Digital payments and the growth of private money are two factors helping drive an increasing focus on central bank digital currencies (CBDCs), said Federal Reserve Governor Lael Brainard.
A number of policy considerations remain before the U.S. can assess issuing a digital dollar, she said, speaking at CoinDesk’s Consensus 2021 on Monday. They include: preserving access to “safe central bank money,” increasing financial inclusion, payment and clearing efficiency, reducing cross-border frictions, complementing bank deposits and protecting both financial stability and personal privacy.
“While distributed LEDGER technology may have the potential to improve efficiencies, increase competition and lower costs, digital assets pose heightened risks such as those related to Bank Secrecy Act/anti-money laundering, cybersecurity, price volatility, privacy and consumer compliance,” she said. “The Federal Reserve is actively monitoring developments in this area, engaging with the industry and other regulators and working to identify any regulatory, supervisory and oversight framework gaps.”
The longtime public official, who served in the U.S. Treasury Department prior to her role at the central bank, has warned regulators to pay attention to the digital-asset space for years, well before many agencies began taking an active role in the industry.
Brainard revealed in 2020 that the Boston branch of the Fed was researching central bank digital currencies (CBDC) with the MIT Digital Currency Initiative. The branch is expected to publish its first report on this research later this summer.
“Unlike central bank fiat currencies, stablecoins do not have legal tender status,” Brainard said in Monday’s speech. “Depending on underlying arrangements, some may expose consumers and businesses to risk.”
Brainard also warned that the growth of private monies might prove detrimental to the U.S. payment system, which would in turn raise costs for businesses or households.
She likened this risk to the wildcat banking activities of the 19th century in the U.S., when private entities issued their own paper money. The era is associated with inefficiency and fraud, she said.
“It is not obvious that new forms of private money that reference fiat currency, like stablecoins, can carry the same level of protection as bank deposits or fiat currency,” she said.
