On May 26, local time, Fed Vice Chairman Lael Brainard will attend the hearing of the House Finance Committee, and she talked about the potential benefits and risks of the US central bank digital currency (CBDC) in her prepared testimony.
Brainard said that in recent weeks, the price of algorithmic stablecoins (referring to UST) has plummeted, and as the most traded crypto asset, stablecoins (referring to USDT) have also fallen below its claimed price of anchoring $1. These turbulences in crypto financial markets underscore the importance of regulation in this area and show that both the regulatory framework and the digital dollar should bring robustness to the development of the financial system.
Brainard noted that physical currencies are issued by central banks and are convertible without worrying about liquidity or credit risk. Over the past five years, the share of U.S. cash payments has fallen from 31 percent to 20 percent, and the share under the age of 45 is even lower. Therefore, when evaluating the future digital financial system, it is prudent to consider how to maintain the public's use of central bank money, perhaps through digital simulation of physical money.
"We have witnessed the risks posed by the proliferation of private currencies. In the 19th century, fierce competition among private paper money issuers led to inefficient, fraudulent, and unstable U.S. payment systems, ultimately requiring governments to support a unified form of money. Brainard said the dominance of private currencies jeopardizes consumer protection and financial stability because of its potential volatility and risk of runs, while the U.S. payment system can also be torn apart.
Brainard said that in some future scenarios, the digital dollar may coexist and complement stablecoins and commercial bank currencies, just as cash coexists with commercial bank currencies today. At the same time, given the critical role of CBDCs in credit provision, monetary policy transmission, and disbursement, the potential risks of decentralized banks should also be concerned.
"In some cases, widely used central bank digital currencies can replace commercial bank currencies, reducing the total amount of deposits in the banking system. Central bank digital currencies are also attractive to risk-averse users. Therefore, if the Fed wants to promote central bank digital currencies, it can develop functions such as providing interest-free CBDCs or limiting the number of CBDCs that consumers can hold or transfer. Brainard said.
Brainard also said the evolution of international payments and capital flows will also affect U.S. consideration of CBDCs. The U.S. dollar is the most widely used currency for international payments and investments, and it benefits the United States by reducing transaction and borrowing costs for U.S. households, businesses, and governments. Carefully consider how the existence of the Fed digital dollar will affect the usability of the dollar in global payments.
"More broadly, it is the U.S. that will play a leading role in developing international digital financial transaction standards involving CBDCs, including privacy, accessibility, interoperability, and security norms." Brainard said it's important to strike a balance between privacy and the prevention of financial crime, just as commercial banks provide strong privacy protections as well as strong controls to combat money laundering and the financing of terrorism.