InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Brainard discusses central bank digital currency at House hearing
On May 25, Fed Governor Lael Brainard spoke before the U.S. House Financial Services Committee in a virtual hearing titled “Digital Assets and the Future of Finance: Examining the Benefits and Risks of a U.S. Central Bank Digital Currency.” According to the Committee’s memorandum regarding the hearing, the Fed defines a central bank digital currency (CBDC) as a “digital liability of a central bank that is widely available to the general public,” and though definitions vary, “understanding what distinguishes cryptocurrency from fiat government-issued currency is fundamental.” The memorandum also discussed the Fed’s publication of a discussion paper in January, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, which calls for public comments on questions related to the possibility of a U.S. CBDC (covered by InfoBytes here). In Brainard’s prepared statement, she noted that the “rapid ongoing evolution” of digital assets “should lead us to frame the question not as to whether there is a need for a central bank-issued digital dollar today, but rather whether there may be conditions in the future that may give rise to such a need.” Brainard also stated that “there are risks of not acting, just as there are risks of acting.” While there has not been a decision on creating a U.S. CBDC, Brainard stated that “it is important to undertake the necessary work to inform any such decision and to be ready to move forward should the need arise.” Additionally, Brainard pointed to recent pressure on two widely used stablecoins and resulting market turmoil that “underscore the need for clear regulatory guardrails to provide consumer and investor protection, protect financial stability, and ensure a level playing field for competition and innovation across the financial system.” Brainard further stated that a U.S. CBDC could be a 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.”
Upcoming Treasury reports will highlight CBDC issues
On March 22, Treasury Under Secretary for Domestic Finance Nellie Liang spoke before the National Association for Business Economics on topics related to stablecoins and a possible central bank digital currency (CBDC). As instructed by President Biden’s Executive Order on digital assets (covered by InfoBytes here), Liang announced that Treasury will partner with other agencies in the coming months to produce a series of reports and recommendations focusing on (i) the future of money and payment systems, with a discussion of CBDCs; (ii) financial stability risks and regulatory gaps posed by digital assets; (iii) the use of digital assets for illicit finance and associated national security risks; and (iv) international engagement supporting global principles and standards for digital assets and CBDCs. “Regulatory policy for new financial products may need to evolve, but should follow ‘same risk, same regulation,’ in the sense that regulations should be based on risks of the activity rather than the technology itself,” Liang stressed, adding that Treasury’s work will “complement” other agency efforts such as the Federal Reserve Board’s recent discussion paper which emphasized that any CBDC should ensure users’ privacy, have an intermediated model, be transferable, and prevent illicit finance (covered by InfoBytes here).
Biden calls for coordinated approach to digital asset innovation
On March 9, President Biden issued an Executive Order (E.O.) on digital assets outlining the first “whole-of-government” strategy to coordinate a comprehensive approach for ensuring responsible innovation in digital assets policy. (See also White House fact sheet here.) The White House highlighted that “non-state issued digital assets reached a combined market capitalization of $3 trillion” last November (up from $14 billion five years ago) and noted that many countries are currently exploring, or in certain cases introducing, central bank digital currencies (CBDC). The Executive Order on Ensuring Responsible Development of Digital Assets stressed that “we must take strong steps to reduce the risks that digital assets could pose to consumers, investors, and business protections,” and mitigate “illicit finance and national security risks posed by misuse of digital assets,” including money laundering, cybercrime and ransomware, terrorism and proliferation financing, and sanctions evasion. The E.O. cautioned that future digital assets systems must also promote high standards for transparency, privacy, and security.
The E.O. outlined several principal policy objectives, including that:
- Federal agencies are directed to coordinate policy recommendations to address the growth in the digital asset sector.
- Federal agencies are directed to explore the need for a potential U.S. CBDC. Treasury, along with heads of other relevant agencies, are ordered to submit “a report on the future of money and payment systems, including the conditions that drive broad adoption of digital assets; the extent to which technological innovation may influence these outcomes; and the implications for the United States financial system, the modernization of and changes to payment systems, economic growth, financial inclusion, and national security.” The Federal Reserve Board is also encouraged to continue researching, developing, and assessing efforts for a CBDC, including developing a broad government action plan for a potential launch. The E.O. also directed an assessment of whether legislative changes would be necessary in order to issue a CBDC.
