Lael Brainard, vice-chair of the United States Federal Reserve, submitted a written statement to the Financial Services Committee in advance of the virtual hearing “On the Benefits & Risks a U.S. Central Bank Digital Currency” (CBDC) that took place on Thursday. This was a smart strategic move considering the fact that over 25 legislators gathered to ask questions.
Brainard appeared before the committee just after the end of the comment period on Fed’s discussion paper “Money and Payments” (Money and Payments, The U.S. Dollar In the Age of Digital Transformation). However, recent developments in the stablecoin markets played a significant role in her statement’s framing.
Brainard stated in a written statement that she acknowledged the existence of stablecoins within the economy. She stated:
CBDC could be used in future situations to complement stablecoins or commercial bank money. It would provide a central bank liability that can protect the financial ecosystem and act as a safety net. This is similar to cash, which coexists with money from commercial banks.
Brainard and Anthony Gonzalez of Ohio spoke out in the Q&A about “very robust regulation akin bank-like regulation” that will ensure stability for stablecoins.
Brainard’s written statements and the Q&A covered two questions in great detail: The role of banks and their impact on the economy, as well as the fragmentation and effects of the payment system and the CBDC.
Brainard was also pressed by participants on several points. He stated that the Federal Reserve “does not intend to proceed with issuing a CBDC without clear support form the executive branch as well as Congress, ideally in terms of a specific authorizing legislation.” Lawmakers wanted to find out what other options the Fed might consider when issuing a CBDC. Jake Auchincloss, a Massachusetts resident raised the question.
Maxine Waters, Chairwoman of the Committee, spoke out about a “digital asset space race” and how Americans can benefit from having a currency that’s accepted internationally.
Brainard suggested that CBDC holdings be limited and that CBDC accounts not offer interest could help credit unions remain relevant in the economy. Traditional banking would still play a significant role.
Brainard explained to Gonzalez that a CBDC would facilitate, but not stop, fragmentation in the payment system through interoperability. It would provide a settlement currency for private-sector competitors who are drawing money from the banking system. The share of cash in the United States has fallen from 31% down to 20% since 2017. Brainard also stated that a CBDC would have complete faith in the government, which Ted Budd of North Carolina agreed with.