FRB Vice Chair Barr Highlights Challenges in Payment System Innovation

Federal Reserve Board ("FRB") Vice Chair for Supervision Michael S. Barr reviewed developments in payment system innovation and emphasized the importance of "carefully weigh[ing]" the benefits and risks of the new technologies as to stablecoins and central bank digital currencies ("CBDCs").

In remarks before the FRB's Economics of Payments XII Conference, Mr. Barr emphasized the need for careful regulation of these technologies to ensure that they do not threaten financial stability or payment system integrity. He touted the FRB's introduction of the FedNow Service® which facilitates secure and instant payments.

Mr. Barr made clear that stablecoins should be regulated because they "borrow the trust of the central bank" by pegging their value to government-issued currency. He underscored the FRB's "strong interest" in ensuring stablecoins operate within a prudential framework and pointed to guidance issued by the FRB for banks as to how to engage with their supervisors when considering new products.

Mr. Barr also reviewed current research on CBDC payments, emphasizing that while the FRB supports further research, no decision on issuing a CBDC has been made. Mr. Barr said that the FRB would not issue a CBDC without Congressional authority. He said that current research is focused on "end-to-end system architecture such as how ledgers that record ownership of and transactions in digital assets are maintained, secured, and verified, as well as tokenization and custody models." He said that the FRB is considering "ways in which a digital analog can be designed to the paper bank note so that transfer of value can be made between parties without bank intermediation."

Mr. Barr also called for payment innovation that promotes broad access and financial inclusion to prevent payment services that are cost-prohibitive to low- and moderate-income households and small businesses. He reiterated the FRB's efforts to coordinate with other jurisdictions to achieve cross-border payments that are "faster, cheaper, [and] more transparent."