For release on delivery
4:10 p.m. EST (1:10 p.m. local time)
February 5, 2020
The Digitalization of Payments and Currency: Some Issues for Consideration
Remarks by
Lael Brainard
Member
Board of Governors of the Federal Reserve System
at the
Symposium on the Future of Payments
Stanford Graduate School of Business
Stanford, California
February 5, 2020
I want to thank Darrell Duffie for inviting me to discuss the future of payments.1
Digitalization is enabling consumers and businesses to transfer value instantaneously, technology
platforms to scale up rapidly in payments, and new digital currencies to facilitate these payments.
By transforming payments, digitalization has the potential to deliver greater value and
convenience at lower cost. But there are risks. Some of the new players are outside the financial
system's regulatory guardrails, and their new currencies could pose challenges in areas such as
illicit finance, privacy, financial stability, and monetary policy transmission.
Given the stakes, the public sector must engage in order to ensure that the payments
infrastructure is safe as well as efficient and fast, assess whether regulatory perimeters need to be
redrawn or new approaches are needed in areas such as consumer data and identity
authentication, and explore the role of central bank digital currencies in ensuring sovereign
currencies stay at the center of each nation's financial system. These issues are complicated and
consequential. I will only touch on them today in the spirit of sketching out an agenda for the
public sector along with the private sector and research community.
Digital Players
Technology firms-from BigTechs to FinTechs-are driving the digital transformation
of payments. Not only are the new players bringing innovation to the way payments are made
between businesses and consumers and peer-to-peer, but they are bringing new business models
that bundle payments with other activities in novel ways.
Payments have traditionally been a service provided by trusted intermediaries such as
banks. The operations of banks and some related financial service providers, such as card
companies, are subject to regulatory oversight for sound risk management. Banks offer
important consumer protections, including deposit insurance, error resolution, and fraud
protection. In addition to providing payments services, banks generally provide credit, with
deposits providing stable funding. Many banks rely at least in part on legacy technology.
In contrast, BigTechs tend to be established platforms with massive user networks that
provide payments in support of core nonfinancial services-ranging from commercial
transactions to social engagement to mobile apps to search engines. In China, the majority of
consumers and businesses participate in two mobile payment networks, Alipay and WeChat Pay,
which by some accounts handled more than $37 trillion in mobile payments in 2018.2 BigTechs
and FinTechs typically leverage cloud-based platforms and computing power, along with mobile
applications, often to provide different combinations of services and enhanced user experiences.
They generally benefit from network effects: the more users they have, the more convenience
and benefit new users derive from joining. These network benefits may be augmented by
leveraging economies of scale and scope in user data for a host of purposes, from prioritizing
which information is pushed to users to allocating and pricing credit to sharing reviews.
The entrance of BigTech and FinTech into payments may drive competition, enhance
product offerings, and lower transactions costs. It has the potential to enhance financial
inclusion by expanding the number and diversity of ways people gain access to financial services
and by creating more consumer friendly offerings. A Federal Deposit Insurance Corporation
(FDIC) study found that 8.4 million households are unbanked and an additional 24 million are
underbanked.3 These households often rely on more-expensive means of payments, including
nonbank providers and bank money orders. Many have smartphones, which could facilitate
access to payment apps.
The entry of big technology networks into payments brings risks as well as benefits.
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; their banks to be held to strong
data security standards; 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 to be readily available. Consumers may not appreciate that nonbank providers
might not provide the same protections. Further, the integration of payments with a variety of
consumer services that rely intensively on user data raises the urgency of questions surrounding
data security, how consumers' financial data are used, and the circumstances under which the
data are disclosed to third parties.
Unlike many foreign central banks, the Federal Reserve does not have plenary authority
over payment systems. No federal agency does. The Federal Reserve has broad authority over
payment systems that are designated as systemically important by the Financial Stability
Oversight Council or that are chartered as entities for which the Federal Reserve is the primary
supervisor. These authorities cover two large-value interbank payment systems but no retail
payment system to date. The banking agencies may oversee certain aspects of a nonbank
payment system to the extent there is a bank nexus, under the Bank Service Company Act, or
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bank affiliation, under the Federal Deposit Insurance Act.4 However, this oversight will be quite
limited to the extent that nonbank players reduce or eliminate the nexus to banks, such as when
technology firms develop payments services connected to digital wallets rather than bank
accounts and rely on digital currencies rather than sovereign currencies as the means of
exchange.
