United States Federal Reserve vice chair Lael Brainard submitted a written statement in advance to the Financial Services Committee's virtual hearing, "On the Benefits and Risks of a U.S. Central Bank Digital Currency (CBDC)," that took place Thursday. That was a sound strategic move, considering that more than 25 legislators lined up to ask questions.
Brainard’s appearance before the committee came just after the close of the comment period for the Fed’s discussion paper, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.” However, recent events on the stablecoin market played a preemptive role in the framing of her statement.
Brainard acknowledged the position of stablecoins in the economy, saying in her written statement. She said:
“In some future circumstances, CBDC 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.”
In the Q&A, Brainard spoke in a conversation with Anthony Gonzalez of Ohio of “very robust regulation akin to bank-like regulation” to ensure the stability of stablecoins.
Two questions were touched on extensively in Brainard’s written statement and in the Q&A: the role of banks, and whether their role in the economy will be diminished even without disintermediation; plus the fragmentation of the payment system, and how a CBDC would affect the situation as it already exists.
In addition to those points, several of the participants pressed Brainard on the statement in the discussion paper that “The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.” Lawmakers wanted to know what non-ideal options the Fed would consider in deciding to issue a CBDC. The question was raised even by the final participant, Jake Auchincloss of Massachusetts.
Chairwoman Maxine Waters spoke of a “digital assets space race” and the benefits Americans receive from having a currency that is accepted abroad.
Brainard suggested that limits on CBDC holdings and not offering interest on CBDC accounts could help preserve the place of credit unions in the economy and maintain the role of traditional banking.
A CBDC would help ease, but not prevent, fragmentation of the payment system through interoperability by providing a settlement currency for competing private-sector systems, which are already drawing money out of banking system, Brainard told Gonzalez. Since 2017, the share of cash in United States has declined from 31% to 20%. In addition, a CBDC would have full faith in the government behind it, Brainard told Ted Budd of North Carolina.