- The Secretary of the Treasury will work with relevant agencies to produce a report on the future of money and payment systems, which will include implications for economic growth, financial growth and inclusion, national security, and the extent to which technological innovation may influence these areas. The approach to digital asset innovation must also address the risk of disparate impact, the E.O. stressed, adding that any approach should ensure equitable access to safe and affordable financial services.
- The Attorney General, FTC, and CFPB are “encouraged to consider what, if any, effects the growth of digital assets could have on competition policy.” The agencies are also “encouraged to consider the extent to which privacy or consumer protection measures within their respective jurisdictions may be used to protect users of digital assets and whether additional measures may be needed.” Additional federal agencies are also encouraged to consider the need for investor and market protections.
- The Financial Stability Oversight Council and Treasury are directed to identify and mitigate systemic financial risks posed by digital assets and develop policy recommendations to fill any regulatory gaps.
- Federal agencies are directed to work with allies and partners to ensure international frameworks, capabilities, and partnerships are aligned and responsive to risks posed by the illicit use of digital assets. Agencies should also explore “the extent to which technological innovation may impact such activities,” and explore “opportunities to mitigate these risks through regulation, supervision, public‑private engagement, oversight, and law enforcement.”
- Federal agencies are directed to establish a framework for interagency international engagement with foreign counterparts to adopt global principles and standards for how digital assets are used and transacted, and to promote digital asset and CBDC technology development.
CFPB Director Rohit Chopra and Treasury Secretary Janet Yellen issued statements following Biden’s announcement. “Today’s Executive Order recognizes that the dramatic growth in digital asset markets has created profound implications for financial stability, consumer protection, national security, and energy demand,” Chopra said. “The [CFPB] is committed to working to promote competition and innovation, while also reducing the risks that digital assets could pose to our safety and security. We must make sure Americans in all financial markets are protected against errors, theft, or fraud.” Yellen stated that in addition to partnering with interagency colleagues to produce a report on the future of money and payment systems, Treasury will also work with international partners to promote robust cross-border standards and a level playing field. “As we take on this important work, we’ll be guided by consumer and investor protection groups, market participants, and other leading experts. Treasury will work to promote a fairer, more inclusive, and more efficient financial system, while building on our ongoing work to counter illicit finance, and prevent risks to financial stability and national security,” she said.
Treasury also recently announced that the Financial Literacy and Education Commission (led by Yellen and Chopra and comprised of the heads of 21 federal agencies and entities, including the OCC, Fed, FDIC, SEC, FTC, and HUD, among others) is forming a new subgroup on digital asset financial education to analyze the impact of digital assets on consumer and investor protections. “History has shown that, without adequate safeguards, forms of private money have the potential to pose risks to consumers and the financial system,” U.S. Under Secretary of the Treasury for Domestic Finance Nellie Liang said.
Fed examines ramifications of U.S. central bank digital currency
On January 20, the Federal Reserve Board published a discussion paper, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, which calls for public comments on questions related to the possibility of a U.S. central bank digital currency, or CBDC. “The introduction of a CBDC would represent a highly significant innovation in American money,” the Fed said, although the agency noted that it “does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.” The paper examines the pros and cons of a potential CBDC and outlines a series of potential benefits, including faster payment options between countries. Among the various CBDC structures the Fed is considering is an intermediated model through which the private sector would facilitate the management of CBDC holdings and payments through accounts or digital wallets. Potential intermediaries could include commercial banks and regulated nonbank financial service providers. Such a model “would facilitate the use of the private sector’s existing privacy and identity-management frameworks; leverage the private sector’s ability to innovate; and reduce the prospects for destabilizing disruptions to the well-functioning U.S. financial system,” the Fed said. Additionally, a potential CBDC would also need to be readily transferable between customers of different intermediaries and must be designed to comply with rules regulating money laundering and the financing of terrorism (including the identification of persons accessing CBDC).
