For release on delivery
3:00 p.m. EDT
October 16, 2019
Digital Currencies, Stablecoins, and the Evolving Payments Landscape
Remarks by
Lael Brainard
Member
Board of Governors of the Federal Reserve System
at
The Future of Money in the Digital Age
Sponsored by the Peterson Institute for International Economics and
Princeton University's Bendheim Center for Finance
Washington, D.C.
October 16, 2019
Technology is driving rapid change in the way we make payments and in the concept of
"money."1 There is a long history of technological advances challenging the prevailing notions
of money, from the trading of coins to the use of paper currency, to the electronic debiting and
crediting of funds on the accounts of banks. Today, efforts by global stablecoin networks such
as Facebook's Libra to establish the next chapter in the story of money are raising threshold
questions about legal and regulatory safeguards, financial stability, and monetary policy.
Because of its potential global reach, Facebook's Libra imparts urgency to the debate over what
form money can take, who or what can issue it, and how payments can be recorded and settled.2
Reassessing Money
Money has traditionally served three functions.3 Money facilitates payments as a
medium of exchange, serves as a store of value that can be relied on for future use, and simplifies
transactions by providing a common unit of account to compare the value of goods and services.
A decade ago, Bitcoin was heralded as a new kind of digital money that would address
frictions in payments as well as serve as a unit of account and store of value without the need for
centralized governance. Bitcoin's emergence created an entirely new payment instrument and
asset class exchanged over a set of payment rails supported by distributed ledger technology.
Distributed ledger technology may allow for a shared, tamper-resistant ledger that can be
updated by anyone with sufficient computing power, in contrast to traditional recordkeeping
systems built on a single ledger managed by a trusted central entity.4 But Bitcoin and some other
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early iterations of cryptocurrencies have exhibited extreme volatility, limited throughput
capacity, unpredictable transaction costs, limited or no governance, and limited transparency,
which have limited their utility as a means of payment and unit of account.5
Stablecoins were designed specifically to overcome the substantial volatility exhibited by
first-generation cryptocurrencies, which limits their reach in payments and their utility as a unit
of account. As the name implies, stablecoins aim to maintain stable value by tying the digital
currency to an asset or basket of assets, such as commercial bank deposits or government-issued
bonds. Stablecoins also differ from the initial set of cryptocurrencies in that they may be issued
by a central entity and rely on third-party institutions for some aspects.
Just as any currency's value as a medium of exchange increases with the size of the
network using it, so too the power of a stablecoin payment system will depend on its ability to
achieve widespread adoption, due to the associated network externalities. In light of the 2.7
billion active monthly users on Facebook's platforms, the Libra stablecoin project stands out for
the speed with which its network could reach global scale in a payment system.6
To assess the efforts by stablecoin issuers to provide the three functions of money, it is
useful first to consider existing arrangements for the issuance, regulation, and transfer of money.
Central bank money and commercial bank money are the foundations of the modern financial
system. Central bank money is composed of physical cash and money held in deposits at a
Distributed Ledger Technologies in Payment, Clearing, and Settlement" (speech delivered at the Institute of
International Finance Blockchain Roundtable, Washington, April 14, 2016),
https://www.federalreserve.gov/newsevents/speech/brainard20160414a.htm; and Committee on Payments and
Market Infrastructures (CPMI), Distributed Ledger Technology in Payment, Clearing, and Settlement, February
2017, https://www.bis.org/cpmi/publ/d157.pdf.
5
See, e.g., Lael Brainard, "Cryptocurrencies, Digital Currencies, and Distributed Ledger Technologies: What Are
We Learning?" (speech delivered at the Decoding Digital Currency Conference sponsored by the Federal Reserve
Bank of San Francisco, San Francisco, May 15, 2018),
https://www.federalreserve.gov/newsevents/speech/brainard20180515a.htm.
6
Statistics (October 15, 2019), retrieved from https://newsroom.fb.com/company-info/.
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central bank. Central bank money is important for payment systems because it represents a safe
settlement asset, allowing users to exchange central bank liabilities with confidence in their
acceptance and reliability. In addition, central banks can play a critical role as providers of
liquidity by lending central bank money at moments of stress.
Commercial bank money refers to money held in deposits at commercial banks. It is
widely used in part because people are confident that they can convert it on demand to the
liability of another commercial bank or the central bank, such as physical cash. This confidence
comes in no small part because bank deposits are insured, and commercial banks are subject to
supervision, regulation, and deposit insurance requirements.7 Consumers and businesses also
use this money in transactions because of its convenience and availability, which in turn expand
with the size of the network using this money.
Nonbank private money or assets can also facilitate transactions among a network of
users. In some cases, such as airline miles, such assets may have value only within the network.
