Fed’s Brainard Says US Must Remain on ‘Frontier’ of CBDC Research

Federal Reserve Governor Lael Brainard talks up CBDCs, warns of risks of private money during Consensus speech


key takeaways

  • Days after Federal Reserve announces white paper on CBDCs will arrive in July, Brainard talks up importance of US leadership in sector
  • Despite the popularity of stablecoins, Brainard warned that these aren’t a replacement for CBDCs

The United States is actively working with international partners in developing cross-border payment standards for central bank digital currencies (CBDC) because of the “significant effects” CBDC issuance will have across the globe, Federal Reserve Governor Lael Brainard said Monday.

As the People’s Bank of China continues to test its own CBDC, the eCNY, with a planned rollout during the 2022 Winter Olympics, Brainard said the Fed is watching developments closely while also arguing that stablecoins aren’t the simple fix to the digital currency question. 

“It’s absolutely critical for the United States to be at the table in the development of any cross-border standards. We are at the table today in a variety of international fora given the dollar’s important role globally,” Brainard said during a keynote presentation at the Consensus virtual event. “We do believe that the United States has to remain on the frontier of research and policy development on CBCs. And so that is in my thinking a very important consideration.”  

According to reports, the Boston Fed is working in conjunction with MIT, the Bank of International Settlements and a number of private partners on a CBDC prototype. More details are expected in July when the Fed releases a white paper on the topic.

Accenture has been actively working on its own digital dollar initiatives, but it’s not clear what sort of official support it has. 

Tether Annuit Coeptis

Often in any conversation about digital currency, stablecoins are mentioned. On a surface level, stablecoins already have many of the best attributes of what’s being promised by CBDCs: portability, instant settlement and immutability. 

But the key difference between a stablecoin and a CBDC is the issuer. Stablecoins are digitized money. For every dollar being held in a vault, there is one digital token issued and these tokens are controlled by a private company like Tether’s Bitfinex or USDC’s Circle. In contrast, CBDCs are digitally issued money by a central bank. One is private money, the other is a form of central bank money. The former is based on the credibility of a private company, the other on the full faith and credit of a government.  

So why can’t the Fed skip the development of its own CBDC and adopt stablecoins based on a common standard as an alternative? 

“If stablecoins were to be widely adopted and serve as the basis of an alternative payment system oriented around new private forms of money there’s a real risk that you could see fragmentation of the payment system,” Brainard said. “You could see consumer protection [and] financial stability risks because of the risk of run-like behavior.”

Brainard warned that a financial system based on stablecoins would harken back to the ‘free banking’ period where banks actively competed against each other to issue private paper notes in a time that was better remembered for its inefficiency, fraud and instability in the payment system. This eventually led to a uniform of money backed by the Federal government, she said.  

“I think it’s a prominent consideration as we think about a system oriented around private money, and a digital payment system oriented around what is essentially public money,” she added, emphasizing that stablecoins can’t carry the same level of protection as bank deposits or fiat currency.

During last week’s digital assets crash, Tether was down to nearly 87 cents from its peg of $1.


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