While a CBDC could improve cross-border payments and increase financial inclusion, the Fed warned that a CBDC may also yield potential negative effects, including affecting monetary policy implementation and interest rate control, as well as illicit finance controls and operational resilience. Consumer privacy could also be a concern, the Fed stated, noting that “any CBDC would need to strike an appropriate balance between safeguarding consumer privacy rights and affording the transparency necessary to deter criminal activity,” as the infrastructure of a CBDC could create opportunities for hackers since it would “potentially have more entry points than existing payment services.” The CBDC model under consideration would have intermediaries leverage exiting tools to address privacy concerns.
Feedback on the paper will be received through May 20.
Waters establishes Digital Assets Working Group
On June 16, Chairwoman of the House Financial Services Committee Maxine Waters (D-CA) announced the organization of the “Digital Assets Working Group of Democratic Members” to develop “legislation and policy solutions” on issues emerging in the digital asset space, including those related to (i) the regulation of cryptocurrency; (ii) the use of blockchain and distributed ledger technology; and (iii) the potential development of a U.S. central bank digital currency (see InfoBytes coverage on matters related to a CBDC here). During the first hearing held by the Task Force on Financial Technology, Waters stated that the working group will “focus on making sure there is responsible innovation in the cryptocurrency and digital asset space,” noting that “[a]s cryptocurrencies, central bank digital currencies and other digital assets enter the mainstream, the Committee will look at how digital assets have begun to enter many aspects of our lives—from payments to investments to remittances—and consider how to devise legislation to support responsible innovation that protects consumers and investors while promoting greater financial inclusion.”
Senate holds hearing on central bank digital currency
On June 9, the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Economic Policy held a hearing titled “Building A Stronger Financial System: Opportunities of a Central Bank Digital Currency” to discuss the potential opportunities of a central bank digital currency (CBDC). Among the issues discussed at the hearing were protecting consumer privacy and security, financial inclusion, and the Federal Reserve’s authority.
The Honorable J. Christopher Giancarlo, Senior Counsel at Willkie Farr & Gallagher, was a witness on behalf of the Digital Dollar Project (DDP). The digital dollar, proposed by the Fed, would be distributed through the two-tiered banking system and operated alongside physical currency and commercial bank money. Senator Catherine Cortez Masto (D-NV) asked how a CBDC should be designed, implemented, and regulated to reduce the risk of fraud and ensure privacy. Giancarlo, who stated he is not convinced of the need for CBDC, but believed in the need to examine this issue, said the DDP convened a privacy subcommittee which addressed four principles: (i) economic privacy; (ii) security; (iii) inclusion; and (iv) sufficient transparency to provide settlement and payment certainty. When Senator Mark Warner (D-VA) questioned witness Dr. Neha Narula, Director of the Digital Currency Initiative at MIT, on security risks associated with cryptocurrencies, she responded that, with respect to ransomware attacks, the issue is that valuable data has not been properly secured, and suggested that a CBDC could have built-in safeguards. She also believed that open source software is critical for security.
Subcommittee Chairwoman Senator Elizabeth Warren (D-MA) suggested that banks use “abusive” practices and that the crypto industry has promised a better and more inclusive financial system, which reduces cost and improves quality. When Warren asked if a well-designed CBDC could help people who are poorly served by the current financial system, Narula emphasized the importance of designing a CBDC with a focus on accessibility and reducing barriers to access.
Senator Sherrod Brown (D-OH) argued that Americans should not be subject to excessive fees to access their own money. He also noted that a CBDC may work with a solution he has proposed, called No-Fee Accounts, which would be available to every American and backed by the Fed. As previously covered by InfoBytes, Federal Reserve Governor Lael Brainard noted in a speech that a CBDC may address concerns regarding the lack of federal deposit insurance and banking supervision for nonbank issuers of digital assets, and that “new forms of private money may introduce counterparty risk into the payments system in new ways that could lead to consumer protection threats or, at large scale, broader financial stability risks.” Ranking Member Pat Toomey (R-PA) expressed his concerns around the Fed’s position in retail banking services and was doubtful that the Fed would provide high quality customer service, while Ranking Member John Kennedy (R-LA) questioned if it is appropriate for the federal government to get entangled in the credit markets by way of a CBDC.
