Why the push for a central bank digital dollar has slowed

For years now, the hot trend among the world's central banks has been to explore the creation of a central bank digital currency (CBDC). On Wednesday, a top U.S. Treasury official said the government is studying the question closely.

• But in practical terms, the possibility the United States will join the digital currency movement is looking more distant than ever.

Why it matters: The dollar is the bedrock of the world financial system, and decisions by U.S. officials on how much to test the digital dollar waters now could have massive downstream implications for both global financial stability and future U.S. financial power.

• Biden administration and Federal Reserve officials are loath to do anything that would create systemic economic risks. Yet they also don't want to risk China and other rivals creating their own globe-spanning digital currency that may supplant the dollar in global exchange.
• But those two goals are at cross purposes.

Meanwhile, there is not much of a constituency in Washington for Federal Reserve-issued digital dollars, and the banking industry would fight many forms of it tooth and nail.

Driving the news: At the Atlantic Council, Treasury undersecretary Nellie Liang spelled out the Biden administration's approach. While deliberations are ongoing, Liang's remarks showed how many obstacles stand in the way.

Between the lines: She noted that the Fed has "emphasized that it would only issue a CBDC with the support of the executive branch and Congress, and more broadly the public." In other words, this would only happen with broad bipartisan consensus, which is hard to find about anything.

• She notes that one option would be to have a retail CBDC (meaning ordinary people), where people could hold digital currency backed by the Fed through their banks, just as they can hold paper currency.
• But anything that undermines the role of banks taking deposits and making loans would risk the flow of credit in the economy. And every bank lobbyist in town could put their kids through college on what they'd get paid to stop it.

Yes, but: A wholesale digital currency — accessed only by banks and other financial institutions — could avoid those problems. But that raises questions about how this CBDC would be different from what already exists.

• Banks already have accounts at the Fed, which is well along in developing faster payment systems so that transfers between banks can happen near-instantly any time of day or night. The FedNow Service is due out this year.

Moreover, the implosion of many cryptocurrencies has undermined one of the cases for a CBDC; namely, that crypto-based stablecoins would create walled gardens of private financial networks that expose savers to undisclosed risk and enable illegal activity.

Of note: As the No. 2 Fed official, Lael Brainard was perhaps the central banker with the most enthusiasm for a digital currency. While she's gone from the Fed, she is now the top White House economic adviser and is a potential successor to Treasury secretary Janet Yellen.

The bottom line: The case for a dollar-based CBDC relies on long-term geostrategic thinking. The case against it is built on practical problems, and questions that officials may struggle to solve.