Fed Vice Chairman Says Digital Dollar Can Coexist With Stables

WASHINGTON—Fed’s Vice Chairman Lael Brainard told Congressmen on Thursday that a US central bank digital currency could one day provide consumers with a level of security amid the proliferation of privately issued digital assets such as stablecoins.

Ms Brainard told the House Financial Services Committee that in the future, a central bank digital currency could coexist and complement stablecoins by providing a widely accessible, government-backed payment method.

“It can provide secure, central bank liability as a neutral settlement layer in the digital financial ecosystem,” he said. “It will actually facilitate and enable private sector innovation.”

His remarks came while the Fed was discussing a potential new form of money to keep up with innovations in private sector payments, including stablecoins, a type of cryptocurrency intended to be pegged to the dollar or another national currency.

Unlike private cryptocurrencies like Bitcoin, a Fed-issued central bank digital currency will be issued and backed by a government agency, the US central bank, like US paper dollar bills and coins.

The idea divided Fed officials and made it unlikely that they would soon decide whether to create a digital dollar.

Stablecoins caught the attention of regulators again this month after they saw the value of TerraUSD, one of the largest stablecoins at the time, plummet to well below a dollar.

“The recent turmoil in crypto-finance markets makes it clear that the steps we take now, whether in the regulatory framework or over a digital dollar, must be robust for the future evolution of the financial system,” said Ms. Brainard.

Maxine Waters (D., California), Chair of the House Financial Services Committee, said that central bank digital currency could enable the United States to continue to compete with other countries that are considering or issuing digital currencies, such as China.

Ms Waters said, “We have to keep in mind that we could very well be in the midst of a new digital assets space race, where countries around the world are competing to distribute digital versions of their currencies.” she said. “America cannot be left behind.”

Ms Brainard echoed these words in her written statement, saying that the digital dollar “could be a potential way to ensure that people using the dollar around the world continue to rely on the strength and security of the US currency to transact and do business.” in the digital financial system.”

House of Representatives Republicans cited skepticism. Representative Patrick McHenry (R., NC) argued that the potential harms of a US digital dollar outweigh any benefits. “What specific problems, if any, will a central bank digital currency solve?” asked Mrs. Brainard.

Ms Brainard said the benefits include consumer access to safe, central bank-issued currency at a time when the use of physical cash is declining rapidly. If stablecoins one day become the dominant form of digital payments, the digital dollar could also address the disintegration of the payment system, she said.

In January, the central bank sought public comment on an internal report designed to spark discussions about whether and how a U.S. digital dollar could improve the local payments system. The paper does not support any policy conclusions, and the Fed said the release of the report did not signal an imminent decision.

President Biden’s cryptocurrency executive order may have generated more questions than it answered: What is a central bank digital currency? How is it different from crypto? And why didn’t the Fed introduce a digital dollar? WSJ’s Dion Rabouin explains. Photo composition: David Fang

The report comes as central banks around the world are grappling with the rise of a multitude of proprietary electronic alternatives to traditional money and weighing in on creating their own versions. Special offerings of digital currencies have been extremely volatile and in many cases have been associated with criminal activity. And so far, they haven’t been widely adopted for day-to-day transactions like buying groceries or movie tickets.

China has created its own government-issued digital currency and banned transactions using cryptocurrencies issued by non-monetary authorities, examples being bitcoin, ether, and tether. Meanwhile, El Salvador became the first country in the world to adopt bitcoin as its national currency alongside the US dollar.

Banks and trade groups say the idea has many downsides in the US; Among them is the potential to disrupt the financial system by pulling deposits from traditional commercial banks, resulting in higher loan costs for households and businesses.

“Current research overwhelmingly undermines the purported benefits of a CBDC and instead shows that a CBDC would severely disrupt the financial system, significantly harming consumers and businesses,” said Greg Baer, ​​president of the Bank Policy Institute, an industry group. . statement last week.


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Proponents of the idea say a Fed digital dollar could move money through the financial system faster and cheaper, attract unbanked people, and provide an efficient way for the government to distribute financial aid.

However, Fed Chairman Jerome Powell stated he saw reason to be cautious. He said that partly because of the critical global role of the dollar, using the digital dollar correctly is more important than being the first to enter the market.

Other officials have expressed greater skepticism about the need for a Fed digital currency. Former governor Randal Quarles, who left the Fed in December, said last summer that the US dollar was already “highly digitized” and expressed doubts that a Fed digital currency would help attract unbanked people into the financial system or lower financial transaction costs. It’s a goal that can be accomplished by other means, he said.

summer Andrew Ackerman at [email protected]

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