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Official digital money can help financial system stability

26 May 2022

Official digital money can help financial system stability

Creating an official digital version of the US dollar could help ensure financial system stability as crypto assets and digital currencies developed by other countries become increasingly popular, Federal Reserve Vice Chair Lael Brainard said Wednesday (05/25/2022).

“As we assess the future of digital financial systems, it is wise to consider how to maintain ready public access to secure central bank money, perhaps via digital analogues of physical currency issuance.

Federal Reserve,” Brainard said in testimony released before his appearance on the matter before the U.S. House of Representatives Financial Services Committee on Thursday.

“We recognize there is a risk of inaction, just as there is a risk of acting,” he said.

Fed policymakers remain divided on the need for a central bank digital currency (CBDC) and have just completed a three-month public consultation period seeking feedback on the idea.

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The Fed has also indicated it would not launch it without clear support from the White House and lawmakers.

That puts it behind its other major global central bank peers, including the European Central Bank (ECB), the Central Bank of Japan (BoJ) and the Bank of England (BoE), on the process of possible adoption.

China is currently piloting its own CBDC and in total nine countries have launched one and another 87 countries are exploring the option, according to the Atlantic Council.

The risks of loosely regulated cryptocurrencies and stablecoins, whose value has exploded during the COVID-19 pandemic, have been in sharp focus with crypto markets slumping this month following the crash of the major “stablecoin” terraUSD. Leading cryptocurrency bitcoin has fallen more than 50 percent since November.

“This incident underscores the need for a clear regulatory barrier to provide consumer and investor protection, protect financial stability, and ensure a level of competition and innovation across the financial system,” said Brainard.

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Unlike cryptocurrencies, which are typically run by private actors, CBDCs will be issued and backed by a central bank. If the US goes ahead with creating it, Brainard said, it will have to be designed so that commercial banks, given their centrality to the financial system, are not interrupted, for example by limiting the amount a person can hold or transfer.

Brainard also thinks US CBDCs can protect the dollar’s global interests.

Other Fed policymakers, including Fed Governor Christopher Waller, were more skeptical and pointed out that many dollar transactions are already digital, and have also raised privacy concerns.

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