Nacha, which oversees the largest U.S. automated payments system, is cautioning the Federal Reserve to take any plans to implement a central bank digital currency slowly, with an incremental approach to implementation.
That’s the message Nacha delivered in a May 11 comment letter submitted after the Fed produced a report earlier this year providing a broad outline of what a central bank digital currency (CBDC) might look like and what issues it might raise. While the deadline for letters was due in May, the Nacha input was part of a trove of submissions that haven’t been widely reported on.
Some central banks globally have already launched CBDCs, or are using them in pilot projects, notably China. Many others are considering the possibility, according to the Atlantic Council. The issue is of particular importance to the U.S. as it seeks to maintain the dollar’s standing as the reserve currency of the world.
Nacha, which was formerly known as the National Automated Clearinghouse Association, oversees the ACH Network and works closely with government regulators at the Fed, Treasury Department and state banking agencies. Any prospective CBDC, also known as a digital dollar, would be a significant addition to the overall payments and banking systems. That’s part of the reason Nacha is urging the Fed to take it slow.
“A CBDC has the potential to disrupt consumer and business payments as well as deposit-based lending in fundamental and profound ways,” Nacha said in its letter authored by William Sullivan, the organization’s senior director and group manager for government and industry relations. ”To mitigate the negative impacts of such a disruption, but recognizing the broad desire to modernize existing payment systems by expanding interbank settlement capabilities, Nacha suggests an incremental approach to the introduction of a CBDC.”
Nacha provided a prescription for what that incremental approach might look like, recommending that a CBDC only be used initially for settling interbank payments, operating alongside existing parts of the U.S. payments infrastructure, including the National Settlement Service, the Fedwire Funds Service and the soon-to-launched FedNow real-time payments system.
“The role of the CBDC could evolve to become a primary settlement mechanism and liquidity management tool as confidence in its use builds,” the letter from Sullivan said.
Nacha knocked the Fed in the letter for seemingly rushing ahead with the CBDC when it hasn’t completed other aspects of a 2015 plan dubbed Strategies for Improving the U.S. Payment System Report. For instance, the Fed has not proceeded with an effort to upgrade the NSS to round-the-clock operations, so it still closes nightly as well as for weekends and holidays (last year hours of operation were extended by one hour), the letter noted.
“To the extent that the Fed is prioritizing a CBDC, that should not be done to the detriment of additional improvements to existing interbank settlement services,” the three-page letter said.
If the Fed were to proceed with implementation of a CBDC just for the purpose of settling interbank transfers, it could determine whether a digital dollar was viable in a finite community of regulated users; supplement existing settlement services in a way that furthers the Fed’s long-stated goals; enable the U.S. to tap the technological benefits of a digital currency; and avoid direct competition with stablecoins being developed in the private sector, the letter said.
Nacha’s measured response was more supportive than that of the private banking industry, which largely bashed the idea of proceeding with a digital dollar. In their own comments, U.S. banks and bank trade groups focused on the risks that a CBDC would present and the potential injury it could cause for the existing financial system. Payments companies were more mixed in their response, focusing on questions left open by the Fed’s January report on the potential for a CBDC.
The Fed, which is now weighing some 2,000 comments from the public, didn’t take a position in its report on whether to pursue a CBDC or not.