In a speech delivered this morning, Federal Reserve Governor Lael Brainard provided an update on the Fed’s exploration of central bank digital currencies (CBDC). Among the reasons why the Fed is ‘sharpening its focus’ on the idea of a U.S. digital dollar, the first provided was not Bitcoin, but stablecoins.
According to Brainard, the threat of the increased use of stablecoins may create, “… network externalities associated with achieving scale in payments, there is a risk that the widespread use of private monies for consumer payments could fragment parts of the U.S. payment system in ways that impose burdens and raise costs for households and businesses.”
Not only would the U.S. payments system become unstable, but stablecoins raise concerns with respect to consumer protection due to their volatility, as well as financial stability risk because of the risk of run-like behavior, according to Brainard. She further noted, “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.”
One example of a stablecoin is USDC, which currently shows $20.5 billion in circulation according to the website of www.circle.com. Described as the world’s leading digital dollar stablecoin, USDC is an ERC-20 token that is backed 1:1 against the U.S. dollar. Other types of stablecoins include Tether, that has a market cap of almost $60 billion. The stablecoins of USDC are backed 1:1 by U.S. dollars typically held at U.S. banks and make themselves available to audits to show a sufficient amount of actual dollars supports 1:1 against the peg of the USDC token.
Dante Disparte, the Chief Strategy Officer and Head of Global Policy at Circle, wrote an op-ed just last week where he criticized the creation of a U.S. central bank digital currency. Disparte suggested that, “…instead Dollar digital currencies that are backed 1:1 with assets preserved in the two-tier U.S. banking system (like USDC), import all the safety, soundness and values of the U.S. dollar, turbocharging it with the power of the internet.”
Additionally, the Office of the Comptroller of the Currency (OCC) last year empowered the largest banks in the U.S. to use stablecoins as a payment mechanism that relies on an ‘Independent Node Verification Networks” (INVN). The new Acting Comptroller Michael Hsu has not yet discussed his views on stablecoins; however, he did initiate a review of cryptocurrency custody.
Without an answer to dollar-backed U.S. stablecoins, Brainard warns of a return to a “…period in the nineteenth century when there was active competition among issuers of private paper banknotes in the United States is now notorious for inefficiency, fraud, and instability in the payments system.” According to Brainard, “…this ultimately led to a need for a uniform form of money backed by the Federal Government.”
In terms of the policy benefits of introducing a U.S. CBDC, some of the ideas put forward by Brainard include the following in her talk: 1) preserve general access to safe central bank money; 2) promote competition and diversity and lower transactions costs; 3) improve efficiency, 4) reduce cross-border frictions, 5) complement currency and bank deposits, 6) protect privacy and safeguard financial integrity, and 7) increase financial inclusion.
Regarding other reasons for pursuing a CBDC, the migration to digital payments, cross-border payment remittance and financial exclusion concerns were also mentioned by Brainard.
Migration To Digital Payments
In the United States, the pandemic accelerated the migration to digital payments as well as increased demand for cash. According to Brainard, this trend may “crowd out the use of cash,” which could raises questions about ensuring consumers can access safe central bank money. Brainard re-emphasized the Fed’s commitment to secure payments for the U.S., including cash. Similarly, Powell described the prospect of a CBDC as one that would complement, not replace cash, in a talk last week where he also mentioned the renewed interest in CBDC.
Cross-Border Payment Remittance
Brainard cites the idea of cross-border payments, such as remittances, as representing one of the most compelling use cases for digital currencies, with the intermediation chains for cross-border payments are notoriously long, complex, costly, and opaque. According to Brainard, “Digitalization, along with a reduction in the number of intermediaries, holds considerable promise to reduce the cost, opacity, and time required for cross-border payments.” Brainard mentioned the Fed was collaborating with international colleagues through the Bank for International Settlements, Committee on Payments and Market Infrastructures, and the G7 to ensure the U.S. stays abreast of developments related to CBDC abroad.
Concerns About Financial Exclusion
“At the height of the pandemic, the challenges associated with getting relief payments to hard-to-reach households highlighted that it is important for all households to have transactions accounts,” stated Brainard. As Covid-19 demonstrated, it can be critical to send money electronically at times of crisis. Brainard suggested that, “In emergencies, CBDC may offer a mechanism for the swift and direct transfer of funds, providing rapid relief to those most in need broader solution to the challenge of achieving ubiquitous account access,” as a way that could improve financial inclusion in the U.S.
The full speech of the Federal Reserve Governor Brainard can be found here.