For release on delivery 9:00 a.m. EDT May 24, 2021 Private Money and Central Bank Money as Payments Go Digital: an Update on CBDCs Remarks by Lael Brainard Member Board of Governors of the Federal Reserve System at the Consensus by CoinDesk 2021 Conference Washington, D.C. (via webcast) May 24, 2021Technology is driving dramatic change in the U.S. payments system, which is a vital infrastructure that touches everyone. 1 The pandemic accelerated the migration to contactless transactions and highlighted the importance of access to safe, timely, and low-cost payments for all. With technology platforms introducing digital private money into the U.S. payments system, and foreign authorities exploring the potential for central bank digital currencies (CBDCs) in cross-border payments, the Federal Reserve is stepping up its research and public engagement on CBDCs. As Chair Powell discussed last week, an important early step on public engagement is a plan to publish a discussion paper this summer to lay out the Federal Reserve Boards current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the U.S. context. 2 Sharpening the Focus on CBDCs Four developmentsthe growing role of digital private money, the migration to digital payments, plans for the use of foreign CBDCs in cross-border payments, and concerns about financial exclusionare sharpening the focus on CBDCs. First, some technology platforms are developing stablecoins for use in payments networks. 3 A stablecoin is a type of digital asset whose value is tied in some way to traditional stores of value, such as government-issued, or fiat, currencies or gold. Stablecoins vary widely in the assets they are linked to, the ability of users to redeem the stablecoin claims for the 1 I am grateful to Alexandra Fernandez, Sonja Danburg, David Mills, and David Pope of the Federal Reserve Board for their assistance in preparing this text. These are my own views and do not necessarily reflect those of the Federal Reserve Board or the Federal Open Market Committee. 2 See Jerome Powell, “Federal Reserve Chair Jerome H. Powell Outlines the Federal Reserves Response to Technological Advances Driving Rapid Change in the Global Payments Landscape,” Board of Governors of the Federal Reserve System news release, May 20, 2021, federalreserve.gov/newsevents/pressreleases/other20210520b.htm. 3 See Lael Brainard, “The Digitalization of Payments and Currency: Some Issues for Consideration,” remarks at the Symposium on the Future of Payments, Stanford University, California, February 5, 2021, federalreserve.gov/newsevents/speech/brainard20200205a.htm.- 2 - reference assets, whether they allow unhosted wallets, and the extent to which a central issuer is liable for making good on redemption rights. Unlike central bank fiat currencies, stablecoins do not have legal tender status. Depending on underlying arrangements, some may expose consumers and businesses to risk. If widely adopted, stablecoins could serve as the basis of an alternative payments system oriented around new private forms of money. Given the network externalities associated with achieving scale in payments, there is a risk that the widespread use of private monies for consumer payments could fragment parts of the U.S. payment system in ways that impose burdens and raise costs for households and businesses. A predominance of private monies may introduce consumer protection and financial stability risks because of their potential volatility and the risk of run-like behavior. Indeed, the period in the nineteenth century when there was active competition among issuers of private paper banknotes in the United States is now notorious for inefficiency, fraud, and instability in the payments system. 4 It led to the need for a uniform form of money backed by the national government. Second, the pandemic accelerated the migration to digital payments. Even before the pandemic, some countries, like Sweden, were seeing a pronounced migration from cash to digital payments. 5 To the extent that digital payments crowd out the use of cash, this raises questions about how to ensure that consumers retain access to a form of safe central bank money. In the United States, the pandemic led to an acceleration of the migration to digital payments as well as increased demand for cash. While the use of cash spiked at certain times, there was a pronounced shift by consumers and businesses to contactless transactions facilitated by 4 See, for instance, Joshua R. Greenberg, Bank Notes and Shinplasters: The Rage for Paper Money in the Early Republic (Philadelphia: University of Pennsylvania Press, 2020). 5 Codruta Boar and Rbert Szemere, “Payments go (even more) digital” (Basel: Bank for International Settlements, January 2021), bis/statistics/payment_stats/commentary2011.htm.- 3 - electronic payments. 