By Steven K. Beckner
(MaceNews) – Federal Reserve Governor Lael Brainard linked the development of a digital central bank currency to preservation of the U.S. dollar’s primacy in international trade and finance Friday.
The Fed is not ready to announce the issuance of a digital currency, but Brainard said the Fed is well along the path toward making that an eventual reality.
She suggested that the dollar could suffer if other central banks issue digital currencies and the Fed does not.
Brainard, who has been nominated to become vice chairman of the Federal Reserve Board, said “the financial system is not standing still, and neither can we.”
“The digital financial ecosystem is evolving rapidly and becoming increasingly connected with the traditional financial system.” So “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.
“To prepare for the financial system of the future, the Federal Reserve is engaging in research and experimentation with these new technologies and consulting closely with public and private sector partners,” Brainard told the University of Chicatgo Booth School’s annuel monetary policy forum.
Earlier Friday, New York Federal Reserve Bank President John Williams said “a lot of work needs to go on” before the Fed can adopt a digital currency, but he said “that’s happening.”
“We’re not making any decisions right now, but we’re working very hard on research,” he said, noting that the Federal Reserve Bank of Boston is working with the Massachusetts Institute of Technology on digital currency research.
Brainard said the Fed “needs to be preparing for the payment landscape of the future even as we continue to make improvements to meet today’s needs.”
“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 (CBDC) in the digital payment landscape of the future and about its potential properties, costs, and benefits,” she continued in prepared remarks.
Although progress has been made improving the payments system, including improved real-time payments, Briainard said there remains “a lack of access to digital banking and payment services for some Americans and expensive and slow cross-border payments.”
She said “growing interest in the digital financial ecosystem suggests that technology is enabling potential improvements that merit consideration.”
Braindard added that the Fed must “consider how new forms of crypto-assets and digital money may affect the Federal Reserve’s responsibilities to maintain financial stability, a safe and efficient payment system, household and business access to safe central bank money, and maximum employment and price stability.”
“It is prudent to explore whether there is a role for a CBDC to preserve some of the safe and effective elements of the financial system of the present in a way that is complementary to the private sector innovations transforming the financial landscape of the future,” she added.
The Fed recently released a paper outlining the benefits and risks of a Fed digital currency, and Brainard said key principles are that “a potential CBDC should be privacy-protected, so consumer data and privacy are safeguarded; intermediated, such that financial intermediaries rather than the Federal Reserve interface directly with consumers; widely transferable, so the payment system is not fragmented; and identity-verified, so law enforcement can continue to combat money laundering and funding of terrorism.”
Brainard said a major consideration of a potential digital currency is “its impact on the stability of the financial system—not only as it exists today but also as it may evolve in the future.”
“In consideration of the financial system today, it would be important to explore design features that would ensure complementarity with established financial intermediation,” she said.
She said a digitail currency “could be attractive as a store of value and means of payment to the extent it is seen as the safest form of money.”
“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,” she continued. “So it is important to undertake research regarding the tools and design features that could be introduced to limit such risks, such as offering a non-interest bearing CBDC and limiting the amount of CBDC an end user could hold or transfer.”
The role of the dollar internationally is also an important consideration, Brainard stressed.
Noting that the dollar is “not only the predominant global reserve currency, but …also the most widely used currency in international payments,” she warned that “decisions by other major jurisdictions to issue CBDCs could bring important changes to global financial markets that may prove more or less disruptive and that could influence the potential risks and benefits of a U.S. CBDC.”
“Thus, it is wise to consider what the future states of global financial markets and transactions would look like both with and without a Federal Reserve-issued CBDC,” she said.
Brainard said “it is prudent to consider how the potential absence or issuance of a U.S. CBDC could affect the use of the dollar in payments globally in future states where one or more major foreign currencies are issued in CBDC form.”
She said “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 U.S. currency to transact and conduct business in the digital financial system.”
“More broadly, it is important to consider how the United States can continue to play a lead role in the development of standards governing international digital financial transactions involving CBDCs consistent with norms such as privacy and security.”
“Given the dollar’s important role as a payment instrument across the world, it is essential that the United States be on the frontier of research and policy development regarding CBDC, as international developments related to CBDC can have implications for the global financial system,” she added.