In other cases, the issuer of an asset within a network may guarantee convertibility to a sovereign
currency. Consumers trust that the company issuing such money will be able to honor these
liabilities. Many U.S. consumers have experience with nonbank private money in the form of
gift cards, loyalty points, and virtual gaming currencies. Although many of these are relatively
limited in scale and purpose, some nonbank money networks are sizeable. Starbucks reported
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that it had $1.6 billion in stored value card liabilities as of September 2018-more than the
deposits held at many depository institutions.8
As the scale and scope of such private networks grow, so too do the convenience and
benefit of transacting within the network in a self-reinforcing dynamic, called network
externalities. These network benefits may be augmented by the active use of network data for a
host of purposes, from allocating and pricing credit to sharing reviews to prioritizing information
that is pushed to users. In China, consumers and businesses participate in two mobile networks,
Alipay and WeChatPay, which by some accounts handled more than $37 trillion in mobile
payments last year.9 These networks operate within China based on the renminbi as the unit of
account, and balances are transferable in and out of bank or credit card accounts.
Stablecoins with Global Scale and Scope
Stablecoins may resemble private nonbank liabilities depending on their design and claim
structure. 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. Indeed, for some
potential stablecoins, a close assessment suggests users may have no rights with respect to the
underlying assets or the system overall.
We have seen the growth of massive payments networks on existing digital platforms,
such as Alibaba and WeChat, and the issuance of stablecoins on a smaller scale, such as Tether,
Gemini, and Paxos. What sets Facebook's Libra apart is the combination of an active-user
network representing more than a third of the global population with the issuance of a private
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digital currency opaquely tied to a basket of sovereign currencies.10 It should be no surprise that
Facebook's Libra is attracting a high level of scrutiny from lawmakers and authorities.11
Libra, and indeed any stablecoin project with global scale and scope, must address a core
set of legal and regulatory challenges before it can facilitate a first payment. I will emphasize a
few issues in particular.
First, compliance with know-your-customer rules and regulations are essential to ensure
stablecoins are not used for illegal activities and illicit finance. Libra's business model is
inherently cross-border, and, as such, each participant in the system deemed to be a financial
institution would need to ensure compliance with each national jurisdictions' anti-money-
laundering laws. Libra's intended global reach would likely necessitate a consistent global anti-
money-laundering framework in order to reduce the risk of illicit transactions.
Second, issuers of stablecoins designed to facilitate consumer payments must clearly
demonstrate how consumer protections would be assured. Consumers will need to be educated
on how their rights differ with respect to digital wallets compared to bank accounts. In the
United States, as elsewhere, statutory and regulatory protections have been implemented with
respect to bank accounts so that consumers can reasonably expect their deposits to be insured up
to a limit; 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
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since they do not appear to have rights to the stablecoin's underlying assets. Consumers need to
be cautioned that stablecoins are likely to be starkly different from sovereign-issued currency in
legal terms. It will be important to get clarity on what legal entity can be held responsible for the
security of personally identifiable information and transaction data and how personal data will be
stored, accessed, and used. The large number of cyber breaches in the last few years highlight
the importance of these issues.
Third, it will be necessary to define the financial activities that the various players in the
Libra ecosystem are conducting in order for jurisdictions to assess whether existing regulatory
and enforcement mechanisms are adequate. As the legal domicile of the Libra Association,
Switzerland is of particular interest. Swiss authorities have established three new categories to
facilitate their approach of regulating by function: "payment tokens" are cryptocurrencies that
are meant for use in payments or value transfers; "utility tokens" are blockchain-based
applications; and "asset tokens" are cryptoassets that are analogous to equities, bonds, and
derivatives.12 To the extent that some innovations do not fit neatly within a single category,
these classifications may not be mutually exclusive.
In the United States, regulators are closely examining the specific functions of particular
stablecoins and cryptocurrencies more broadly to determine whether and where they fit in the
existing regulatory structure and whether additional authorities or guidance is necessary. U.S.
market regulators have authorities for products judged to be securities or commodity futures
under relevant law. At the state level, the New York State Department of Financial Services has
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established a BitLicense for entities associated with virtual currencies.13 The Federal Reserve
and the other federal banking agencies have supervisory authority over banks, including, in many
cases, the ability to regulate and examine companies that provide services to banks. Neither the
Federal Reserve nor any other regulator has plenary authority over payment systems operating in
the United States. Although the Financial Stability Oversight Council does have the authority to
designate systemically important nonbank financial companies; financial market utilities; or
payment, clearing, and settlement activities based on the facts of the specific situation, it is not
clear at this time whether any cryptocurrency issuer would meet the statutory requirements for
designation.
