President Waters, Ranking Member McHenry and other members of the Committee, it is a pleasure to be with you today. With technology driving profound change, it is important that we prepare for tomorrow’s financial system and not limit our thinking to today’s financial system. No decision has been made on whether a US central bank digital currency (CBDC) will be part of that future, but it is important to undertake the work necessary to inform such a decision and be ready to go. forward if the need arises.
There has been explosive growth in an emerging digital financial system built around new digital assets and facilitated by crypto-asset platforms and stablecoins as settlement assets. In recent weeks, two widely used stablecoins have come under considerable pressure. A widely used algorithmic stablecoin has shrunk to a small fraction of its presumed value, and the stablecoin which is the most traded crypto asset by volume has temporarily fallen below its purported individual valuation with the dollar.
These events underscore the need for clear regulatory safeguards to ensure consumer and investor protection, safeguard financial stability, and ensure a level playing field for competition and innovation across the financial system. The recent turmoil in the crypto financial markets makes it clear that the actions we take now, whether on the regulatory framework or on a digital dollar, should be robust for the future evolution of the financial system. The rapid and continued evolution of the digital financial system domestically and internationally should lead us to ask the question not whether there is a need today for a central bank-issued digital dollar., but rather whether there may be conditions in the future which might give rise to such a need. We recognize that there are risks in not acting, just as there are risks in acting.
Congress recognized the importance of safe, efficient, and widely accessible payments when it created the Federal Reserve and made payments central to our mission. It entrusted the Federal Reserve with issuing risk-free government currency to the public. The Federal Reserve operated alongside the private sector, providing stable currency and operating key aspects of the payments system, while supporting private sector innovation.
Today, physical currency allows the public to access safe, exchangeable central bank money without concern for liquidity or credit risk. The share of US payments made in cash has fallen from 31% to 20% over the past five years, and the share is even lower for those under 45. As we assess the future digital financial system, it is prudent to consider how to preserve public access to secure central bank money, perhaps through the digital analogue of issuing physical money. by the Federal Reserve. Today, consumers and businesses do not consider whether the money they use is a liability of the central bank, as with cash, or of a commercial bank, as with bank deposits. Confidence in commercial bank money is based on deposit insurance, banks’ access to central bank liquidity, and banking regulation and supervision.
New forms of digital currency such as stablecoins that do not share these same protections could reintroduce significant counterparty risk into the payment system. As we have seen, these new forms of money can lose their promised value relative to fiat money, harm consumers, or, on a large scale, create broader risks to financial stability. We have already seen the risks posed by the widespread use of private money. In the 19th century, active competition among issuers of private paper banknotes led to inefficiency, fraud, and instability in the American payment system, which ultimately necessitated a uniform form of currency backed by the national government. A predominance of such private funds could introduce risks to consumer protection and financial stability due to their potential volatility and the risk of flight behavior, as has been demonstrated on a smaller scale in recent weeks.
Moreover, if private funds – in the form of stablecoins or cryptocurrencies – were to become widespread, we could see a fragmentation of the American payments system into so-called walled gardens. In some future circumstances, the CBDC could coexist and be complementary to stablecoins and commercial bank money by providing secure central bank accountability in the digital financial ecosystem, just as cash currently coexists with commercial bank money. .
It is also important to consider the potential risks of a CBDC associated with the disintermediation of banks, given their critical role in credit provision, monetary policy transmission and payments. Under certain circumstances, a widely available CBDC could serve as a substitute for commercial bank currency, potentially reducing the total amount of deposits in the banking system. And a CBDC would be attractive to risk-averse users in times of stress. Therefore, if the Federal Reserve were to move forward with CBDC, it would be important to develop design features that could mitigate these risks, such as offering interest-free CBDC or limiting the amount of CBDC a consumer could hold or transfer.
Future developments in international payments and capital flows will also influence considerations surrounding a possible CBDC in the United States. The dollar is the most widely used currency in international payments and investments, which benefits the United States by reducing transaction and borrowing costs for American households, businesses, and the government. In future states where other major foreign currencies are issued as CBDCs, it is prudent to consider how the absence or potential presence of a US central bank digital dollar might affect the use of the dollar in global payments. For example, the People’s Bank of China has piloted the digital yuan, and several other foreign central banks are issuing or considering issuing their own digital currencies. A US CBDC can be a potential way to ensure that people around the world who use the dollar can continue to rely on the strength and security of US currency to transact and conduct business in the digital financial system. More generally, it is important that the United States take a leadership role in developing standards governing international digital financial transactions involving CBDCs, consistent with privacy, accessibility, interoperability, and security standards.
In January, the Federal Reserve issued a discussion paper, Currency and Payments: The US Dollar in the Age of Digital Transformationto solicit public comment on this important issue.1 The document’s comment period closed on May 20, and by that date we had received nearly 2,000 comments from a wide range of stakeholders. We plan to post a public summary of comments soon.
The document emphasizes that a CBDC would best meet the needs of the United States by being privacy protected, intermediated, widely transferable, and identity verified. In line with these principles, many commentators have highlighted the importance of privacy, suggesting innovative ways to protect consumer privacy and strike a balance between privacy and financial crime prevention. Striking the right balance here is very important, just as commercial banks offer strong privacy protections as well as robust controls to combat money laundering and terrorist financing. Other commentators have stressed the importance of banks’ continued role as intermediaries, as our article suggests. An intermediated system, in which private intermediaries, including banks, would offer digital accounts or wallets to facilitate CBDC management, would leverage existing private sector identity frameworks and service delivery to consumers while by mitigating the risk of disintermediation.
As we move forward, it is essential that we continue to engage with Congress. I appreciate that the members of this committee are paying critical attention to this issue.
1. See Federal Reserve Board of Governors, Currency and Payments: The US Dollar in the Age of Digital Transformation (Washington: Board of Governors, January 2022). Return to text