Federal Reserve Governor Lael Brainard provided a broad description of the Fed’s ongoing research and plans in the potential development of a U.S. central bank digital currency (CDBC), also described in the U.S. as a Digital Dollar. Brainard, who has for years led the discussion at the Fed on distributed ledger technology and digital currencies, noted the Fed is active in conducting research and experimentation in these areas.
In her speech to during Federal Reserve ‘Innovation Office Hours’ at the Federal Reserve Bank of San Francisco today, Brainard noted, “Given the dollar's important role, it is essential that the Federal Reserve remain on the frontier of research and policy development regarding CBDCs. As part of this research, central banks are exploring the potential of innovative technologies to offer a digital equivalent of cash...We are continuing to assess the opportunities and challenges of, as well as the use cases for, a CBDC, as a complement to cash and other payments options.”
Brainard described ‘in-house experiments’ at the ‘Board Technology Lab’, where a multidisciplinary team of application developers from the Federal Reserve Banks of Cleveland, Dallas, and New York helps support a policy team at the Board studying the “implications of digital currencies on the payments ecosystem, monetary policy, financial stability, banking and finance, and consumer protection.”
Additionally, Brainard explained how the Federal Reserve Bank of Boston is collaborating with researchers at the Massachusetts Institute of Technology. Robert Bench is an assistant vice president in the Secure Payments group for the Federal Reserve Bank of Boston who is running a a multiyear effort to build and test a hypothetical digital currency oriented to central bank uses. Brainard noted lessons from this collaboration will be published with codebase offered as open-source software.
Recently, Bench was interviewed by J. Christopher Giancarlo, Senior Counsel at Willkie, Farr, and Gallagher and the former Chairman of the Commodity Futures Trading Commission (CFTC) in a ‘Digital Dollar Live’ webinar. Giancarlo is a Principal and Project Lead at the Digital Dollar Project (DDP), which hosted the webinar. He has testified three times on Capitol Hill this year on the subject where he has compared the critical importance of creating a tokenized U.S. digital dollar to compete with China and maintain the global reserve currency status for the United States.
Brainard explained the objectives of the research is to understand safety and efficiency of digital currency systems, including ‘private-sector arrangements’, and provide hands-on experience to understand the technologies available for central bank money. The fact that Brainard mentioned understanding ‘private-sector arrangements’ may be a signal that the Fed will consider inputs from the private sector. At a recent hearing in the House of Representatives in response to a question from Congressman Tom Emmer (R-MN), Fed Chair Jerome Powell noted he did not believe private sector involvement in the production of U.S. dollars would be trusted by the citizens. “I do think this is something that the central banks have to design,” Powell said. “The private sector is not involved in creating the money supply, that’s something the central bank does.”
Brainard also mentioned that with China moving ahead rapidly on a version of the CBDC, she explained that the research the Federal Reserve would also need to evaluate the policy behind implementing a digital dollar. Brainard stated, “a significant policy process would be required to consider the issuance of a CBDC, along with extensive deliberations and engagement with other parts of the federal government and a broad set of other stakeholders.” The speech also cautioned that the laws of the Federal Reserve Act must be examined, “with regard to currency issuance apply to a CBDC and whether a CBDC would have legal tender status, depending on the design,” and that the Fed had not made a decision on engaging in this deep dive on policy.
Brainard also clarified the U.S. is participating in the CBDC coalition of central banks on lessons learned, jointly conducting experiments, to understand the threats to cybersecurity, counterfeiting and fraud, and anti-money laundering. With shared goals of “increasing the ease and efficiency of cross-border transactions,” Brainard also cautioned on avoiding a ‘poorly designed CBDC’ that could create financial stability issues elsewhere. She explained the Federal Reserve’s new initiative with the Bank of International Settlement's Innovation Hub, through an innovation center at the Federal Reserve Bank of New York, would also help inform the U.S. on developments in other countries that progress toward a CBDC.
In terms of real-time payments, Brainard did also champion the concept of FedNowSM Service, which she stated, “will enable millions of American households and small businesses to get instant access to funds rather than waiting days for checks to clear.” The Federal Reserve received a bi-partisan letter from Congressman Bill Foster (D-IL) and Congressman French Hill (R-AR) late last year to start exploring digital currencies, to which Chair Powell commented that the Fed was looking into digital currencies.
Brainard’s full speech offering transparency into how the U.S. central bank is exploring the possibility of a digital currency can be found here.
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