Kashkari calls CBDC a threat to privacy, defends regional bank independence

NEW YORK — The Federal Reserve has a neutral stance on whether it pursues its own digital currency, but at least one regional bank president remains deeply skeptical of the idea.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said consumers already had access to instant digital payments through private-sector platforms without the privacy concerns that arise from a government-backed alternative.

"I can see why China would do it," Kashkari said. "If they want to monitor every one of your transactions, you could do that with a central bank digital currency. You can't do that with Venmo. If you want to impose negative interest rates, you could do that with a central bank digital currency. You can't do that with Venmo. And if you want to directly tax customer accounts, you could do that with a central bank digital currency. You can't do that with Venmo. I get why China would be interested. Why would the American people be for that?"

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Kashkari's remarks came during an on-stage Q&A session at the 2022 Journal of Financial Regulation conference at Columbia University on Wednesday. 

Whether the Fed needs a CBDC has become an increasingly debated topic during the past two years. Advocates say the U.S. should strive for a leading position in the currency digitization rates and detractors call it a solution in search of a problem. 

The Fed has been studying the concept of a CBDC in recent years in the interest of staying on top of the technology, but Fed leaders have said they would prefer to wait for direction from Congress before rolling out a digital dollar. Still, recent speeches have given the idea more deference and an external push for CBDC authorization is gaining traction.

Kashkari said crypto assets broadly are "95% noise, hype and confusion." He said that since it is possible that digital asset technology leads to some type of crucial advancement, it should not be disregarded entirely.

In the wide-ranging interview, Kashkari also defended the right for reserve banks to set their own research agendas, something that has been called into question by lawmakers who feel the regional banks are deviating from the Fed's core mission. 

Kashkari said the Fed system was designed to have regional banks that could reflect and understand economic issues in their districts. 

"George Floyd was killed down the street, a mile or so from our bank," he said. "And this is a very real issue in our city, the racism in Minneapolis and the economic disparities."

Sen. Pat Toomey, R-Pa., the ranking member of the Senate Banking Committee, has called out Kashkari for endorsing an amendment to the Minnesota Constitution to guarantee all children a "quality" education. Toomey has deemed it political activism. Kashkari maintains the change would advance the Fed's goal of maximum employment. 

"To me, understanding economic disparities and racial disparities actually is really important to getting maximum employment right, to actually know when we have reached … maximum employment," Kashkari said. "I think we did not have a good understanding of maximum employment in the last expansion."

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Kashkari also weighed in on master account access, another contentious topic between the Fed and Congress. He said regional Fed banks should still have the final say over which groups gain access to the Fed's payment systems, but acknowledged that, given the growing number of financial technology firms, it is crucial that the 12 regional banks have uniform standards for what groups get access.

"I'm not suggesting that there isn't" consistency now, "but I think it's worthwhile doing extra work as these new types of entities are approaching us to make sure that … they're all being treated in a fair and consistent manner," he said.

Kashkari also reiterated his preference for greater capital requirements on banks, stating that his preferred capital requirement would be so great that it would require an act of Congress. In the near term, he said, the Fed should activate the countercyclical capital buffer, or CCyB, a mechanism that would require banks to increase capital buffers in preparation for an anticipated episode of stress. 

The Fed typically votes on whether to activate the CCyB once a year, but it has not taken the matter up since late 2020. It has never voted to activate the CCyB.

"My staff tells me that by the end of next year, 18 countries across Europe will have activated their countercyclical capital buffers, it's high time that we use our tool to its full potential," Kashkari said. "And this is not trivial. It's another 1.2% … of risk-weighted assets. It's a meaningful amount of capital. Not enough by itself, but it's meaningful."

Kashkari is concerned banks will not have enough capital to absorb a major shock to the financial system, despite the resilience they showed in this year's stress test. Kashkari said the stress test has been weakened over the years, taking issue with the efforts undertaken by then-Vice Chair for Supervision Randal Quarles to make the criteria for the tests more transparent.

"We used to give failing grades," Kashkari said. "Now nobody can fail the stress test."

Kashkari said rather than subjecting banks to roughly the same scenario — albeit with varying degrees of severity — every year, he would like to see banks put through multiple tests that challenge banks on a wide variety of exposures.

"There's no reason that the Fed could not staff up for that," he said. "And there's no reason that the bank should not be able to capitalize themselves well enough to endure."

With Michael Barr joining as vice chair for supervision last month, Kashkari said he hopes the Fed will move in a "different direction" with its stress testing practices.