The U.S central bank has thrown its weight behind digital currencies and is looking at the possibility of issuing its own central bank digital currency (CBDC).
Governor Lael Brainard said that the bank is currently exploring the policy, design and legal options for regulating digital currencies and payments. Her remarks also implied that the Federal Reserve would consider issuing a central bank digital currency of its own.
“By transforming payments, digitalization has the potential to deliver greater value and convenience at lower cost”, Brainard said at a conference on payments at the Stanford Graduate School of Business.
There are Risks
The rapid growth of stablecoins and digital payment networks at a global scale is leading the Fed to revisit its stance on digital currency. However, there are fears among global central banks that without requisite safeguards, stablecoin networks at a global scale may put consumers at risk. Cryptocurrencies also pose several risks to the financial system, and these could be magnified by a widely accepted stablecoin for payments such as Facebook’s Libra.
According to Brainard:
“Some of the new players are outside the financial system’s regulatory guardrails, and their new currencies could pose challenges in areas such as illicit finance, privacy, financial stability, and monetary policy transmission.”
To mitigate the risks of stablecoins, the Fed is developing round-the-clock real-time payments and settlement service. She added that the Fed is also actively researching and experimenting with blockchain to identify potential uses cases, including the potential for CBDC.
Facebook Libra “Imparted Urgency” to Initiate Cryptocurrency Conversations
Digital currency payments projects from big technology firms such as Facebook have the potential to scale even more rapidly given their massive network advantages. This is why Fed officials, including Brainard, have raised concerns about the implications of such stablecoins on the data and privacy protection mechanisms for users.
Brainard said at the event that the Facebook Libra project “imparted urgency” to the conversation around digital currencies. In the United States, she said that one of the main issues that need to be researched is the question of whether a digital currency would make the payments system safer or simpler. Also to be studied are the risks, privacy and fraud protection and whether the central bank’s digital currency would be considered legal tender.
Brainard also called for the public sector to actively embrace CDBD. She said:
“In the United States no less than in other major economies, the public sector needs to engage actively with the private sector and the research community to consider whether new guardrails need to be established, whether existing regulatory perimeters need to be redrawn, and whether a CBDC would deliver important benefits on net.”
Her comments came amid a heated debate around the world over how central banks should manage privately issued cryptocurrencies, and the distributed ledger technology used by these projects.
Many of the major economies in the world have started planning to have a national digital currency. China has more than once provided updates about its plan to issue a national digital currency, Digital Currency Electronic Payment (DCEP). Meanwhile, in Europe, six central banks including the central banks of the U.K. and Japan, as well as the European Central Bank (ECB), recently instituted a working group to cooperate and share research relating to CBDCs.