For release on delivery
5:15 a.m. EST (11:15 a.m. local time)
December 18, 2019
Update on Digital Currencies, Stablecoins, and the Challenges Ahead
Remarks by
Lael Brainard
Member
Board of Governors of the Federal Reserve System
on the
Monetary Policy, Technology, and Globalisation Panel at
"Monetary Policy: The Challenges Ahead," an
ECB Colloquium Held in Honour of Benoît Coeuré
sponsored by the European Central Bank
Frankfurt, Germany
December 18, 2019
I am honored to be here today to celebrate Benoît Coeuré's tenure at the European
Central Bank (ECB). I have been working with Benoît now for a decade-starting at our
respective Treasuries where we both were drafted as financial firefighters, migrating to
our respective central banks to help with stabilization, recovery, and normalization, and
most recently preparing for the challenges that lie ahead. Over the course of that decade,
I have developed deep admiration for Benoît's keen insights and outstanding judgment.1
Equally important, Benoît always has a plan. Generally, it is the right plan
addressed to the right problem, and he executes it with exceptional efficacy and strong
support. That is a rare and invaluable combination in public service. Indeed, Benoît's
tenure at the ECB coincided with an incredible turnaround in unemployment and output
growth. Both the euro area and the global economy have benefited greatly from Benoît
Coeuré's outstanding public service.
Moreover, Benoît's research interests are forward-looking and extend well
beyond the macro economy. When Benoît was appointed chair of the Committee on
Payments and Market Infrastructures (CPMI), the global standard setter for payment
issues, he doubled its output, resulting in 75 reports.2 He turned its focus to distributed
ledger, stablecoins, and central bank digital currencies long before many other central
bankers realized these issues would be transforming their worlds. Indeed, the number of
Google searches for "central bank digital currencies" increased sharply over the course of
Benoît's tenure as chair of the CPMI.
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Digital Currencies, Money, and Payments
I was asked to provide some brief thoughts about digital developments in the
world of monetary policy and central banking. At the start of Benoît's ECB term,
bitcoin's market capitalization was small, and only a handful of cryptocurrencies existed.
In the eight years since then, bitcoin's market capitalization has grown rapidly and now
exceeds 100 billion euros, and thousands of cryptocurrencies have been created.3
The potential of "global stablecoins" to scale rapidly is evident from the
increasingly fast rates of technology adoption and the growth of large networks.
Adoption rates for new technologies have accelerated over time. In 1921, 35 percent of
U.S. households had telephone service, and it took 40 more years for telephone lines to
reach 80 percent of homes. In contrast, the internet achieved the same level of adoption
in only 13 years. More recently, smartphones and social media have achieved the same
level of U.S. household adoption in less than a decade.4
Rapid adoption is also evident in the payments landscape, where network
externalities figure prominently. Between the first quarter of 2014 and the first quarter of
2019, transactions through Venmo grew over 66 times to $21 billion (23.9 billion euros).5
Systems in other countries have also scaled rapidly. In China, mobile payments grew
over 35 times during the same period to $8.2 trillion (9.3 trillion euros).6 India's Unified
Payments Interface (UPI) has grown even faster: between the fourth quarter of 2016 and
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the first quarter of 2019, the transaction value grew nearly 400 times to $500 million (600
million euros).7
Digital currency payments projects from big technology firms that have network
advantages have the potential to scale even more rapidly. Because the utility of any
medium of exchange increases with the size of the network using it, the power of a
stablecoin payment system depends on the breadth of its adoption. With nearly one-third
of the global population as active users on Facebook, the Libra stablecoin project stands
out for the speed with which its network could reach global scale in payments.
Stablecoin networks at global scale are leading us to revisit questions over what
form money can take, who or what can issue it, and how payments can be recorded and
settled. While central bank money and commercial bank money are the foundations of the
modern financial system, nonbank private "money" or assets also facilitate transactions
among a network of users. In some cases, such nonbank private assets may have value
only within the network, while in other cases, the issuer may promise convertibility to a
sovereign currency, such that this becomes a liability of the issuing entity. Stablecoins
aspire to achieve the functions of traditional money without relying on confidence in an
issuer-such as a central bank-to stand behind the "money." For some potential
stablecoins, a close assessment suggests users may have no rights with respect to the
underlying assets or any issuer.
