Fed Vice Chair Brainard suggests digital version of US dollar

Financial system stability could be helped by a digital version of the US dollar as crypo-assets and digital currencies developed by other countries become increasingly popular, according to Federal Reserve Vice Chair Lael Brainard on Wednesday.

Brainard said in testimony released in advance of her appearance on the issue before the US House of Representatives Financial Services Committee on Thursday that the rapid evolution of the digital financial system at national and international levels should lead us to frame the question not as whether there is a need for a central bank- issued digital dollar today but rather whether there may be conditions in the future that may give rise to such a need.

She said there are risks of not acting, just as there are risks of acting.

The public consultation period ended recently, and the Fed policymakers are divided on the need for a central bank digital currency, CBDC. The Fed is not going to launch one without the support of the White House and lawmakers.

It is behind the Bank of England, the Bank of Japan and the European Central Bank on the process of 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.

The risks of loosely regulated cryptocurrencies and stablecoins, which have exploded in value during the COVID 19 epidemic, have come into sharp focus this month after the downfall of major stable coin terraUSD. The leading criptocurrency has dropped more than 50% since November.

These events underscore the need for clear regulatory guardrails to provide consumer and investor protection, to ensure financial stability, and to ensure a level playing field for competition and innovation across the financial system, according to Brainard.

A CBDC would be issued and backed by the central bank, unlike cryptocurrencies, which are typically run by private actors. If the US goes ahead with creating one, Brainard said it should be designed so that commercial banks, given their centrality to the financial system, are not disintermediated, by for example limiting the amount an individual can hold or transfer.

Brainard also argued that a US CBDC could safeguard the dollar's global importance.

Other Fed policymakers, including the Fed Governor Christopher Waller, are more skeptical and point out that many dollar transactions are already digital, and have also raised privacy concerns.