Fed’s Lael Brainard Says U.S. Backed Digital Dollar Could Coexist with Stablecoins

Federal Reserve Vice Chairwoman, Lael Brainard, plans to tell House lawmakers Thursday that a U.S. central bank issued digital currency could coexist and potentially complement the private sector’s stablecoin. 

“In some future circumstances, CBDC [central bank digital currency] could coexist with and be complementary to stablecoins and commercial bank money by providing a safe central bank liability in the digital financial ecosystem, much like cash currently coexists with commercial bank money,” Ms. Brainard is expected to tell lawmakers, according to prepared testimony released by the Fed.

Thursday’s testimony is supposed to take place at noon and comes as the Fed debates potential new forms of money to keep up with the private sector. Unlike other cryptocurrencies, including stablecoins, a federal reserve issued digital currency would also be backed by the federal reserve, just like the U.S. dollar and coins are backed by them. 

Fed officials remain divided on this issue, and it is unlikely a decision will be made in the near future. Nevertheless, hashing out the details and the possibility is one way the Fed is trying to stay relevant in terms of digital currency. 

Stablecoins have regained a new level of attention in wake of TerraUSD’s (UST) monumental collapse that saw the once, third-largest stablecoin by market cap drop from its pegged $1 to its current value of $0.0496, according to Bitpush Terminal data. That collapse also got Treasury Secretary Janet Yellen to mention  it when speaking in a Senate banking hearing. 

“The recent turmoil in crypto financial markets makes clear that the actions we take now—whether on the regulatory framework or a digital dollar—should be robust to the future evolution of the financial system,” Ms. Brainard said in her prepared testimony.

She added a digital dollar may be “one potential way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of the U.S. currency to transact and conduct business in the digital financial system.” 

This scheduled testimony comes as central banks around the world are considering adding their own version of digital currency to compete with numerous private alternatives. While there is a lot of new technology coming out in the terms of private cryptocurrencies, opponents are fearful that private coins can be more easily used for illicit activity including money laundering and financing terrorism. A government digital coin could potentially eliminate these concerns. 

Potential drawbacks to the Feds creating a digital currency are potentially disrupting the financial system, attracting money away from traditional commercial banks and as a result increasing the loan costs for households and businesses. 

Pros for the digital currency include a faster and cheaper way to move money and creating a system where more people are able to come into the financial system. 

There still remains a tremendous amount of uncertainty in terms of a U.S. backed digital currency, stablecoins and cryptocurrencies, but one thing is clear: the Feds are interesting and exploring options. 

Author: Tyler Irvin

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