global economy and financial system continue to evolve, some foreign currencies - including some foreign CBDCs - will be used more in international transactions than they currently are,” said Quarles. “It seems unlikely, however, that the dollar's status as a global reserve currency, or the dollar's role as the dominant currency in international financial transactions, will be threatened by a foreign CBDC.”

He added: “The dollar's role in the global economy rests on a number of foundations, including the strength and size of the U.S. economy; extensive trade linkages between the United States and the rest of the world; deep financial markets, including for U.S. Treasury securities; the stable value of the dollar over time; the ease of converting U.S. dollars into foreign currencies; the rule of law and strong property rights in the United States; and last but not least, credible U.S. monetary policy.”

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