Currencies

Lawmakers Debate Government Sanctioned Digital Currency

The House Financial Services Committee discussed the future of the federal banking system in relation to cryptocurrencies on Wednesday, specifically regarding the future of stablecoins as viable currency and how a U.S. central bank digital currency could be developed. 

Lael Brainard, the vice chair of the Board of Governors of the Federal Reserve System, testified on the pros and cons of a government sanctioned digital currency, as well as the regulatory requirements a currency-pinned stablecoin would require. 

“In some future circumstances, CBDC [central bank digital currency] 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,” Brainard wrote in her opening statement

A major consideration officials within the Fed are weighing is the importance of maintaining the U.S. dollar’s global dominance. The dollar is one of the most common and highly valued currencies around the world. New CBDCs issued by other governments, such as China, could threaten its position. 

“A U.S. CBDC may be one potential way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of the U.S. currency to transact and conduct business in the digital financial system,” Brainard said.

“It’s very important for us to be involved in standard setting in cross border transactions,” she added during the hearing. 

A major motive for issuing a U.S. CBDC is the rapid decline of using physical cash as payment. With the increasing movement of funds being digital and via third party applications, Brainard said that the Federal Reserve is still developing its FedNow platform that helps financial institutions get payments to customers. A federal payment platform could help usher in a U.S. CBDC.

Simultaneously, given the continued popularity of cryptocurrencies, Brainard also noted that a CBDC could help protect against a fragmentation of the U.S. financial payments system. She told Rep. Vicente Gonzalez, D-Texas, that treating a stablecoin with the same regulations as a standard fiat would prevent volatility and ideally help it coexist alongside fiat money.  

This includes high-quality assets backing a stablecoin, sufficient liquidity, and other supervision. 

“There is relevance there for a central bank digital currency and…we have a variety of research around the system that is potentially relevant both to what it would take to execute on a digital dollar issued by the Federal Reserve but also relevant to simply understanding some of the private sector platforms that have stablecoins or are building stablecoins,” she said. 

Brainard also noted that not only could a CNBC be “complementary” to stablecoins, but could prompt more private sector innovation. 

“That rapid ongoing evolution of the digital financial system 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 testified. 

No decision has been made by federal authorities of issuing a central bank currency, but Brainard acknowledged the importance of cybersecurity measures ahead of issuing a digital currency. 

“Operational and cybersecurity risks are an ongoing challenge for all payment systems,” she said. “And I think any digital dollar would be the same.”

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