The Federal Reserve is keeping its options open when it comes to developing and issuing its own digital currency.
During a nearly three-hour-long hearing on a potential U.S. central bank digital currency, Lael Brainard, vice chair of the Fed’s Board of Governors, reiterated the stance that the Fed would prefer to pursue a digital dollar with the backing of Congress, but she did not concede that the central bank would require such a mandate to move forward.
“The Federal Reserve discussion paper that was released in January, said that the Federal Reserve would not move forward without strong support from the executive branch and Congress, ideally in the form of authorizing legislation,” Brainard said.
Republicans were not satisfied with that response. Rep. Blaine Leutkemeyer, R-Mo., asked Brainard to specify if legislation was the only way forward.
“The word I want to clarify here, madam governor, is 'ideally' here,” Leutkemeyer said. “Is that the only form that you would go forward with? Or are there other things, other ways that you would consider approval from Congress or the administration? I want to nail this down. What do you think it takes to make this happen?”
Brainard declined to venture a guess. Instead, she directed the congressman toward the Justice Department and the Fed’s in-house legal counsel.
“I believe in the
Several other Republicans on the committee pressed Brainard on the topic, but were equally stymied by the governor.
Jaret Seiberg, the financial services and housing policy analyst for the financial services firm Cowen Group, said Brainard was wise to choose her words carefully. By not committing in absolute terms to any specific course of action, the Fed maintains flexibility, he said.
“The same Republicans today who are raising questions could be pushing for immediate Fed action if the future of the dollar's role in global trade is at risk because there's a digital euro,” Seiberg said. “The politics of today are not necessarily the politics the Fed will confront when the real decisions have to be made.”
Republicans on the committee also pressed Brainard on the use case for a CBDC. Several raised the question of what issues with the current payment system it would resolve.
Brainard highlighted the
Brainard pointed to potential financial stability risks and consumer protection concerns presented by a large migration of money into unregulated currencies, citing past private currency crises that, in part, led to the creation of the Federal Reserve.
Yet, she did not endorse the creation of a U.S. CBDC. Instead, she said there are pros and cons to both implementing one as well as doing nothing.
“It's really the future state of the financial system that we should be thinking about as we think about the costs and benefits,” she said. “There are potential risks to creating a CBDC, depending on the future evolution of the financial system. There are also potential risks to not having a CBDC.”
The biggest risk to not having a CBDC, Brainard said, was that it could lead to the U.S. dollar losing its edge over other world currencies. As other central banks, including those in China and the European Union, make progress on their own CBDCs, the U.S. could lose the advantages that come with being the world’s reserve currency.
On several occasions, Brainard noted that if Congress were to deem this a threat worthy of addressing through the creation of a U.S. CBDC, it would be wise to do so swiftly, to avoid falling even further behind. She added that Fed research on CBDCs, including its partnership with the Massachusetts Institute of Technology, known as Project Hamilton, would be key to getting a digital dollar up and running.
“The financial system is moving very rapidly. It's very hard for us to see five years out,” she said. “If we wait until five years to decide to launch, it will probably be another five years before we could actually deliver and so that's why it's really important to do that work, just to be prepared.”
Should the U.S. move forward with a CBDC, Brainard confirmed that the Fed would not allow individuals to establish accounts with Reserve Banks. Instead, the program would be intermediated through commercial banks. In an effort to avoid diverting too many traditional deposits, the Fed would place a cap on how many digital dollars an individual can hold and it would prohibit CBDCs from generating interest.
While these measures were meant to protect banks from being disintermediated, Rep. Sean Casten, D-Ill., questioned whether banks would have financial incentives for participating in such a system. He noted that because the number of digital dollars would be fixed, a bank could not use them to make loans as it would with traditional deposits.
“I'm hard-pressed to think of how a private bank would ever have a specific incentive to take CBDC deposits,” Casten said during the hearing. “I can't imagine the interest rate that gives them the same incentive that they would have if they could lend against deposits.”
Brainard said banks would likely want to take on CBDC deposits to remain engaged in the payment field, but acknowledged there were many unknowns about how the financial system would evolve.
Other unknowns that arose during the hearing included how currently unbanked consumers might be drawn into the system, how the Fed would provide access to its currency in parts of the country with little or no internet and how things like limits on individual CBDC holdings would factor into the Fed’s aspiration of creating a cash-like currency for the digital economy.
Overall, Seiberg said Brainard managed to thread the needle of outlining where the Fed stands on the issue of a CBDC and where it could go without painting itself into a corner.
“The Fed is smart to tread lightly here,” he said. “The Fed is trying to be cautious so it doesn't create any rush for Congress to do something to either bless a digital dollar or block it. It’s trying to preserve all its options.”