Given the growing role of nonbank technology players in payments, a review of the
nation's oversight framework for retail payment systems could be helpful to identify important
gaps. A good place to start may be contrasting the U.S. oversight framework for retail payment
systems with other jurisdictions. Many foreign central banks, for example, have explicit
authority for general retail payments oversight.5 Moreover, most jurisdictions require that
payment systems obtain a license and/or registration before commencing operations. A 2018
World Bank study found that the large majority of jurisdictions have some sort of license and/or
registration requirement for mobile money platforms, payment card networks or switches, or
clearinghouses.6 The United States requires registration of a money transmitter at the federal
level for purposes of Bank Secrecy Act/Anti-Money-Laundering compliance, but it does not
require broader federal oversight of payment system operators.7
4
The Bank Service Company Act grants the federal banking agencies the authority to regulate and examine
thirdparty service providers that perform certain services for supervised banks. The Federal Deposit Insurance Act
provides the banking agencies with enforcement powers to address unsafe and unsound practices, violations, and
breaches of fiduciary duty by supervised banks and their institution-affiliated parties.
5
Bank for International Settlements, Committee on Payment and Settlement Systems, Policy Issues for Central
Banks in Retail Payments (Basel: BIS, March 2003), https://www.bis.org/cpmi/publ/d52.pdf. In some countries-
such as Australia, the Netherlands, and Singapore-the central bank oversees all retail payment systems, whereas in
others-such as Canada, Switzerland, and the United Kingdom-the central bank oversees systemically important
payments, while another authority oversees payments that are not systemically important.
6
World Bank Group, Payment Systems Worldwide: A Snapshot (Washington: World Bank, September 2018),
http://pubdocs.worldbank.org/en/591241545960780368/GPSS-4-Report-Final.pdf.
7
For example, PayPal and Square are organized as money services businesses in the United States and subject to
regulation by most states, while PayPal is organized as a bank in Luxembourg, and Square is licensed as an
authorized payment institution in the United Kingdom.
In contrast to other jurisdictions where there is explicit responsibility for broad regulation
of payment systems, the Federal Reserve's role as an operator has instead long formed the basis
of the U.S. approach to promoting accessible, safe, and efficient payments. Since the Federal
Reserve Banks opened for business around the country in 1914, as directed by the Congress, they
have provided payment and settlement services in competition with private-sector providers.
Real-Time Infrastructure
So let's turn to our retail payments infrastructure, which touches every American. While
new players are making important contributions to the digital transformation of payments, it is
critical that consumers and businesses can achieve the same speed and efficiency using their
trusted deposit account providers with the safety and security they have come to expect. To
make this possible, it is vital to invest in real-time retail payments infrastructure with national
reach.
Today, it can take a few days to get access to your funds. A real-time retail payments
infrastructure would ensure the funds are available immediately-to pay utility bills or split the
rent with roommates, or for small business owners to pay their suppliers. Immediate access to
funds could be especially important for households on fixed incomes or living paycheck to
paycheck, when waiting days for the funds to be available to pay a bill can mean overdraft fees
or late fees that can compound. Similarly, for small businesses, getting immediate access to
funds from a sale in order to pay for supplies can be a game-changer.
The latest evolution in the payments infrastructure is faster payments, in which the
payment message is transmitted and funds are settled between banks and made irrevocably
available to recipients in real (or near-real) time. Consistent with the real-time and anytime
nature of faster payments, settlement takes place in real time on a 24-hour, seven-day basis.
We are committed to closing the gap between the transaction capabilities in the digital
economy and the underlying payment and settlement capabilities. Recognizing that consumers
and businesses across the country want and expect real-time payments, and the banks they trust
should be able to provide this service securely, this summer, the Federal Reserve announced that
it is building its first new payments rail in more than forty years-the FedNow Service.8
FedNow will facilitate end-to-end faster payment services, increase competition, and ensure
equitable and ubiquitous access to banks of all sizes nationwide.
Together, the Clearing House's RTP and FedNow are moving the U.S. banking system to
real-time retail payments. These systems will enable consumers and businesses to settle retail
transactions in real time, at any time, and allow them to manage their money with greater
flexibility. RTP and FedNow should significantly increase the speed and efficiency of the U.S.
payment system.
Given the importance of safety in faster payments, providing access to more than one
real-time payment service for back-up purposes will enhance resiliency. The Federal Reserve
has always had a vital role in the payment system by providing liquidity and operational
continuity in times of stress, and FedNow will extend this role into the real-time retail payments
market.
The addition of FedNow should also provide a neutral foundation for private sector
innovation in developing end-user services. Some stakeholders noted that a single provider that
is owned and operated by one segment of the payment industry may focus on a limited set of use
cases instead of the full breadth of possible use cases for faster payments.
The FedNow team is already hard at work determining initial business requirements. The
comment period for the Federal Register notice seeking public input into FedNow features and
designs closed in November, and we are analyzing the nearly 200 letters submitted.9 We
understand the urgency among stakeholders to launch FedNow quickly with features that support
safe, efficient, and ubiquitous faster payments.
