Fed governor chants benefits of digital dollar

Federal Reserve Governor Lael Brainard stood up for central bank digital currencies (CBDCs), saying that central bank-backed cryptocurrencies may offer a wide variety of benefits, while private ones carry multiple risks.

In an online event held on Monday EST, Brainard introduced CBDC as a universal channel to guarantee access to secure central bank currencies, contrasting private cryptocurrencies with possible future Fed-backed CBDCs in this way.

“New forms of private currencies could create counterparty risk that enters the payment system in new ways, a risk that could threaten consumer protections or create widespread financial stability risks.”

“In contrast, the digital dollar would be a new type of currency issued by a central bank for use by the public in digital form. The introduction of a secure central bank currency that households and businesses can use to access the digital payment system will reduce counterparty risk and the associated risks to consumer protection and financial stability.”

Brainard mentioned that some tech platforms are developing stablecoins for use in payment networks, which are forms of digital assets tied to some traditional form of stored value, and unlike legal tender issued by central banks, stablecoins do not have the status of legal tender, and some stablecoins may expose consumers and businesses to risk.

Brainard did not mention specific cryptocurrencies, but said that if consumers pay a lot with private currencies, it could generate the risk of fragmentation of the U.S. payment system, that would increase the burden on households and businesses and increase costs. And private currencies going mainstream could create risks to consumer protection and financial stability because they could be more volatile and there is a risk of a run.

She also gave the example of competing private currencies issued by multiple issuers in the United States in the 19th century, when the payment system was known to be inefficient, fraudulent and unstable, thus requiring a uniform form of currency backed by a national government.

Speaking about banking activities, Brainard said banks are now looking at new technologies to strengthen their operations and acting to meet customer demand for services such as custodial digital assets. In particular, she noted that

Distributed ledger technology may have the potential to improve efficiency, increase competition and reduce costs, but digital assets may exacerbate some risks, such as those associated with the Bank Secrecy Act/money laundering, cybersecurity, price volatility, privacy and consumer compliance.

The Federal Reserve is actively monitoring this area, interacting with industry and other regulators to identify any gaps in the regulatory, supervisory and oversight framework. Given that one bank’s decisions can affect other banks, the point is that regulators need to work together to develop a common approach to ensure that banks can properly identify, monitor and manage the risks associated with digital assets.

Brainard believes that the new pneumonia epidemic has accelerated the trend toward digital payments. In the U.S., the epidemic led to a faster shift to digital payments and more demand for cash. While there was a spike in cash usage at certain times, there was also a clear shift toward contactless-type transactions between consumers and businesses, a change that was facilitated by electronic payments.

Brainard mentioned that the Federal Reserve-backed system has security and can improve efficiency and cross-border payments. She said.

The Federal Reserve remains committed to ensuring that the public has access to safe and secure channels, as well as access to payment methods that include cash. As part of that commitment, we must examine and try to envision how the needs and preferences of households and businesses might shift further toward digital payments over time in the future.

In Brainard’s view, in terms of efficiency, CBDC would reduce or even eliminate inefficiencies in payments, clearing and settlement. In terms of cross-border payments, it would reduce friction, and digitalization would reduce a large number of intermediaries.

Other benefits of CBDC cited by Brainard include: CBDC can provide a digital form of secure central bank money; promote competition and diversification of private businesses in payment services and reduce transaction costs; CBDC can serve as a complement to money and bank savings; can maintain financial stability and monetary policy transmission; and protect privacy and the integrity of the financial system.

Brainard also believes that CBDC can improve financial inclusion, mentioning that nearly 20% of Americans are now underbanked and that providing financial services is a benefit that CBDC can bring.