Stablecoins, and cryptocurrencies more generally, challenge the long-held premise that
payments must be recorded in a central ledger managed by a single entity. In fact, banks were
established to perform this central ledger function. Distributed ledger technology allows for the
direct peer-to-peer transfer of assets, potentially eliminating the need to transact through
intermediaries. While distributed ledger technology could offer advantages by enhancing
operational resilience, increasing transparency, and simplifying recordkeeping, the public and
immutable nature of the transactions ledger also introduces risks, such as data privacy concerns
and legal complexity.
Global stablecoin networks also may pose challenges to bank business models. In the
extreme, widespread migration to one or more global stablecoin networks could disintermediate
the role of banks in payments. If consumers and businesses reduce their deposits at commercial
banks in favor of stablecoins held in digital wallets, this could shrink banks' sources of stable
funding, as well as their visibility into transactions data, and thereby hinder banks' ability to
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provide credit to businesses and households. That said, many banks are likely to adapt by
offering alternative methods of peer-to-peer settlement and by incorporating stablecoins into
their business models, whether by partnering with fintech firms who issue stablecoins or by
issuing their own, as some are already doing.14
Moreover, widespread adoption of stablecoins could have implications for the role of
central banks and monetary policy. Payments are the economy's circulatory system. Large-
scale migration into a new stablecoin network for purposes of payments may prove to be the
leading edge of a broader migration. If a large share of domestic households and businesses
come to rely on a global stablecoin not only as a means of payment but also as a store of value,
this could shrink demand for physical cash and affect the size of the central bank's balance sheet.
The central bank's approach to implementing monetary policy may be complicated to the extent
that banks' participation in short-term funding markets is affected.
These effects are likely to be more significant for small, open economies or those with
weak monetary institutions, where the migration away from the sovereign currency to a global
stablecoin could weaken the scope for independent monetary policy through a process that is the
digital analogue of dollarization.15 Large-scale stablecoin use could also affect larger, advanced
economies with extensive connections to the global financial system, including by increasing
market volatility and by transmitting shocks across borders.
Finally, there are likely to be financial stability risks for a stablecoin network with global
reach. If not managed effectively, liquidity, credit, market, or operational risks-alone or in
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combination-could trigger a loss of confidence and a classic run. A global stablecoin network
raises complicated issues associated with many legally independent but interdependent
operations, and the lack of clarity about the management of reserves and the rights and
responsibilities of various market participants in the network. The potential for risks and
spillovers could be amplified by potential ambiguity surrounding the ability of official authorities
to provide oversight and backstop liquidity and to collaborate across borders.
Central Bank Digital Currencies
Even before the advent of stablecoins, the rapid migration of payments to digital systems
prompted interest in the issuance of central bank digital currencies. In some jurisdictions, there
has already been a pronounced migration from cash to digital payments, which naturally prompts
monetary authorities to explore moving to digital issuance of their own.
The potential for global stablecoin systems has intensified the interest in central bank
digital currencies. 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.16 For instance, Markus Brunnermeier, Harold James, and Jean-Pierre Landau provide
important arguments.17
Of course, the Federal Reserve and other central banks already provide money digitally in
the form of central bank deposits in traditional reserve or settlement accounts. However, in the
current context, 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. Under this definition, central bank digital currency could be a
flexible form of central bank money that could differ from traditional reserves along three
dimensions: a much broader set of institutions and individuals could access it, some types of
balances might not pay interest, and it might entail greater government visibility into end users'
transactions.
In the United States, there are compelling advantages to the current system. First,
physical cash in circulation for the U.S. dollar continues to rise, suggesting robust demand.18
Second, the dollar is an important reserve currency globally, and maintaining public trust in the
sovereign currency is paramount. Third, we have a robust banking system that meets the needs
of consumers: our banks are many in number, diverse in size, and geographically dispersed.
Finally, we have a widely available and expanding variety of digital payment options that build
on the existing institutional framework and the applicable safeguards.
Moreover, central bank digital currency for general purpose use-that is, for individual
consumer use-would raise profound legal, policy, and operational questions.19 Let's consider
the balance between privacy and illicit activity. If it is designed to be financially transparent and
provide safeguards against illicit activity, a central bank digital currency for consumer use could
conceivably require the central bank to keep a running record of all payment data using the
digital currency-a stark difference from cash, for instance. A system in which individual
payments information would be recorded by a government entity would mark a dramatic shift. A
related question is whether the Federal Reserve has the authority to issue currency in digital form
and, if necessary, to establish digital wallets for the public.
There could also be profound monetary policy implications. Some economists have
argued that a central bank digital currency could address the problems posed by the zero lower
bound by potentially transmitting monetary policy directly to the public. Executing monetary
policy in such a manner would effectively imply the elimination of all physical cash and the
power to impose a negative rate, or a tax, on households' holdings of digital money. My own
strong preference is to address the effective lower bound by using our existing tools vigorously,
since I view the cost-benefit assessment of negative rates as unattractive for the current U.S.
context.