6 The Federal Reserve remains committed to ensuring that the public has access to safe, reliable, and secure means of payment, including cash. As part of this commitment, we must exploreand try to anticipatethe extent to which households and businesses needs and preferences may migrate further to digital payments over time. Third, some foreign countries have chosen to develop and, in some cases, deploy their own CBDC. Although each country will decide whether to issue a CBDC based on its unique domestic conditions, the issuance of a CBDC in one jurisdiction, along with its prominent use in cross-border payments, could have significant effects across the globe. Given the potential for CBDCs to gain prominence in cross-border payments and the reserve currency role of the dollar, it is vital for the United States to be at the table in the development of cross-border standards. Finally, the pandemic underscored the importance of access to timely, safe, efficient, and affordable payments for all Americans and the high cost associated with being unbanked and underbanked. While the large majority of pandemic relief payments moved quickly via direct deposits to bank accounts, it took weeks to distribute relief payments in the form of prepaid debit cards and checks to households who did not have up-to-date bank account information with the Internal Revenue Service. The challenges of getting relief payments to these households highlighted the benefits of delivering payments more quickly, cheaply, and seamlessly through digital means. Policy Considerations In any assessment of a CBDC, it is important to be clear about what benefits a CBDC would offer over and above current and emerging payments options, what costs and risks a 6 Kelsey Coyle, Laura Kim, and Shaun OBrien, Consumer Payments and the COVID-19 Pandemic: The Second Supplement to the 2020 Findings from the Diary of Consumer Payment Choice (San Francisco: Federal Reserve Bank of San Francisco, February 2021), frbsf/cash/publications/fed-notes/2021/february/consumer- payments-covid-19-pandemic-2020-diary-consumer-payment-choice-supplement-2/.- 4 - CBDC might entail, and how it might affect broader policy objectives. I will briefly discuss several of the most prominent considerations. Preserve general access to safe central bank money Central bank money is important for payment systems because it represents a safe settlement asset, allowing users to exchange central bank liabilities without concern about liquidity and credit risk. Consumers and businesses dont generally consider whether the money they are using is a liability of the central bank, as with cash, or of a commercial bank, as with bank deposits. This is largely because the two are seamlessly interchangeable for most purposes owing to the provision of federal deposit insurance and banking supervision, which provide protection for consumers and businesses alike. It is not obvious that new forms of private money that reference fiat currency, like stablecoins, can carry the same level of protection as bank deposits or fiat currency. Although various federal and state laws establish protections for users, nonbank issuers of private money are not regulated to the same extent as banks, the value stored in these systems is not insured directly by the Federal Deposit Insurance Corporation, and consumers may be at risk that the issuer will not be able to honor its liabilities. 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. In contrast, a digital dollar would be a new type of central bank money issued in digital form for use by the general public. By introducing safe central bank money that is accessible to households and businesses in digital payments systems, a CBDC would reduce counterparty risk and the associated consumer protection and financial stability risks.- 5 - Improve efficiency One expected benefit is that a CBDC would reduce or even eliminate operational and financial inefficiencies, or other frictions, in payments, clearing, and settlement. Today, the speed by which consumers and businesses can access the funds following a payment can vary significantly, up to a few days when relying on certain instruments, such as a check, to a few seconds in a real-time payments system. Advances in technology, including the use of distributed ledgers and smart contracts, may have the potential to fundamentally change the way in which payment activities are conducted and the roles of financial intermediaries and infrastructures. The introduction of a CBDC may provide an important foundation for beneficial innovation and competition in retail payments in the United States. Most immediately, we are taking a critical step to build a strong foundation with the introduction of the FedNow SM Service, a new instant payments infrastructure that is scheduled to go into production in two years. The FedNow Service will enable banks of every size and in every community across America to provide safe and efficient instant payment services around the clock, every day of the year. Through the banks using the service, consumers and businesses will be able to send and receive payments conveniently, such as on a mobile device, and recipients will have full access to funds immediately. Promote competition and diversity and lower transactions costs Today, the costs of certain retail payments transactions are high and not always transparent to end users. 