No decision has been made about adoption of a U.S. central bank digital currency (CBDC), the vice chair of the Federal Reserve Board said Thursday to a congressional committee, but she indicated that “clear regulatory guidelines” are necessary to protect consumers and financial stability, among things, in the face of rising use of crypto currencies and stablecoins.
In testimony before the House Financial Services Committee, Fed Board Vice Chair Lael Brainard said that work must be done now to inform any future decision about the Fed issuing a CBDC and for the agency to be ready to move forward should the need arise.
The Fed vice chair said recent market events affecting cryptocurrencies and stablecoins, which generally devalued or otherwise pressured those vehicles, “underscore the need for clear regulatory guardrails to provide consumer and investor protection, protect financial stability, and ensure a level playing field for competition and innovation across the financial system.”
Brainard was clear that the Fed is, however, considering action, citing the market havoc. “The recent turmoil in crypto financial markets makes clear that the actions we take now—whether on the regulatory framework or a digital dollar—should be robust to the future evolution of the financial system,” she said. “The rapid ongoing evolution of the digital financial system at the national and international levels should lead us to frame the question not as whether there is a need for a central-bank-issued digital dollar today, but rather whether there may be conditions in the future that may give rise to such a need. We recognize there are risks of not acting, just as there are risks of acting.”
Brainard compared crypto and stablecoins to “private monies” issued in the 19th century by individual banks. She noted that use led to “inefficiency, fraud, and instability in the U.S. payments system, which ultimately necessitated a uniform form of money backed by the national government.” That was accomplished by the establishment of the Federal Reserve and its uniform currency.
But emergence in this century of private monies in the forms of crypto and stablecoins, she indicated, “could introduce consumer protection and financial stability risks because of their potential volatility and the risk of run-like behavior, as was demonstrated at a smaller scale in recent weeks.”
“In addition, if private monies—in the form of either stablecoins or cryptocurrencies—were to become widespread, we could see fragmentation of the U.S. payment system into so-called walled gardens,” she said. “In some future circumstances, CBDC could coexist with and be complementary to stablecoins and commercial bank money by providing a safe central bank liability in the digital financial ecosystem, much like cash currently coexists with commercial bank money.”
Brainard also cited risks of a CBDC with disintermediating banks, or pushing them out of the payments process. “In some circumstances, a widely available CBDC could serve as a substitute for commercial bank money, possibly reducing the aggregate amount of deposits in the banking system,” she said. She defined commercial bank money as bank deposits.
She also asserted that a CBDC would be “attractive” to risk-averse users during times of stress.
“Accordingly, if the Federal Reserve were to move forward on CBDC, it would be important to develop design features that could mitigate such risks, such as offering a non-interest bearing CBDC or limiting the amount of CBDC a consumer could hold or transfer,” she suggested.
International payments are also a consideration, she told the committee, for considering a CBDC. Pointing out that the U.S. dollar remains the predominant form of payment worldwide, she said that in future states where other major foreign currencies are issued in CBDC form, “it is prudent to consider how the potential absence or presence of a U.S. central bank digital dollar could affect the use of the dollar in global payments.”
She noted that the People’s Bank of China has been piloting the digital yuan and that other countries are similarly considering digital currencies. “A U.S. CBDC may be one potential way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of the U.S. currency to transact and conduct business in the digital financial system,” she said.
Brainard noted that the comment period on the Fed’s discussion paper on digital assets, issued in January, closed May 20. She said more than 2,000 comments were received, which will be summarized in a public paper to be published “in the near future.”