Brainard speaks to House Financial Services Committee on potential role of CBDC and future of stablecoins

Federal Reserve Vice Chairman Lael Brainard delivered a written statement ahead of the Financial Services Committee's virtual hearing "On the Benefits and Risks of a U.S. Central Bank Digital Currency (CBDC)" on Thursday. It was a sound strategic move, considering more than 25 lawmakers lined up to ask questions.

Brainard's appearance before the committee came as the comment period for the Fed's discussion paper, "Money and Payments: The Dollar in the Age of Digital Transformation," concluded. However, recent events in the stablecoin market pre-empted her remarks.

In her written statement, Brainard acknowledged the role of stablecoins in the economy. she says:

“In some future scenarios, CBDC could co-exist with and complement stablecoins and commercial bank money by providing safe central bank liabilities in the digital financial ecosystem, just as cash currently coexists with commercial bank money.”

During the Q&A, Brainard talked about “very strong regulation akin to banking regulation” to ensure stablecoin stability in a conversation with Ohio’s Anthony Gonzalez.

In Brainard's written statement and Q&A, two issues were raised extensively: the role of banks, and whether their role in the economy would be diminished even without disintermediation; and the fragmentation of payment systems, and how would a CBDC affect the existing situation.

In addition to these points, some participants pressed Brainard regarding the statement in the discussion paper that “the Fed does not intend to proceed with issuing a CBDC without explicit support from the executive branch and Congress, preferably in the form of specific enabling laws”. Lawmakers wonder what non-ideal options the Fed will consider when deciding to issue a CBDC. The last participant, Jake Auchincloss from Massachusetts, asked this question.

Maxine Waters, chairman of the U.S. House of Representatives Financial Services Committee, spoke about the "race to the digital asset space," and the benefits Americans will gain from owning a currency that is accepted overseas.

Brainard argues that limiting CBDC holdings and not providing interest to CBDC accounts could help protect credit unions in the economy and maintain the role of traditional banks.

Brainard told Gonzalez that a CBDC would help mitigate rather than prevent the fragmentation of payments systems that are already withdrawing funds from the banking system by providing a settlement currency through interoperability to competing private sector systems. Since 2017, the proportion of cash in the United States has fallen from 31% to 20%. Additionally, Brainard told Ted Budd from North Carolina that a CBDC would have full confidence in the government behind it.

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