FRB Vice Chair Lael Brainard Testifies on Implications of a U.S. CBDC

In testimony before the House Committee on Financial Services, Federal Reserve Board ("FRB") Vice Chair Lael Brainard considered the potential use and creation of a central bank digital currency ("CBDC").

Ms. Brainard considered:

• CBDCs' Benefits for Financial Stability: Ms. Brainard stated that it would be prudent for regulators and policymakers to consider "how to preserve ready public access to safe central bank money," including through the issuance of a U.S. CBDC. She highlighted that (i) physical currency "provides the public with access to safe central bank money, exchangeable without concern for liquidity or credit risk," and (ii) the share of U.S. payments made by cash has "declined from 31 percent to 20 percent just over the past five years." Given the risks posed to financial system stability by stablecoins and other cryptocurrencies, including fragmentation of the U.S. payment system, Ms. Brainard emphasized that a CBDC might mitigate such risks. She stated that a "CBDC could coexist with and be complementary to stablecoins and commercial bank money by providing a safe central bank liability in the digital financial ecosystem, much like cash currently coexists with commercial bank money."
• CBDCs and Bank Disintermediation: Ms. Brainard stated that policymakers must consider the bank disintermediation risks posed by CBDCs. Highlighting the role banks play in the U.S. financial system (e.g., credit provision, monetary policy transmission, payments, etc.), Ms. Brainard suggested that a "widely available CBDC could serve as a substitute for commercial bank money, possibly reducing the aggregate amount of deposits in the banking system." She argued that if the Federal Reserve decides to issue a U.S. CBDC, it should design the CBDC in a way to mitigate such risks, including by potentially offering a non-interest-bearing CBDC or capping consumer holdings or transfers of such a CBDC.
• The Impact of Foreign CBDCs on the Need for a U.S. CBDC: Ms. Brainard stated that the development and usage of foreign CBDCs (particularly the Chinese digital yuan) informs whether a U.S. CBDC is needed. She said that it is important for the United States to be setting standards in cross-border transactions in order to maintain benefits to the United States, such as lower borrowing costs, and that a U.S. CBDC may be a part of that equation. Ms. Brainard argued that "it is important for the United States to play a lead role in the development of standards governing international digital finance transactions involving CBDCs consistent with the norms of privacy, accessibility, interoperability and security."

Ms. Brainard cited the recently issued FRB discussion paper titled "Money and Payments: The U.S. Dollar in the Age of Digital Transformation." She noted that the FRB paper received "nearly 2,000 comments from a wide range of stakeholders," and that the FRB would publish a public summary of comments "in the near future."