We have already seen the growth of massive payments networks on existing
digital platforms, such as Alibaba and WeChat. So far, these networks operate within a
jurisdiction based on the sovereign currency as the unit of account, and balances are
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transferable in and out of bank or credit card accounts. We have also seen the issuance of
stablecoins on a smaller scale, such as Gemini or Paxos. What would set Facebook's
Libra apart, if it were to proceed, is the combination of an active-user network
representing more than a third of the global population with the issuance of a private
digital currency opaquely tied to a basket of sovereign currencies.8
Libra, like any stablecoin project with global scale and scope, must address a
core set of legal and regulatory challenges. A significant concern regarding Facebook's
Libra project is the potential for a payment system to be adopted globally in a short time
period and to establish itself as a potentially new unit of account. Unlike social media
platforms or ridesharing applications, payment systems cannot be designed as they
develop, due to the nexus with consumers' financial security. This is why in many
jurisdictions, including the European Union, there is a regime to oversee retail payment
systems.
Without requisite safeguards, stablecoin networks at global scale may put
consumers at risk. Cryptocurrencies already pose a number of risks to the financial
system, and these could be magnified by a widely accepted stablecoin for general use.
Estimated losses from fraud and thefts associated with cryptocurrencies are rising at a
staggering pace - from $1.7 billion (1.4 billion euros) in 2018 to over $4.4 billion (3.9
billion euros) in 2019, based on one industry estimate.9 The hacking of exchanges
represents a significant source of the theft, followed by the targeting of individual users
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through scams using QR codes, malware, and ransomware. These estimates reflect only
known fraud and thefts; it is likely that not all losses are reported and some amount of
cryptocurrencies is lost or forgotten. In most cases, customers bear the losses.
By contrast, over many decades, consumers in the United States and euro area
have come to expect strong safeguards on their bank accounts and the associated
payments. Statutory and regulatory protections on bank accounts in the United States
mean that consumers can reasonably expect their deposits to be insured up to a limit;
many fraudulent transactions to be the liability of the bank; transfers to be available
within specified periods; and clear, standardized disclosures about account fees and
interest payments. Not only is it not clear whether comparable protections will be in
place with Libra, or what recourse consumers will have, but it is not even clear how much
price risk consumers will face since they do not appear to have rights to the stablecoin's
underlying assets.
Anti-money laundering (AML), counterterrorist financing (CTF), and know-your-
customer (KYC) requirements are significant concerns. In one industry report,
researchers found that roughly two-thirds of the 120 most popular cryptocurrency
exchanges have weak AML, CTF, and KYC practices.10 Only a third of the most popular
exchanges require ID verification and proof of address to make a deposit or withdrawal.
This is troubling, since a number of studies conclude that cryptocurrencies support a
significant amount of illicit activity. One study estimated that more than a quarter of
10
Ciphertrace (2019b).
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bitcoin users and roughly half of bitcoin transactions, for example, are associated with
illegal activity.11
There are also questions related to the implications of a widely used stablecoin
for financial stability. If not managed effectively, liquidity, credit, market, or operational
risks, alone or in combination, could trigger a loss of confidence and run-like behavior.
This could be exacerbated by the lack of clarity about the management of reserves and
the rights and responsibilities of various market participants in the network. The risks
and spillovers could be amplified by potential ambiguity surrounding the ability of
official authorities to provide oversight, backstop liquidity, and collaborate across
borders.
The precise risks would depend on the design of the cryptocurrency as well as the
scale of adoption. The effect of a stablecoin on financial stability, for example, would be
driven in part by how the stablecoin is tied to an asset (if at all) and the features of the
asset itself. A stablecoin tied one-to-one to an individual currency would have different
implications than one tied to a basket of currencies. A stablecoin that is built on a
permissioned network would have different risk implications than a permissionless
network, which may be more vulnerable to money laundering and terrorist financing
risks. A stablecoin used solely by commercial banks would have a different risk profile
than one for consumer use.
