Fed Vice Chair Defends CBDC, But Launch Would Take At Least 5 Years
A digitized version of the US Dollar could provide a safe central bank liability in the digital financial ecosystem, according to Federal Reserve Vice Chair Lael Brainard.
The Vice Chair of the U.S. Federal Reserve testified before the Committee on Financial Services on May 26, and called for “clear regulatory guardrails” to provide consumer and investor protection, uphold financial stability, and ensure a level playing field for competition and innovation across the financial system amidst the turmoil in the crypto market.
Brainard 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.”
Call for a Digital Dollar
In the aftermath of the collapse of algorithmic stablecoin TerraUSD to just few cents and Tether also briefly de-pegging, the Vice-Chair said that a CBDC could establish financial system stability.
Brainard argued that a widely available CBDC could act as a substitute for commercial bank money. She added that this could potentially reduce the aggregate amount of deposits in the banking system. The economist also noted that a digital dollar would be attractive to risk-averse users during adverse market conditions.
With CBDCs becoming popular across different parts of the world, Brainard underscored the importance of understanding the impact of the potential absence or presence of a US CBDC on the use of the dollar in global payments. She added,
“..It is important for the United States to play a lead role in the development of standards governing international digital finance transactions involving CBDCs consistent with the norms of privacy, accessibility, interoperability, and security.”
While Brainard has taken a pro-CBDC stance, the Fed policymakers, in general, have remained divided on the entire debate. It recently concluded a three-month public consultation period soliciting feedback on the idea of a potential CBDC and has asserted it would not go ahead with a launch if it fails to receive clear support from the White House and lawmakers.
Five Years Upon Approval
While discussing a timeline for the implementation of a CBDC, Brainard said that if “Congress were to decide… to issue a central bank digital currency, it could take five years to put in place the requisite security features, the design features.”
That is why, according to Brainard, the CBDC question is more about anticipating the future of the U.S. financial system than meeting its current needs. She acknowledged there were risks to creating a CBDC, but pointed out there were also risks in not creating one.
One of these risks, she argued, was for stablecoins to “become the dominant form of US digital dollars.” She went on to explain this could possibly create a “fragmentation of the payment system.”
Among her concerns was that other central banks in Europe or China could issue digital analogues to cash unrivaled, which would threaten the U.S. dollar’s status as the global reserve currency. A recent report from the House Committee on Financial Services stated that more than 85% of central banks worldwide are currently researching CBDCs.
The Federal Reserve would need approval from Congress and the White House to proceed with the design and implementation of a CBDC.
Comments
“If working people got paid in CBDC, could it threaten the ability of commercial banks using their deposits to fund lending activities?” Bill Posey (R-FL) asked Brainard.
As for the areas of criticism, the idea that Fed expanding its role into allocating credit has drawn fire from Republicans. Democrats are more suspicious of the commercial banking system that sits between citizens and the Fed. Today and elsewhere, they have proved willing to experiment with more direct lines between the Federal Reserve and the general public.
That specific degree of support includes proposals for FedAccounts that initially appeared in 2020, as well as moves to expand the role of the US Postal Service in payments and accounts, which Rep. Ayanna Pressley (D-MA) praised during today’s hearing.
Rep. Bill Foster (D-IL) pointed to the potential for a CBDC to cut out the significant fees that credit card companies charge merchants. “I don’t have an estimate right now but I know that transaction fees are very high,” said Brainard.
However, Brainard said that there would still be intermediaries.
“You don’t support direct consumer accounts with the Fed?” asked French Hill (R-AR). Brainard answered, “Yes, I think statute is clear on that.”