Brainard provides update on central bank-issued digital currencies
On May 24, Federal Reserve Governor Lael Brainard spoke at the Consensus by CoinDesk 2021 Conference about the Fed’s exploration of central bank digital currencies (CBDCs) and cross-border payments. Brainard noted that a CBDC may address concerns regarding the lack of federal deposit insurance and banking supervision for nonbank issuers of digital assets, and that “new forms of private money may introduce counterparty risk into the payments system in new ways that could lead to consumer protection threats or, at large scale, broader financial stability risks.” She highlighted that “introducing a safe and accessible central bank money to households and businesses in digital payments systems. . .would reduce counterparty risk and the associated consumer protection and financial stability risks.” Brainard noted that a Fed-backed digital currency could cause payment transactions to be cheaper, faster, and more efficient by improving processes for sending and receiving money internationally, encouraging private-sector competition in retail payments, and increasing financial inclusion.
Brainard discussed how CBDCs could affect central banks’ ability to manage the economy, saying a digital dollar would need to be designed with safeguards to “protect against disintermediation of banks and to preserve monetary policy transmission more broadly.” She cautioned that the design should complement, not replace, existing currency and bank deposits and emphasized the need for regulators to work together “to ensure that banks are appropriately identifying, monitoring, and managing risks associated with digital assets.”
As previously covered by InfoBytes, last week Chairman Jerome Powell stated that an important step in engaging the public about CBDCs involves “publishing [a] paper this summer to lay out the Fed’s current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the U.S. context.”
Fed highlights potential of central bank digital currencies
On May 20, Federal Reserve Chairman Jerome Powell released a video message outlining the potential use of central bank digital currencies (CBDCs) in the U.S. payment system. Powell discussed how “the rise of distributed ledger technology, which offers a new approach to recording ownership of assets, has allowed for the creation of a range of new financial products and services—including cryptocurrencies,” which may carry potential risks to those users and to the broader financial system. Powell highlighted that the Fed is contemplating whether and how a U.S. CBDC would impact the domestic payments system, emphasizing that CBDCs “could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar.” Powell also noted that, as part of the Fed’s ongoing efforts in exploring the potential benefits and risks of CBDCs from a variety of angles, the Fed will begin broader consideration of the creation of a U.S. CBDC by issuing a discussion paper and requesting public comment on benefits and risks. Powell stated he expects the Fed to play a leading role in developing international standards for CBDCs by “engaging actively with central banks in other jurisdictions as well as regulators and supervisors here in the United States throughout that process.”
Brainard addresses FedNow and other payment issues
On February 5, Federal Reserve Governor Lael Brainard spoke at the “Symposium on the Future of Payments” to discuss benefits and risks associated with the digitalization of payments and currency. Noting that some of the new players in this space are outside financial regulatory guardrails and offer new currencies that “could pose challenges in areas such as illicit finance, privacy, financial stability, and monetary policy transmission,” Brainard stressed the importance of assessing new approaches and redrawing existing parameters. Emphasizing, however, that no federal agency has broad authority over the payments systems, Brainard stated that Congress should review how retail payments are regulated in the U.S., given the growth in ways that money is able to move around without the need for a financial intermediary. Banking agencies may oversee nonbank payments “to the extent there is a bank nexus” or bank affiliation, Brainard noted, however, she cautioned that “this oversight will be quite limited to the extent that nonbank players reduce or eliminate the nexus to banks, such as when technology firms develop payments services connected to digital wallets rather than bank accounts and rely on digital currencies rather than sovereign currencies as the means of exchange.” According to Brainard, “a review of the nation’s oversight framework for retail payment systems could be helpful to identify important gaps.”
Among other topics, Brainard stated that the Fed is currently reviewing nearly 200 comment letters concerning the proposed FedNow Service announced last summer, which would “facilitate end-to-end faster payment services, increase competition, and ensure equitable and ubiquitous access to banks of all sizes nationwide.” (Covered by InfoBytes here.) Brainard also discussed the possibility of creating a central bank digital currency (CBDC). While noting that the “prospect for rapid adoption of global stablecoin payment systems has intensified calls for central banks to issue digital currencies in order to maintain the sovereign currency as the anchor of the nation’s payment systems,” Brainard stressed the importance of taking into account private sector innovations and considering whether adding a new form of central bank liability would improve the payment system and reduce operational vulnerabilities from a safety and resilience perspective. She noted that the Fed is “conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC.”