CBDC still under research, Fed top supervisor advises; notes concern with growth of stablecoins

A central bank digital currency (CBDC) continues to be studied by the Federal Reserve, its top supervisor said Friday – but the official emphasized that the agency has made no decision yet and reiterated that it would not without support from the White House and Congress.

In comments before the Federal Reserve Bank of Philadelphia’s Seventh Annual Fintech Conference (in Philadelphia), Fed Board Vice Chair for Supervision Michael S. Barr said his agency “to speak to a broad range of stakeholders and conduct basic research in emerging technologies that might support a CBDC payments backbone, or for other purposes in the existing payments system.”

He said the Fed’s research into the use of CBDCs is focused on system architecture, especially on how ledgers that record ownership of and transactions in digital assets are maintained, secured, and verified, as well as tokenization models “That is, the design of the digital analog to the paper bank note that permits a transfer of value between two parties without direct facilitation by the issuing central bank,” he said.

But Barr also made it clear that investigation and research are very different from decision making about next steps in terms of payments system development. “We are a long way from that,” he said, noting that the Fed “has made no decision on issuing a CBDC and would only proceed with the issuance of a CBDC with clear support from the executive branch and authorizing legislation from Congress.”

Given the importance of this infrastructure, investigating the potential opportunities, risks, and tradeoffs for payments innovation is just one way the Fed fulfills its role in supporting the responsible innovation that enables a safe and efficient U.S. payments system,” he said.

In other comments, Barr reiterated comments that he and the Fed remain concerned about the growing use of stablecoins (digital tokens whose value is tied to a government-issued currency, such as the U.S. dollar). Barr called stablecoins a form of private money.

“When that asset is also used as a means of payment and a store of value, it borrows the trust of the central bank,” Barr said. “So, the Federal Reserve has a strong interest in ensuring that any stablecoin offerings operate within an appropriate federal prudential oversight framework, so they do not threaten financial stability or payments system integrity.”

He noted that early this year, the Fed required banks to, before they begin issuing stablecoins, to obtain a written supervisory non-objection from his agency verifying that the bank has appropriate risk management and systems in place to identify and control potential risks, such as those related to cybersecurity and compliance with anti-money-laundering laws.

“The guidance only covers the activities of the banks over which we have supervisory authority,” Barr said. “But there are big risks when the Federal Reserve does not have direct supervisory and regulatory authority.

“I remain deeply concerned about stablecoin issuance without strong federal oversight,” he added.

Since stablecoins are a form of money, he said, their ultimate source of credibility is the central bank.

“If non-federally regulated stablecoins were to become a widespread means of payment and store of value, they could pose significant risks to financial stability, monetary policy, and the U.S. payments system,” he contended. “It is important to get the legislative and regulatory framework right before significant risks emerge.”

Federal Reserve Board Vice Chair for Supervision Michael S. Barr: “The Federal Reserve’s Role in Supporting Responsible Innovation”