Leal Brainard, vice chairwoman at the Federal Reserve, has been the central bank’s most vocal proponent for experimenting with government-issued digital money as cryptocurrencies like bitcoin
have exploded in popularity and as use of Federal Reserve paper money has declined in recent years.
On Thursday, Brainard appeared before the House Financial Services Committee to make the case for these experiments in the wake of considerable volatility in crypto markets that lead to the failure of the widely used stablecoin TerraUSD.
Brainard said that physical cash provides the public with access to safe central bank money that is free from the risk that the Federal Reserve will go bankrupt, unlike private digital currencies like Terra.
Private stablecoins “don’t share the same protections that underpin confidence in commercial bank money such as deposit insurance,” Brainard said adding that “such new forms of money can lose their promised value relative to [the dollar], harming consumers and creating broader financial stability risks.”
“We have seen before the risks posed by the widespread use of private monies,” she added. “In the 19th century, active competition among issuers of private paper banknotes led to inefficiency, fraud. It was so widespread that it led to the need for a uniform national currency.”
In January, the Federal Reserve issued a report on central-bank digital currency, which explained the potential risks and benefits of a Fed-issued digital dollar.
Meanwhile, the Federal Reserve Bank of Boston has been experimenting, in partnership with the Massachusetts Institute of Technology, with the technological architecture that could serve as the basis for a digital dollar.
The Boston Fed released research in February showing that one code base it experimented with was capable of handling 1.7 million transactions per second, much higher than public blockchains like bitcoin.
A central-bank digital currency could work much like the mostly bank-issued digital money Americans use today, with some key differences. First, it would be backed by the full faith and credit of the United States government and therefore risk-free. Second, transactions using a CBDC could be executed nearly instantaneously at little cost, and with proper collaboration with foreign central banks, while greatly reducing the cost and time it takes to execute cross border transactions.
Advocates of CBDCs also believe a digital dollar could be used to foster greater financial inclusion, enabling Americans who are skeptical of banks to use a digital form of the Federal Reserve notes they carry in their pockets, enabling them to participate in the ever-expanding online economy.