Fed Vice Chair Brainard Supports a US Dollar CBDC on Capitol Hill

Key Insights:

• In the wake of the TerraUSD (UST) collapse, central bank digital currencies (CBDC) are a hot topic again.
• On Thursday, Fed Vice Chair Lael Brainard pushed for a US Dollar CBDC.
• The US trails other central banks in progress towards a CBDC, with China and the eCNY already in the pilot phase.

This month, central bank digital currencies (CBDC) are back in the limelight. The collapse of stablecoin TerraUSD (UST) and the brief unpegging of Tether (USDT) caused some US lawmakers to press for a US Dollar CBDC.

On Capitol Hill, stablecoins and CBDCs have been a regulator topic of debate, despite the US trailing other nations on the rollout of a CBDC.

This week, Fed Vice Chair Lael Brainard pushed for a US Dollar central bank digital currency to combat the rising demand for stablecoins.

Fed Vice Chair Brainard Talks US Dollar CBDC Amidst Market Volatility

On Thursday, Fed Vice Chair Brainard attended a virtual hearing on a US central bank digital currency.

The focal point of the hearing was the Fed’s CBDC report that it released in January.

Giving testimony before the Committee on Financial Services, Brainard set the stage by saying,

“In recent weeks, two widely used stablecoins have come under considerable pressure. One widely used algorithmic stablecoin declined to a small fraction of its purported value, and the stablecoin that is the most traded crypto asset by volume temporarily dipped below its purported one-to-one valuation with the dollar.”

The Fed Vice Chair went on to say,

“These events 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 added,

“The rapid ongoing evolution of the digital financial system at the national and international levels should lead us to frame the question not as 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.”

While Brainard delivered reasons to pursue a Dollar CBDC, lawmakers were divided.

Republicans Take a Less Supportive Position on CBDCs

Republican Party member Patrick McHenry talked of a number of considerations before Brainard’s testimony.

McHenry said,

“No one has made a compelling case on why we should expand the Fed’s mandate into retail banking or how a Fed-issued CBDC won’t politicize the Fed.”

McHenry added,

“There is potential for significant harm to our financial system if we move forward without sorting through potential consequences.”

McHenry questioned Brainard on what problem a CBDC would solve when considering payments are digital and the movement of cash between banks is digital.

Brainard highlighted three risks that included,

• Declining use of cash.
• Consumers no longer have access to a safe central bank-issued digital currency.
• Stablecoins become the dominant form of the US digital dollar, which could lead to Fragmentation of the payment system
• Instability of those digital currencies. The kind of instability that Congress tried to move away from 100 years ago.

The hearing highlighted that US lawmakers and the Fed are way off from a central bank digital currency.

CBDCs in Circulation Today

A number of central banks and monetary authorities have developed and issued CBDCs today. According to CBDC Tracker, The Bahamas was the first with the Sand Dollar. Nigeria is the only other nation to launch a CBDC with the e-Naira.

Countries currently in their CBDC pilot phase include South Africa, Russia, South Korea, China, Canada, and the UAE.

Fourteen nations are in the proof of concept phase, including Australia, Brazil, Japan, and New Zealand.

Denmark, Ecuador, Finland, Haiti, the Philippines, and Singapore are currently the only nations to have canceled plans to introduce CBDCs. The rest of the world, including the UK, the US, and the euro area, are currently in the research phase.

Both the UK and the US will likely continue to trail other nations, with lawmakers concerned with a number of issues, including cyber security.