Brainard notes Fed’s ongoing research into opportunities, risks related to central bank digital currencies

The Federal Reserve’s ongoing research and experimentation related to opportunities and risks associated with central bank digital currencies (CBDCs) was outlined by the central bank Thursday during an “Office Hours” event at the Federal Reserve Bank of San Francisco during remarks by Fed Gov. Lael Brainard.

The Fed noted this work complements the central bank’s payments-related innovations projects currently underway. (Most recently, the Fed released approved elements of a new FedNow instant-payments service that is expected to launch between 2023-2024.)

“Given the dollar’s important role, it is essential that the Federal Reserve remain on the frontier of research and policy development regarding central bank digital currencies,” Federal Reserve Board Gov. Lael Brainard, the board’s point person on payments, said during Thursday’s event, which was webcast. “Like other central banks, we are continuing to assess the opportunities and challenges of, as well as the use cases for, a digital currency, as a complement to cash and other payments options.”

Brainard sketched out the current digital payments landscape and the many initiatives within the Fed and industry related to digital currencies. She noted in particular that the Fed Board’s Technology Lab (TechLab) is expanding experimentation with technologies relevant to digital currencies and other payment innovations. Also noted was the work of the Federal Reserve Bank of Boston, which is collaborating with researchers at the Massachusetts Institute of Technology on a multiyear effort to build a hypothetical digital currency oriented for central bank use. She said the project is intended to support the board’s broader efforts in assessing the safety and efficiency of central bank digital currency systems.

“Lessons from this collaboration will be published, and any codebase that is developed through this effort will be offered as open-source software for anyone to use for experimentation,” said Brainard.

“The project focuses solely on developing an understanding of the capacities and limitations of the relevant technologies, rather than serving as a prototype for a Federal Reserve issued digital currency or addressing the wide-ranging policy issues associated with its potential issuance,” the Fed noted in a release issued alongside Brainard’s written remarks.

“The objectives of our research and experimentation across the Federal Reserve System are to assess the safety and efficiency of digital currency systems, to inform our understanding of private-sector arrangements, and to give us hands-on experience to understand the opportunities and limitations of possible technologies for digital forms of central bank money,” she said. “These efforts are intended to ensure that we fully understand the potential as well as the associated risks and possible unintended consequences that new technologies present in the payments arena.”

Brainard noted that a significant policy process would be required to consider the issuance of a CBDC, along with extensive deliberations and engagement with other parts of the federal government and other stakeholders. She also pointed to legal considerations.

“It is important to understand how the existing provisions of the Federal Reserve Act with regard to currency issuance apply to a CBDC and whether a CBDC would have legal tender status, depending on the design,” she said. “The Federal Reserve has not made a decision whether to undertake such a significant policy process, as we are taking the time and effort to understand the significant implications of digital currencies and CBDCs around the globe.”

An Update on Digital Currencies,” speech by Fed Gov. Lael Brainard at the Federal Reserve Board and Federal Reserve Bank of San Francisco’s Innovation Office Hours, San Francisco, California (via webcast)

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