Fed governor offers more insights to goals of upcoming paper on digital currency for U.S.

The Federal Reserve’s upcoming paper on digital money will be used to solicit public comment on a range of questions related to the use of the new currency, a member of agency’s board of governors said Monday.

In a speech (via webcast) to the Consensus by CoinDesk 2021 Conference in Washington, D.C., Gov. Lael Brainard said the paper on central bank digital currency (CBDC) announced late last week by Board Chair Jerome H. (“Jay”) Powell would seek public comment on questions such as payments, financial inclusion, data privacy and information security regarding a CBDC use in the U.S.

She said the Fed is stepping up its research and pubic engagement on a digital version of the U.S. dollar, and she noted that Congress and other federal executive agencies are also exploring the issue.

Brainard told the group that a digital dollar would be a new type of central bank money issued in digital form for use by the general public. “By introducing safe central bank money that is accessible to households and businesses in digital payments systems, a CBDC would reduce counterparty risk and the associated consumer protection and financial stability risks,” she said. She added that introducing a CBDC may provide an “important foundation” beneficial innovation and competition in retail payments in the U.S.

She also revealed that the Fed is working to ensure the U.S. stays abreast of developments related to CBDC abroad by collaborating with other countries through the Bank for International Settlements, Committee on Payments and Market Infrastructures, and the G7.

“We are engaging in several international efforts to improve the transparency, timeliness, and cost-effectiveness of cross-border payments,” she said. “It will be important to be engaged at the outset on the development of any international standards that may apply to CBDCs, given the dollar’s important role as a reserve currency.”

The Fed governor called it “critical” to consider ways in which a CBDC could introduce risks relative to the current payments system, but she also said such a digital currency may increase resilience relative to a payments system where private money (such as a stablecoin, which she described as a type of digital asset whose value is tied in some way to traditional stores of value, such as government-issued, or fiat, currencies or gold).

“The design of any CBDC would need to include safeguards to protect against disintermediation of banks and to preserve monetary policy transmission more broadly,” she said.

Finally, Brainard said a CBDC could be one part of a broader solution for providing “ubiquitous” account access (that is, transaction accounts at financial institutions for all households). “Depending on the design, CBDC may have the ability to lower transaction costs and increase access to digital payments,” she said. “In emergencies, CBDC may offer a mechanism for the swift and direct transfer of funds, providing rapid relief to those most in need. A broader solution to financial inclusion would also need to address any perceived barriers to maintaining a transaction account, along with the need to maintain up-to-date records on active accounts to reach a large segment of the population.”

Private Money and Central Bank Money as Payments Go Digital: an Update on CBDCs