By Lindsay (NYSE:) Dunsmuir
(Reuters) – The world is moving rapidly toward increasing use of digital payments and an official digital version of the U.S. dollar could help safeguard its global dominance as other countries issue their own, Federal Reserve Vice Chair Lael Brainard said on Thursday.
“I don’t think we should be taking the global status of the dollar for granted and in a world where other major jurisdictions move to the issuance of their own digital currencies it is important to think about whether the United States would continue have the same type of dominance without also issuing one,” she told lawmakers in Congress.
Fed policymakers remain divided on the need for a central bank digital currency (CBDC) and have just finished a four-month public consultation period soliciting feedback on the idea.
Brainard has emerged as a supporter of the idea while some other Fed policymakers, including Fed Governor Christopher Waller, are more skeptical and point out that many dollar transactions are already digital, and have also raised privacy concerns. The Fed as a whole has indicated it would not launch one without clear support from the White House and lawmakers.
She reiterated that no decision has been made, and acknowledged the risks of both sides, but noted that in a world that is rapidly digitalizing creating a digital currency could help ensure financial system stability as crypo-assets and digital currencies developed by other countries become increasingly popular.
“We recognize there are risks of not acting, just as there are risks of acting,” Brainard said during a hearing on the issue before the U.S. House of Representatives Financial Services Committee, noting that even if it was agreed to set up one it would take perhaps five years to put a U.S. digital dollar in place.
That puts it behind its other major global central bank peers, including the ECB, Bank of Japan and Bank of England, on the process of possible adoption. China is currently piloting its own CBDC and in total nine countries have launched one and another 87 countries are exploring the option, according to the Atlantic Council think tank.
CRYPTO MARKETS NEED MORE REGULATION
The risks of loosely-regulated cryptocurrencies and stablecoins, which exploded in value during the COVID-19 pandemic, have come into sharp focus with the crypto market slumping sharply this month after the downfall of major “stablecoin” terraUSD. Leading cryptocurrency has dropped more than 50% since November.
“These events underscore the need for clear regulatory guardrails to provide consumer and investor protection, protect financial stability, and ensure a level playing field for competition and innovation across the financial system,” Brainard told the committee.
Unlike cryptocurrencies, which are typically run by private actors, a CBDC would be issued and backed by the central bank. If the United States goes ahead with creating one, Brainard said the Fed should mitigate the risk of “disintermediating banks,” given their centrality to the financial system, by, for instance, limiting the amount an individual could hold or transfer.
Brainard also said her preference would be for a U.S. digital dollar not to be interest bearing in order to prevent a reduction of deposits elsewhere in the banking system.