As crypto-assets and digital currencies produced by other nations grow more popular, Federal Reserve Vice Chair Lael Brainard said on Wednesday that creating an official digital version of the US dollar might assist preserve financial system stability.
As crypto-assets and digital currencies produced by other nations grow more popular, Federal Reserve Vice Chair Lael Brainard said on Wednesday that creating an official digital version of the US dollar might help preserve financial system stability.
“As we consider the future digital financial system, it is prudent to consider how to preserve ready public access to safe central bank money, perhaps through the digital analogue of the Federal Reserve’s issuance of physical currency,” Brainard said in testimony released ahead of her appearance before the Financial Services Committee of the US House of Representatives on Thursday.
“We know that not acting has dangers, just as doing has risks,” she added.
The necessity for a central bank digital currency (CBDC) remains divisive among Fed officials, who have recently completed a three-month public consultation session on the notion. The Fed has also said that it would not initiate one unless it has unambiguous backing from the White House and legislators.
On the road to probable implementation, it lags behind its main global central bank rivals, including the ECB, Bank of Japan, and Bank of England. According to the Atlantic Council, China is now testing its own CBDC, and nine nations have already done so, with another 87 considering it.
The perils of loosely regulated cryptocurrencies and stablecoins, which skyrocketed in value during the COVID-19 epidemic, have been brought into sharp relief, with the crypto market plummeting this month after the demise of key “stablecoin” terraUSD. Bitcoin, the most popular cryptocurrency, has lost more than 50% since November.
“These incidents highlight the need of clear regulatory guardrails to safeguard consumers and investors, maintain financial stability, and provide a fair playing field for competition and innovation throughout the financial system,” said Brainard.
A CBDC would be produced and supported by the central bank, unlike cryptocurrencies, which are normally controlled by private players. If the US decides to create one, Brainard believes it should be constructed in such a way that commercial banks, which are so important to the financial system, are not disintermediated, for as by restricting the amount a person may store or transfer.
A US CBDC, according to Brainard, may protect the dollar’s worldwide prominence.
Others, including Fed Governor Christopher Waller, are more sceptical, pointing out that many dollar transactions are now digital and raising privacy issues.