Central bank-issued digital currencies (CBDCs) could stifle innovation, in the long run, Federal Reserve board Governor Jerome H. Powell said last week.

Speaking at “Blockchain: The Future of Finance and Capital Markets?”, The Yale Law School Center for the Study of Corporate Law, New Haven, Connecticut, Powell focused on the application of public policy objectives in three specific areas where technological innovation is driving change: creating a real-time retail payments system, using distributed ledger technology (DLT) to develop new clearing and settlement services, and the issuance of digital currencies by central banks.

With regard to DLT, Powell noted various issues currently being faced by industry incumbents and governments. This includes upgrading and streamlining payment, clearing, settlement, and related functions with DLT, technical and practical issues and regulatory aspect, among others.

“We will need a thorough analysis of how DLT fits into current legal frameworks and what gaps need to be filled by contractual agreements or new laws and regulations. A robust legal basis that provides certainty across relevant jurisdictions is essential for building strong governance, risk management, and operations”, he said.

Coming to the topic of CBDCs, Powell said that while it is a fascinating concept, there are significant policy issues that need to be analyzed.

Elaborating further he pointed out that CBDC would be a global target for cyber attacks, cyber counterfeiting, and cyber theft. It would also be a prime target as a potential vehicle for global criminal activities, including money laundering.

“Central banks could face difficult trade-offs between strengthening security and enabling illegal activity. Advanced cryptography could reduce vulnerability to cyber attacks but make it easier to hide illegal activity. To the extent we relax strong cryptography to make it easier for authorities to monitor illegal activity, we could simultaneously weaken security. Growing computer power over time could be used to increase security but could also increase threats”, Powell explained.

Furthermore, he said that central banks would have to maintain records of digital currency issuance and individual transactions for authenticating those transactions and to combat cyber risks and illegal activity. However, such records in the hands of a central bank or government entity could raise serious privacy concerns by users and might limit public appeal. Powell also emphasized on considering the full range of the payments system and other policy issues as well as the potential societal benefits.

According to Powell, private sector systems that are being developed will fulfill demands that CBDCs might otherwise seek to meet.

“I would expect private-sector systems to be more forward leaning than central banks in providing new features to the public through faster payments systems as they compete to attract retail customers. A central bank issued digital currency would compete with these and other innovative private-sector products and may stifle innovation over the long run”, he added.