CBDC, stablecoins and commercial bank money can co-exist, says Brainard

Diving Brief:

  • A U.S. digital dollar could “co-exist and be complementary to stablecoins and commercial bank money” under certain future circumstances, Federal Reserve Vice Chairman Lael Brainard said Thursday during a services committee hearing. Chamber financials.
  • Brainard told lawmakers that rolling out a central bank digital currency (CBDC) could help keep the Fed abreast of technological innovation in other countries and in the private sector and could enhance the role of the dollar in as the world’s reserve currency.
  • Lawmakers remain divided on the effectiveness of a U.S. CBDC, with some critics saying a digital dollar would divert deposits from the banking system, reducing credit availability and dampening private sector money creation.

Overview of the dive:

Thursday’s hearing came following the falling prices of algorithmic stablecoin TerraUSD this month, and shortly after the Fed concluded a 120-day comment period on the CBDC report it released in January.

In testimony released ahead of the hearing, Brainard argued that a Fed-backed digital dollar could coexist with commercial bank money and privately developed stablecoins, assuming strong safeguards. regulations were in place.

With proper regulation, a CBDC “could provide safe central bank accountability as a neutral settlement layer in the digital financial ecosystem,” Brainard said. “It would actually facilitate and enable private sector innovation.”

Brainard cited the explosive growth in popularity of stablecoins of late as a reason why regulators should step in to protect investors. She pointed to the crash of TerraUSD and Luna, as well as the temporary undocking of Tether this month, to highlight the need for tougher laws in space. In doing so, Brainard agreed with Treasury Secretary Janet Yellen, who called for stricter regulation of stablecoins during a Senate Banking Committee hearing last week.

However, not all legislators agree on the practicality and necessity of a CBDC.

“What specific problems, if any, will a central bank digital currency solve?” Rep. Patrick McHenry, R-NC, asked Brainard during the hearing.

Brainard, along with House Financial Services Committee Chair Maxine Waters, D-CA, argued that deploying a CBDC could help the United States keep pace with other developing countries. CBDC projects – especially China, which is piloting a digital yuan.

Furthermore The US CBDC can be a potential way to ensure that people around the world who use the dollar can continue to rely on the strength and security of US currency to transact and conduct business in the digital financial system,” said said Brainard.

The impact such technology would have on the commercial banking industry is one of the main sources of contention on the issue of developing a CBDC in the United States.

In letters to the Fed sent on Monday, banking trade groups the American Bankers Association (ABA) and the Bank Policy Institute (BPI) argued that a CBDC would reap hundreds of billions of dollars. on bank depositsslashing banks’ most stable source of funding and dramatically reducing the availability of credit for households and businesses.

“A widely available CBDC could serve as a substitute for commercial bank money, potentially reducing the total amount of deposits in the banking system,” Brainard said. “As a result, if the Federal Reserve were to move forward with CBDC, it would be important to develop design features that could mitigate these risks, such as offering interest-free CBDC or limiting the amount of CBDC a consumer could hold or transfer. “

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