Similarly, there are potential implications for monetary policy. For smaller
economies, there may be material effects on monetary policy from private sector digital
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currencies as well as foreign central bank digital currencies. In many respects, these
effects may be similar to dollarization aside from the fast pace and wide scope of
adoption.
The Work Ahead
The emergence of cryptocurrencies-and particularly stablecoins-has raised
important questions for central banks and other authorities, including on the appropriate
regulatory framework. In the United States, the regulatory framework for
cryptocurrencies is not straightforward. Our current framework is based largely on
whether a cryptocurrency is deemed to be a security or has associated derivative financial
products and whether the participating institutions have a supervisory agency overseeing
their activities. Unlike many other jurisdictions, regulators do not have plenary authority
over retail payments in the United States. Moreover, the regulatory challenges are likely
to be inherently cross-border in nature. Because stablecoins and other cryptocurrencies
are unlikely to be bound by physical borders, regulatory actions in one jurisdiction are
unlikely to be fully effective without coordinated action elsewhere.
The prospect of global stablecoin payment systems has intensified the interest in
central bank digital currencies. Central bank digital currency typically refers to a new
type of central bank liability that could be held directly by households and businesses
without the involvement of a commercial bank intermediary.12 Proponents argue that
central bank digital currencies would be a safer alternative to privately issued stablecoins
because they would be a direct liability of the central bank. A more relevant question
may be whether some intermediate solutions may be able to offer the safety and benefits
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of real-time digital payments based on sovereign currencies without necessitating radical
transformation of the financial system.
In the United States, there are important advantages associated with current
arrangements. Physical cash in circulation for the U.S. dollar continues to rise due to
robust demand, and the dollar plays an important role as a reserve currency globally.
Moreover, we have a robust and diverse banking system that provides important services
along with a widely available and expanding variety of digital payment options that build
on the existing institutional framework with its important safeguards.
Circumstances where the central bank issues digital currency directly to consumer
accounts for general-purpose use would raise profound legal, policy, and operational
questions. That said, it is important to study whether we can do more to provide safer,
less expensive, faster, or otherwise more efficient payments. Some jurisdictions are likely
to move in this direction faster than others, based on the particular attributes of their
payments and currency systems. At the Federal Reserve, we look forward to
collaborating with other jurisdictions as we continue to analyze the potential benefits and
costs of central bank digital currencies.
Most immediately, the Federal Reserve is actively working to introduce a faster
payment system for the United States, to improve the speed and lower the cost of
consumer payments. In many countries, consumers are already able to make real-time
payments at low cost. This summer, the Federal Reserve announced the first new
payment service in more than 40 years-the FedNow Service-to provide a platform for
consumers and businesses to send and receive payments immediately and securely 24
hours a day, 365 days a year.
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As the public and private sectors work to reduce payment frictions, one of the
most important use cases is for cross-border payments, such as remittances. Current
cross-border payments solutions are often slow, cumbersome, and opaque. Authorities in
many jurisdictions, including the United States, recognize the importance of cooperating
across borders with each other and the private sector to address these cross-border
frictions.13
Technology will continue driving rapid change in the way we make payments and
the concept of "money." As central bankers, we recognize the power of technology and
innovation to transform the financial system and reduce frictions and delays, and the
importance of preserving consumer protections, data privacy and security, financial
stability, and monetary policy transmission and guarding against illicit activity and cyber
risks. Given the stakes, any global payments network should be expected to meet a high
threshold of legal and regulatory safeguards before launching operations. The work
ahead is not easy-the policy issues are complex, the coordination challenges are
significant, and there are likely to be few simple fixes. Because the road ahead is
complicated and challenging, I am especially pleased that Benoît will continue to help us
navigate these issues as the new Head of the Bank for International Settlements'
Innovation Hub.
Update on Digital Currencies,
Stablecoins, and the Challenges Ahead
Lael Brainard
Board of Governors of the Federal Reserve System
December 18, 2019
Strengthening Jobs and Growth
Increasing Research Output
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New Technology Adoption is Accelerating
The Value of Payment Networks Increases with Scale
A Notable Share of the Global Population is
Active on Some Social Media Platforms