Federal Reserve to step up research, public engagement on digital currencies

The Federal Reserve is stepping up its research and public engagement on central bank digital currencies (CBDCs).

According to Federal Reserve Governor Lael Brainard's prepared remarks from Coindesk's 2021 Consensus Conference, the research effort is driven by the growing role of digital private money, the migration to digital payments, the plans for the use of foreign CBDCs in cross-border payments, and concerns about financial exclusion.

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She warns that widespread adoption of stable coins as private money for consumer payments could "fragment parts of the U.S. payment system in ways that impose burdens and raise costs for households and businesses."

"A predominance of private monies may introduce consumer protection and financial stability risks because of their potential volatility and the risk of run-like behavior," Brainard said. "Indeed, the period in the nineteenth century when there was active competition among issuers of private paper banknotes in the United States is now notorious for inefficiency, fraud, and instability in the payments system. It led to the need for a uniform form of money backed by the national government."

Brainard adds that the acceleration of digital currencies has raised questions about how to ensure consumers can retain access to a form of safe central bank money. 

"The Federal Reserve remains committed to ensuring that the public has access to safe, reliable, and secure means of payment, including cash," Brainard noted. "As part of this commitment, we must explore—and try to anticipate—the extent to which households' and businesses' needs and preferences may migrate further to digital payments over time."

She also emphasizes the importance for the United States to be at the table in the "development of cross-border standards," as other countries consider developing and deploying their own CBDCs for cross-border payments.

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Brainard points to a series of policy considerations, including preserving general access to safe central banking money, improving efficiency, promoting competition and diversity and lowering transaction costs, reducing cross-border frictions, increasing financial inclusion, and protecting and safeguarding the privacy and financial integrity.

She acknowledges that a CBDC could lead to benefits including reduced transaction costs, a "foundation for beneficial innovation and competition" in U.S. retail payments, and swift direct transfers of relief payments in times of crisis.

However, she points out that international collaboration on standard-setting and protections against illicit activity will be essential to achieve material improvements in cost, timeliness, and transparency of digital transactions and believes the design of any CBDC should "complement and not replace currency and bank accounts" and include safeguards that protect the privacy of household's payment transactions, protect against the disintermediation of banks, preserve broad monetary policy transmission and prevent and trace illicit activity to maintain the integrity of the financial system.

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In order to explore these issues further, the Federal Reserve will collaborate with the Bank for International Settlements' Committee on Payments and Market Infrastructures and the G7 to keep track of CBDC developments abroad. 

The Federal Reserve Banks of Cleveland and Atlanta will also launch initiatives to identify CBDC design features and delivery approaches that expand access to individuals who do not currently use traditional financial services and ensure cash-based and vulnerable populations can safely access and benefit from digital payments. 

Meanwhile, the Federal Reserve Bank of Boston will partner with the Massachusetts Institute of Technology's (MIT) Digital Currency Initiative on Project Hamilton to build and test a hypothetical digital currency platform. MIT and the Boston Fed plan to release a white paper on the progress from the project next quarter. 

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Federal Reserve Chairman Jerome Powell also said last week that the agency would publish a discussion paper on the digital currencies later this summer, which will seek public comment on a range of questions related to payments, financial inclusion, data privacy, and information security related to CBDCs.