Yesterday Republican Federal Reserve Governor Christopher Waller spoke about the role of the Federal Reserve, saying it should leave most payment roles to the private sector. He believes the Federal Reserve should only step in to address market inefficiencies, such as clearing and settlement. He has always been skeptical about the idea of a central bank digital currency (CBDC) and reiterated that stance, saying he can’t see what market failure or efficiency it aims to address.
His speech outlined the history of the Federal Reserve and why it was needed. Given the context of looming government belt tightening by the new Department of Government Efficiency (DOGE), one could interpret the talk as a justification for retaining the Fed.
Musk re-tweets #EndTheFed post
Shortly after Governor Waller delivered his speech, Trump confirmed Elon Musk and Vivek Ramaswamy as co-heads of DOGE, which will operate outside of the government, allowing Musk to retain his business roles. The White House Office of Management and Budget will be tasked with implementing the recommendations from DOGE.
A couple of days ago Musk re-tweeted an X post that included the hashtag #EndTheFed. The tweet mainly discussed Federal Reserve Chair Powell’s refusal to resign with the post stating that “The Executive Branch should be under the direction of the president.” Yesterday Musk reiterated that 99 government departments are sufficient, compared to the 248 that currently exist.
In most countries banks have a single regulator. The United States has three main federal banking regulators: The Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). Plus, credit unions have a separate department. That said, most countries don’t have such a large number of banks, although many US ones are state regulated.
A little chaos in the banking sector could work in Musk’s favor as he turns X into a payments app. The company has acquired more than 30 state money transmitter licenses.
Waller’s speech
While Governor Waller is in favor of the private sector driving payments and innovation, he outlined the need for the Federal Reserve.
“The lesson from this history, as relevant now as ever, is that the payment system has been one of those areas in which the best efforts of the private sector have sometimes fallen short,” he said, after outlining how interbank settlement was problematic prior to the creation of the Federal Reserve. “When engaging in clearing and settling payments, coordination problems and information asymmetries across banks can be, and were, destabilizing.”
The Governor argued that the private sector is more suited to deploy new technologies and deal with the associated innovation risks. And private firms are better at allocating resources.
However, he supports the joint public-private exploration of technologies such as tokenization, including the BIS Project Agorá for cross border payments in association with six other central banks and more than 40 private institutions.
One notable point is that Agorá will potentially use wholesale CBDCs. To date US Republican legislators have not always distinguished between consumer targeted retail CBDCs and their associated privacy and control concerns, versus a wholesale CBDC that should aid in the interbank settlement role Governor Waller discussed.
One caveat is whether wholesale CBDC (wCBDC) transactions end up carrying data relating to associated consumer transactions. They don’t need to and usually do not. If restricted to interbank settlement and other wholesale transactions, wCBDC should benefit the private sector.
