Fed Vice-Chair Presses for CBDC in US Amidst Market Stress

In a testimony before the Committee on Financial Services, Brainard called for “clear regulatory guardrails” to provide consumer and investor protection, uphold financial stability, and ensure a level playing field for competition and innovation across the financial system amidst the turmoil in the crypto market.

Call for a Digital Dollar

In the wake of recent events with the algorithmic stablecoin TerraUSD reducing to a few cents and Tether briefly de-pegging, the Vice-Chair said that a CBDC could establish financial system stability.

Brainard argued that a widely available CBDC could act as a substitute for commercial bank money. She added that this could potentially reduce the aggregate amount of deposits in the banking system. The economist also noted that a digital dollar would be attractive to risk-averse users during adverse market conditions.

With CBDCs becoming popular across different parts of the world, Brainard underscored the importance of understanding the impact of the potential absence or presence of a US CBDC on the use of the dollar in global payments. She added,

“..It is important for the United States to play a lead role in the development of standards governing international digital finance transactions involving CBDCs consistent with the norms of privacy, accessibility, interoperability, and security.”

While Brainard has taken a pro-CBDC stance, the Fed policymakers, in general, have remained divided on the entire debate. It recently concluded a three-month public consultation period soliciting feedback on the idea of a potential CBDC and has asserted it would not go ahead with a launch if it fails to receive clear support from the White House and lawmakers.

Comments

The latest testimony comes days after the Fed invited comments on a report investigating the future of a potential government-run digital dollar, met with significant opposition from the cryptocurrency industry as well as Wall Street bankers.

While outlining several disadvantages, Circle, the issuer of stablecoin USDC, responded to Fed’s report and said that risks from a potential digital dollar outweigh the potential benefits and argued that the latter is already being met by existing blockchain-based payment systems.

American Bankers Association also opposed the move. In a letter, the Washington-based trade association said that CBDC should only be pursued as a last resort to meet clearly defined public policy objectives that cannot be achieved through payment innovations that use existing digital dollars.