Cold water was essentially thrown on the prospect of the U.S. central bank issuing a digital currency – at least for the near term – as a member of the bank’s board Wednesday cited “profound legal, policy and operational questions” of such an action.
However, Federal Reserve Board Gov. Lael Brainard told a gathering sponsored by the European Central Bank in Frankfurt, Germany, that the Fed looks forward to collaborating “with other jurisdictions as we continue to analyze the potential benefits and costs of central bank digital currencies.”
In her remarks to the group, Brainard said digital currencies, including stablecoin networks, at global scale may place consumers at risk. “Cryptocurrencies already pose a number of risks to the financial system, and these could be magnified by a widely accepted stablecoin for general use,” she said. Brainard quoted estimated losses from fraud and thefts associated with cryptocurrencies at $1.7 billion (1.4 billion euros) in 2018 to more than $4.4 billion (3.9 billion euros) in 2019.
She said consumers in both the U.S. and the euro area have come to expect strong safeguards on their bank accounts and the associated payments. “Statutory and regulatory protections on bank accounts in the United States mean that consumers can reasonably expect their deposits to be insured up to a limit; many fraudulent transactions to be the liability of the bank; transfers to be available within specified periods; and clear, standardized disclosures about account fees and interest payments,” she said.
Brainard asserted that it is not clear whether comparable protections will be in place with such stablecoin proposals as Facebook’s Libra, or what recourse consumers will have. She also said “it is not even clear how much price risk consumers will face since they do not appear to have rights to the stablecoin’s underlying assets.”
She also raised questions of financial stability related to wide use of a stablecoin. “If not managed effectively, liquidity, credit, market, or operational risks, alone or in combination, could trigger a loss of confidence and run-like behavior. This could be exacerbated by the lack of clarity about the management of reserves and the rights and responsibilities of various market participants” in the stablecoin network, she said.
The Fed governor called the regulatory structure in the U.S. for cryptocurrencies “not straightforward.” She said the current framework is based largely on whether a cryptocurrency is deemed to be a security or has associated derivative financial products and whether the participating institutions have a supervisory agency overseeing their activities.
She noted that proponents of a central bank digital currency argue that it would be a safer alternative to privately issued stablecoins because the central bank vehicle would be safer as a direct liability of the central bank.
“A more relevant question may be whether some intermediate solutions may be able to offer the safety and benefits of real-time digital payments based on sovereign currencies without necessitating radical transformation of the financial system,” she said.
Brainard cited “important advantages” associated with current arrangements, including physical cash in circulation (as it continues to rise), the dollar’s important role as a global reserve currency, and a “robust and diverse banking system” providing a variety of digital payment options.
“Circumstances where the central bank issues digital currency directly to consumer accounts for general-purpose use would raise profound legal, policy, and operational questions,” she said. “That said, it is important to study whether we can do more to provide safer, less expensive, faster, or otherwise more efficient payments.”
Brainard pointed to work the Fed is already doing to develop a faster payments system to improve speed and lower costs of consumer payments. “In many countries, consumers are already able to make real-time payments at low cost,” she said. “This summer, the Federal Reserve announced the first new payment service in more than 40 years – the FedNow Service – to provide a platform for consumers and businesses to send and receive payments immediately and securely 24 hours a day, 365 days a year.”
The Fed governor closed her remarks by noting that any global payments network should meet “a high threshold of legal and regulatory safeguards before launching operations.”
“The work ahead is not easy—the policy issues are complex, the coordination challenges are significant, and there are likely to be few simple fixes,” she said.