7 Competition among a diversity of payment providers and payment 7 Marie-Hlne Felt, Fumiko Hayashi, Joanna Stavins, and Angelika Welte, Distributional Effects of Payment Card Pricing and Merchant Cost Pass-through in the United States and Canada, Federal Reserve Bank of Boston Research Department Working Papers No. 20-13 (Boston: FRB Boston, 2020), bostonfed/publications/research-department-working-paper/2020/distributional-effects-payment- card-pricing-merchant-cost-pass-through-united-states-canada.aspx.- 6 - types has the potential to increase the choices available to businesses and consumers, reduce transactions costs, and foster innovation in end-user services, although it could also contribute to fragmentation of the current payments system. By providing access to a digital form of safe central bank money, a CBDC could provide an important foundation on which private-sector competition could flourish. Reduce cross-border frictions Cross-border payments, such as remittances, represent one of the most compelling use cases for digital currencies. The intermediation chains for cross-border payments are notoriously long, complex, costly, and opaque. Digitalization, along with a reduction in the number of intermediaries, holds considerable promise to reduce the cost, opacity, and time required for cross-border payments. While the introduction of CBDCs may be part of the solution, international collaboration on standard setting and protections against illicit activity will be required in order to achieve material improvements in cost, timeliness, and transparency. 8 We are collaborating with international colleagues through the Bank for International Settlements, Committee on Payments and Market Infrastructures, and the G7 to ensure the U.S. stays abreast of developments related to CBDC abroad. We are engaging in several international efforts to improve the transparency, timeliness, and cost-effectiveness of cross-border payments. It will be important to be engaged at the outset on the development of any international standards that may apply to CBDCs, given the dollars important role as a reserve currency. Complement currency and bank deposits 8 See Bank for International Settlements, Committee on Payments and Market Infrastructures, Enhancing cross- border payments: building blocks of a global roadmap Stage 2 report to the G20 (Basel: BIS, July 2020), bis/cpmi/publ/d193.pdf; and Financial Stability Board, Enhancing Cross-border Payments: Stage 3 Roadmap (Washington: FSB, October 13, 2020), fsb/wp-content/uploads/P131020-1.pdf.- 7 - A guiding principle for any payments innovation is that it should improve upon the existing payments system. Consumers have access to reliable money in the forms of private bank accounts and central bank issued currency, which form the underpinnings of the current retail payments system. The design of any CBDC should complement and not replace currency and bank accounts. Preserve financial stability and monetary policy transmission The introduction of a CBDC has the potential to have wide-reaching effects, and there are open questions about how CBDC could affect financial stability and monetary policy transmission. Some research indicates that the introduction of a CBDC might raise the risk of a flight out of deposits at weak banks in favor of CBDC holdings at moments of financial stress. 9 Other research indicates that the increase in competition could result in more attractive terms on transactions accounts and an overall increase in banking system deposits. 10 Banks play a critical role in credit intermediation and monetary policy transmission, as well as in payments. Thus, the design of any CBDC would need to include safeguards to protect against disintermediation of banks and to preserve monetary policy transmission more broadly. While it is critical to consider the ways in which a CBDC could introduce risks relative to the current payments system, it may increase resilience relative to a payments system where private money is prominent. Protect privacy and safeguard financial integrity The design of any CBDC would need to both safeguard the privacy of households payments transactions and prevent and trace illicit activity to maintain the integrity of the 9 Christian Pfister, Monetary Policy and Digital Currencies: Much Ado about Nothing? Banque de France Working Paper 642 (Paris: Banque de France, 2017),