Fed Vice Chairman: CBDC won’t exclude banks
A federally issued digital dollar will not cut banks off from the banking system.
If there was one key point that new Federal Reserve Vice Chair Lael Brainard was determined to make during her testimony at the House Financial Services Committee hearing Thursday, May 26 on the benefits and risks of a US central bank digital currency (CBDC), that was it, and for good reason.
Although the Fed was less than eager to pursue a digital dollar early on in the stablecoin-focused conversation, it nonetheless bore the brunt of commercial banking industry anger and angst over a national digital currency. which financial institutions fear could drain hundreds of dollars. billions – even trillions – of dollars from their coffers, if not allow the financial system to bypass them altogether.
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“By drawing deposits away from banks, particularly during a time of economic crisis, a CBDC would likely undermine the commercial banking system in the United States and significantly restrict the availability of credit to the economy,” the Bank Policy Institute wrote in May press release. January 20 statement on the Federal Reserve’s January CBDC report, “Money and Payments: The US Dollar in the Age of Digital Transformation.”
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This is a concern that Brainard addressed very clearly and forcefully from the outset. In fact, it was one of the few CBDC-related issues that she said the Fed had a strong stance on, while agreeing that it couldn’t launch a digital currency without congressional approval.
She was also clear that building a CBDC would likely take at least five years.
“It’s very important to consider the risk of banking intermediation,” Brainard said initially. “A healthy and vibrant banking system with banks of all sizes is very important for the economy and for the Federal Reserve.”
And while acknowledging that a “widely available CBDC could serve as a substitute for deposits” – particularly in times of economic crisis – Brainard later added that “anything we would want to do in this space would have to be consistent with the fact that banks remain really important intermediaries” if a CBDC is launched.
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One way to do this, she said later in response to a representative’s question, is to offer no interest on deposits.
This would “make central bank digital currency holdings only for payments in a way that would not compete with deposits,” Brainard said. “This would limit their use to payments and would not prevent [the] important functions of a vibrant banking system,” such as home loans, she later added.
It’s something consumers are already comfortable with, she added, citing mobile payment apps.
“People have considered designing them in various ways so that they don’t diminish deposits in the banking system,” Brainard noted.
In addition to pointing to the recent collapse of one stablecoin and the brief unpecking of the largest, Tether, Brainard pointed out that privately issued stablecoins present the same risk of disintermediation as well as the possibility of creating walled gardens that could fragment the payment system. .
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A digital dollar would in effect create “a neutral settlement layer” or asset that would encourage private sector innovation and help ensure interoperability across the payments ecosystem, Brainard said.
“All of our payment infrastructure is a kind of neutral infrastructure that enables interoperability between private sector solutions,” she said. “And that’s how I would continue to see the role of the Federal Reserve going forward.”