Federal Reserve Vice Chair Lael Brainard said Thursday the Central Bank is not close to developing a crypto central bank digital currency (CBDC) and before doing so would seek authorization from Congress through legislation.
Brainard told members of the U.S. House Financial Services Committee the Central Bank is waiting for the Treasury to convene a discussion group among federal bank agencies on a CBDC, which Treasury has yet to do. She told lawmakers a discussion paper the Fed issued in January, called Money and Payments: The U.S. Dollar in the Age of Digital Transformation, made clear the Fed would not move forward with creating a CBDC without the approval and authorization from the executive branch and Congress.
Brainard was pressed on this point several times by Republican members of the committee, all 24 of whom signed a letter last week to Fed Chairman Jerome Powell urging the Central Bank to go slowly on the creation of a CBDC, lest it slow private sector innovation. Rep. Andy Barr (R-KY) asked Brainard whether the Fed could move forward if pushed to do so without authorization from Congress. “Will you commit to pushing back to ensure that Congress has a role,” asked Barr. Brainard was reluctant to do so.
Thursday’s hearing, “Digital Assets and the Future of Finance: Examining the Benefits and Risks of a U.S. Central Bank Digital Currency”, comes amid the implosion of the major private sector CBDC, or stablecoin, known as TerraUSD, which has reverberated through the crypto market and cost consumers an estimated $40 billion of losses. Several other cryptocurrencies have plunged in value in recent months, piling on consumer losses.
“These events underscore the need for clear regulatory guardrails to provide consumer and investor protection, protect financial stability, and ensure a level playing field for competition and innovation across the financial system. The recent turmoil in crypto-financial markets makes clear that the actions we take now—whether on the regulatory framework or a digital dollar—should be robust to the future evolution of the financial system, Brainard told lawmakers. “The rapid ongoing evolution of the digital financial system at the national and international levels 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. We recognize there are risks of not acting, just as there are risks of acting.”
“With technology driving profound change, it is important we prepare for the financial system of the future and not limit our thinking to the financial system of today,” said Brainard. “No decision has been made about whether a U.S. central bank digital currency will be a part of that future, but it is important to undertake the necessary work to inform any such decision and to be ready to move forward should the need arise.”
Brainard said it is also important to consider the potential risks of a CBDC associated with disintermediating banks, given their critical role in credit provision, monetary policy transmission, and payments. In some circumstances, she noted, a widely available CBDC could serve as a substitute for commercial bank money, possibly reducing the aggregate amount of deposits in the banking system. And a CBDC would be attractive to risk-averse users during times of stress.
“Accordingly, if the Federal Reserve were to move forward on CBDC, it would be important to develop design features that could mitigate such risks, such as offering a non-interest bearing CBDC or limiting the amount of CBDC a consumer could hold or transfer,” she said.
Unlike cryptocurrencies, which are typically run by private actors, a CBDC would be issued and backed by the central bank. If the U.S. goes ahead with creating one, Brainard said, it ought to be designed so that commercial banks, given their centrality to the financial system, are not disintermediated, by for instance limiting the amount an individual could hold or transfer. She also said a U.S. CBDC could safeguard the dollar’s preeminent role in global commerce.
Brainard noted that several other major economic entities have made progress in developing their own CBDCs. Among them are: the European Central Bank, Bank of Japan and Bank of England. China is currently piloting its own CBDC. At least nine countries have launched one and another 87 countries are exploring a CBDC.
Several lawmakers pressed Brainard on what effect the creation of a CBDC would have on existing banks and credit unions. “It is really important for banks to be intermediaries in any potential system,” she said.
Rep. Patrick McHenry (R-NC), the ranking Republican on the committee, who authored the letter to Fed Chairman Powell, said the Republicans do not believe the Fed has the authority to move forward on a CBDC without congressional authorization. He said he worries federal action would stymie private sector innovation in the area.
“There seems to be a disconnect about how innovation happens – which is outside the walls of government bureaucracy,” said McHenry, “and no one has made a compelling case on why we should expand the Fed’s mandate into retail banking or how a Fed-issued CBDC won’t politicize the Fed.”
Rep. Brad Sherman (D-CA) acknowledged that Congress will have difficulty passing any legislation enabling a CBDC. “Congress is somewhat divided. We may not be able to pass anything,” said Sherman.