On February 5th, 2020, U.S. Federal Reserve Governor Lael Bainard said the U.S. central bank is currently ‘advancing its understanding’ of central bank digital currencies (CBDCs). Previously, the U.S. Federal Reserve showed no interest in a CBDC, but with the emergence of Libra, among other digital assets, the Fed’s view seems to have changed. Is the U.S. preparing to issue its own digital currency?

The U.S. Federal Reserve and a Central Bank Digital Currency Explained

Lael Brainard is a member of the U.S. Federal Reserve’s Board of Governors. She serves as Chair of the Committees on Payments, Clearing and Settlements, Consumer and Community Affairs, Financial Stability, and Federal Reserve Bank Affairs.

According to governor Brainard, the U.S. Federal Reserve is currently exploring the possibility of issuing a central bank digital currency (CBDC). The Fed now joins a growing list of central banks assessing CBDCs, spanning England, Japan, Sweden, Switzerland, Canada, and the European Central Bank.

Speaking at a payments conference on Wednesday at the Stanford Graduate School of Business in California, Brainard said,

“We are collaborating with other central banks as we advance our understanding of central bank digital currencies.”

Brainard’s speech suggested the U.S. central bank is open to the idea of issuing its own digital currency in the future — insinuating a different energy compared to that of the past. Back in May of 2018, Brainard said she saw “no compelling demonstrated need for a Fed-issued digital currency”. Now, she says,

“Given the dollar’s important role, it is essential that we remain on the frontier of research and policy development regarding CBDC.”

Why is the U.S. Federal Reserve Exploring a CBDC?

The reason, she said, centered around the existing popularity of electronic payments in the country. Plenty of U.S. consumers and businesses are already making electronic payments — with credit and debit cards, payment apps, and through the automated clearinghouse network, said Brainard.

Since that time, the landscape of both who can issue digital assets, and exactly what they can issue, has certainly changed. Facebook’s Libra is a prime example. On Wednesday, Brainard said,

“Because Facebook has an active user network of one-third of the global population, the company’s Libra global stablecoin project has imparted urgency to the debate over what form money can take, who or what can issue it, and how payments can be recorded and settled.”

Brainard recognizes the potential benefits of ‘digitalization’, saying herself how it has “the potential to deliver greater value and convenience at lower cost”. Of course however, the process poses a new set of risks.

These risks extend to individual privacy, illicit finance, monetary policy transmission, and financial stability. Brainard added,

“In the United States no less than in other major economies, the public sector needs to engage actively with the private sector and the research community to consider whether new guardrails need to be established, whether existing regulatory perimeters need to be redrawn, and whether a CBDC would deliver important benefits on net.”

The European Central Bank has not only explored CBDCs, they’ve established a task force to determine the feasibility of implementing a CBDC. One major attraction seen through the implementation of Distributed Ledger Technology (DLT) is the area of settlement.

The financial securities industry has also noticed the potential here. So far, the Security Token Offering (STO) has been leveraged to raise nearly $1 billion to date.

What do you think about the U.S. Federal Reserve exploring a Central Bank Digital Currency (CBDC)? Will the Federal Reserve go on to issue a CBDC? We want to know what you think in the comments section below.

Image courtesy of the Federal Reserve.