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Former US Fed Chairman does not see the need for CBDCs

Former Chairman of the US Federal Reserve Alan Greenspan recently made his views on central bank digital currencies (CBDCs) known. According to him, he does not think they serve any meaningful purpose. The comments were made during the Caijing annual conference held on November 12.

Greenspan said that there was no reason why any central bank should pursue a digital currency backed by its national currency. He also noted that all the financial resources of a country backed its national currency. As a result, even Facebook's Libra would never be able to match that no matter how big it became. It was a bit confusing for Greenspan to talk about Facebook's Libra and CBDCs in the same breath. This is because Facebook is not connected to a central bank, neither it is a central bank.

The Main Issue

There is a lot to unpack from what Greenspan said. First, it is important to note that there are two types of CBDCs. The first is a digital currency that is a representation of the nation's fiat currency, such as a digital US dollar. Alternatively, it could be a bank's internal token that is only used within the bank.

Facebook's Libra does not fall into any of the two categories mentioned. Libra will be a digital currency that is backed by a basket of assets that includes bonds, fiat currencies, and others that the Libra Association might decide are appropriate.

This news comes shortly after a report by IBM showed that many central banks would launch a CBDC within the next few years. If Greenspan was talking about central digital currencies, his point might be valid. Today, the online space has developed quite well. Most people nowadays make most of their purchases via an online medium, without ever having to touch physical currencies.

Greenspan May Have a Point

The only advantage that a digital currency might have over an electronic payment system is cost. However, costs are already going down. By the time such a project is launched, it would not offer much of a cost advantage. As such, it would be more prudent for a central bank to spend its resource ensuring the development of a robust and secure electronic payment system as opposed to trying to reinvent the wheel. This is especially so in developed nations where electronic payment systems are highly developed.

The main advantage that cryptocurrencies have over the fiat currency system is anonymity. However, a CBDC would not offer such a level of anonymity. In fact, users would need to comply with all existing anti-money laundering (AML), know your customer (KYC), and anti-terrorist financing (ATF) requirements. This already happens with the existing electronic payment systems.

As a result, it seems that Greenspan has a point. The resources that would be spent developing such a system do not appear to be worth it. However, only time will tell if he is right or not. This is especially valid given the looming launch of China's CBDC.

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