On U.S. CBDC, Fed ‘not standing still,’ engaging in research, experimentation, governor says

Engaging in research and experimentation with new technologies – such as a U.S. central bank digital currency (CBDC) – and “consulting closely with public and private sector partners” are both parts of the Federal Reserve’s approach to keeping up with a changing financial system, a member of the agency’s board said Friday.

In a speech to the 2022 U.S. Monetary Policy Forum in New York, Fed Gov. Lael Brainard asserted that the “financial system is not standing still, and neither can we.” Brainard said the digital financial ecosystem is evolving rapidly and becoming increasingly connected with the traditional financial system. “It is prudent for the Board to understand the evolving payment landscape, the technological advancements and consumer demands driving this evolution, and the consequent policy choices as it seeks to fulfill its congressionally-mandated role to promote a safe, efficient, and inclusive system for U.S. dollar transactions,” she said.

Regarding CBDCs, Brainard disclosed that the Federal Reserve Bank of Boston, working with the Massachusetts Institute of Technology (MIT), has developed a theoretical high-performance transaction processor for CBDC. She said the bank had recently published the resulting software under an open-source license “as a way of engaging with the broader technical community and promoting transparency and verifiability.”

“The Federal Reserve needs to be preparing for the payment landscape of the future even as we continue to make improvements to meet today’s needs,” she said. “In light of the rapid digitalization of the financial system, the Federal Reserve has been thinking critically about whether there is a role for a potential U.S. central bank digital currency in the digital payment landscape of the future and about its potential properties, costs, and benefits.”

However, Brainard made clear that any consideration of a CBDC needs to be evaluated for its impact on financial stability. That includes both the present and the future, she said. For the present, she said, design features that ensure complementarity with established financial intermediation could be considered. “A CBDC – depending on its features – could be attractive as a store of value and means of payment to the extent it is seen as the safest form of money,” she said. “This could make it attractive to risk-averse users, perhaps leading to increased demand for the CBDC at the expense of other intermediaries during times of stress.”

For the future, the role of a CBDC to promote financial stability in a financial system in which consumer payment and financial transactions would be conducted via digital currencies such as stablecoins should be considered, she said.

“If current trends continue, the stablecoin market in the future could come to be dominated by just one or two issuers,” Brainard asserted. “Depending on the characteristics of these stablecoins, there could be large shifts in desired holdings between these stablecoins and deposits, leading to large-scale redemptions by risk-averse users at times of stress that could prove disruptive to financial stability. In such a future state, the coexistence of CBDC alongside stablecoins and commercial bank money could prove complementary, by providing a safe central bank liability in the digital financial ecosystem, much like cash currently coexists with commercial bank money.”

She said in that environment, it is “essential” that policymakers, including the Federal Reserve, plan for the future of the payment system and “consider the full range of possible options to bring forward the potential benefits of new technologies, while safeguarding stability.”

Gov. Lael Brainard: Preparing for the Financial System of the Future