• T Skevington and M Bacina

US Federal Reserve provides update on digital currencies


US Federal Reserve governor Lael Brainard recently gave a speech providing an update on the Fed's approach to digital currencies. Speaking at a San Francisco Innovation Office Hours event (virtually of course), Governor Brainard discussed the Fed's role in conducting research & experimentation related to distributed ledger technology as well as the broader potential use cases for digital currencies.


Interestingly, Governor Brainard started by underscoring the Fed's commitment to delivering on the recently announced FedNow service as a means of enabling immediate and trusted access to funds. Governor Brainard then went on to acknowledge that while digital currencies have the potential to enhance payments efficiency, expand financial inclusion, speed up settlement flows, and reduce end-user costs:

Digital currencies, including central bank digital currencies (CBDCs), present opportunities but also risks associated with privacy, illicit activity, and financial stability. The introduction of Bitcoin and the subsequent emergence of stablecoins with potentially global reach, such as Facebook's Libra, have raised fundamental questions about legal and regulatory safeguards, financial stability, and the role of currency in society.

After acknowledging China's rapid developments in the space, and describing the Fed's research and policy development regarding CBDCs to date, Governor Brainard made the following comments on the potential future adoption of a CBDC:

Separately, 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.

In short, it's super complicated. As to whether we can expect to see a CBDC framework in the US any time soon:

The Federal Reserve has not made a decision whether to undertake such a significant policy process, as we are taking the time and effort to understand the significant implications of digital currencies and CBDCs around the globe.

Thankfully, Governor Brainard also confirmed the US's commitment to international collaboration on CBDC development, whether it be through partnerships, the CBDC coalition of central banks, or the Bank of International Settlement's Innovation Hub. Rightfully, Governor Brainard points out that getting it right is critical, given the need for central banks to:

address challenging hurdles, such as threats to cybersecurity, counterfeiting and fraud, and anti-money laundering, to name a few

Governor Brainard also highlights an issue that is often ignored, in that:

Since financial and payments systems share extensive cross-border linkages, a poorly designed CBDC issued in one jurisdiction could create financial stability issues in another jurisdiction. A cyberattack on a CBDC arrangement in one jurisdiction could create domestic financial stress, which could, in turn, affect linked economies or have broader effects if confidence in certain technologies or payment mechanisms is eroded.

A transcript of the speech can be found here, as well as a copy of the associated press release.

© Michael Bacina. All rights reserved

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