Financial stability considerations are also important. The ability to convert commercial
bank deposits into central bank digital currency with a simple swipe surely has the potential to be
a run accelerant. Here, too, the role of banks in providing financial intermediation services could
be fundamentally altered.
Finally, there could be operational risks to introducing a central bank digital currency.
For starters, this might require the Federal Reserve to develop the operating capacity to access or
manage individual accounts, which could number in the hundreds of millions. A myriad of other
operational challenges would need to be addressed, including electronic counterfeiting and cyber
risks. It is worth noting that the technologies used currently for private-sector digital currencies
do not provide the same level of information technology reliability, integrity, and scalability as
central bank systems in use today. Many of these technologies do not provide for clear,
predictable, and final settlement, which is a core tenet of payment systems.20
That said, some jurisdictions may move in this direction faster than others, based on the
particular attributes of their payments and currency systems. At the Federal Reserve, we will
continue to analyze the potential benefits and costs of central bank digital currencies and look
forward to learning from other central banks.
Supporting Payments Innovation
While prudence cautions against rushing into untested approaches to central bank digital
currencies, we are actively investing in our payments infrastructure, so that everyone has access
to real-time payments. Every day, U.S. payment and securities settlement systems turn over
roughly $12.5 trillion.21 The Federal Reserve is committed to working closely with the private
sector to promote a safer and more efficient payments system.22
This summer, we announced that the Federal Reserve will launch the first new payment
service in more than 40 years to help make real-time payments available to everyone.23 The
Federal Reserve will develop the FedNowSM Service as a platform for consumers and businesses
to send and receive payments immediately and securely 24 hours a day, 7 days a week, 365 days
a year. This initiative is intended to provide a neutral platform for new private-sector innovation
in faster payment services. In addition to FedNow, we are exploring enhancements to same-day
20
Many distributed ledgers in existence today rely on probabilistic settlement, meaning that the more times a
transaction is confirmed on the ledger, the less likely it will be revoked, but a non-zero risk of settlement failure
persists.
21
Based on staff estimates.
22
See, e.g., https://fedpaymentsimprovement.org/.
23
Lael Brainard, "Delivering Fast Payments for All" (speech delivered at the Federal Reserve Bank of Kansas City,
Kansas City, Missouri, August 5, 2019),
https://www.federalreserve.gov/newsevents/speech/brainard20190805a.htm; Lael Brainard, "Supporting Fast
Payments for All," (speech delivered at the Fed Payments Improvement Community Forum, Chicago, October 3,
2018), https://www.federalreserve.gov/newsevents/speech/brainard20181003a.htm.
settlement of automated clearinghouse (ACH) transactions and expansion of Fedwire® Funds
Service and National Settlement System operating hours. We are working with the industry to
improve the security of the payments system by, for example, increasing understanding of
synthetic identity fraud and identifying a fraud classification approach to improve information
sharing.
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. Intermediation chains for
cross-border payments are long, slow, cumbersome, and opaque. Technology enables e-
commerce to transcend national borders, but current cross-border payments solutions often
represent complicated workarounds rather than seamless end-to-end solutions. Authorities in
different jurisdictions recognize the importance of cooperating across borders with each other
and the private sector to address the very real cross-border frictions that exist today.
Concluding Thoughts
Our nation has rich and varied experiences to draw on as we assess various proposals for
private money, from the period in our history when the colonial states each issued their own
currencies to the many decades when the circulation of private commercial banknotes stood in
for a national currency. The Federal Reserve was created in part to respond to the inability of
many of these banks to make good on their obligations for the banknotes they issued and the
panics and runs that ensued. Those experiences will help inform us as we potentially enter
another phase in the evolution of money and payments.
Today, consumers and businesses have a variety of payment options, including physical
cash, checks, ACH transfers, debit cards and credit cards, and mobile-based payment solutions,
to name a few. These tend to have clearly defined legal rights and responsibilities. We will
likely see far-reaching innovation in payments in the coming years, with a plethora of new and
emerging options, including stablecoins.
The Federal Reserve remains confident in the power of technology and innovation to
transform the financial system and reduce frictions and delays, while preserving consumer
protections, data privacy and security, financial stability, and monetary policy transmission and
guarding against illicit activity and cyber risks. Given the stakes, global stablecoin networks
should be expected to meet a high threshold of legal and regulatory safeguards before launching
operations. We are monitoring new technologies closely to ensure that the innovations that arise
fit with our operational responsibilities and broader public policy goals, as reflected in the
Federal Reserve Act. At the same time, we are upgrading our services to support innovation in
new ways. And, we will continue to foster a safe and efficient payments system, including
where money in all its myriad forms-present and future-is concerned, as we have for over a
century.