Digitalization of Currencies
Digital transformation of payments extends not only to the systems and players, but also
to the medium of exchange.10 The existing payments system combines central bank money,
commercial bank money, and certain kinds of nonbank private money, which provide a medium
of exchange based on the U.S. dollar as a unit of account. By contrast, some technology players
have payment systems based on their own digital currency rather than the sovereign currency.
Depending on their design and scale, private digital-currency-based payment systems could
magnify concerns surrounding illicit activity and consumer risk, while potentially creating
challenges for the public sector's ability to safeguard financial stability and use monetary policy
to buffer the economy.
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 the United States, central bank money is composed of paper
currency and money held in deposits at the Federal Reserve Banks. Commercial bank money-
money held in deposits at commercial banks-is widely used because consumers and businesses
trust that the money they deposit with a commercial bank can be converted, on demand, into a
claim on another commercial bank's money or currency. This confidence owes in large part to
bank deposit insurance and the fact that commercial banks are supervised and regulated.
Nonbank private money based on the U.S. dollar as the unit of account exists on a smaller
scale for a variety of consumer uses, particularly in closed-loop payment systems like prepaid
cards and digital wallets. 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. Although various federal and state laws
establish protections for users, issuers of nonbank money are not regulated to the same extent as
banks, the value stored in these systems is not insured directly by the FDIC, and consumers may
be at risk that the issuer will not be able to honor its liabilities. To provide a sense of the scale,
PayPal Holdings Inc. had customer accounts that totaled $22.5 billion as of September 30, 2019;
Walmart had roughly $1.9 billion in deferred gift card revenue as of October 31, 2019; and
Starbucks reported $1.6 billion in stored-value card liabilities as of September 2018-more than
the deposits at many banks.11
In contrast, cryptocurrencies introduce separate units of account. Built using distributed
ledger technologies, cryptocurrencies typically allow for peer-to-peer payments without the need
for a financial intermediary. The private sector is exploring uses of distributed ledger
technologies to create a wide range of payment instruments, some that are designed to resemble
traditional commercial bank money, some that look similar to Bitcoin, and some that have
attributes more similar to securities. Cryptocurrencies vary across multiple attributes, including
whether the arrangement is open to everyone or only approved entities and whether they are
intended for general-purpose use or for wholesale use.
One important design choice is whether a digital currency is account-based or token-
based. From an accounting perspective, there is an account structure for the asset owner and for
the asset itself. Individual accounts could take the form of traditional account structures of
commercial banks or be pseudo-anonymous. The accounting of the asset itself could take the
form of debiting and crediting account balances or tracking of specific "tokens." Another key
design consideration is the method for authenticating the asset owner-to open an account and to
make transactions. Traditionally, identity authentication is done by the account provider, but
new tools, such as biometrics, may be required for decentralized systems. A third important
design variant is convertibility. Private-sector digital currencies vary in important ways with
regard to whether they are linked in a legally binding way to a sovereign currency.
A decade ago, Bitcoin was heralded as a new kind of digital money that would serve as a
store of value, means of exchange, and unit of account delinked from any sovereign currencies
without the need for centralized governance. Bitcoin has not achieved widespread acceptance as
a means of payment or unit of account because of its extreme volatility, as well as limited
throughput capacity, unpredictable transaction costs, limited or no governance, and limited
transparency.
Stablecoins were designed specifically to overcome the volatility of first-generation
cryptocurrencies by tying the digital currency to an asset or basket of assets, such as commercial
bank deposits or government-issued bonds. Unlike first-generation cryptocurrencies, they may
be issued by a central entity and rely on third-party institutions for some aspects. But even
within this broad class of digital currencies, stablecoins vary widely in their underlying reference
assets and the associated "exchange rate," the ability to redeem the stablecoin claims for the
underlying assets, and the extent to which a central issuer is liable for making good on
redemption rights.
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. Any
stablecoin project with global scale and scope faces a core set of legal and regulatory challenges.
Cryptocurrencies already pose risks associated with fraudulent activity, consumer losses, and
illicit activity, and these could be magnified by a widely accepted stablecoin for general use. Not
only is it not clear what protections or recourse consumers would have with regard to their global
stablecoin transactions and balances, but it is also not clear how much price risk consumers will
face in cases where they do not appear to have claims on the stablecoin's underlying assets.
If not managed effectively, liquidity, credit, market, or operational risks-alone or in
combination-could affect financial stability, triggering a loss of confidence and run-like
behavior. The precise nature of the risk would be driven in part by how the stablecoin is tied to
an asset (if at all), the underlying legal arrangements, and the features of the asset itself. For
smaller economies, there may be material effects on monetary policy from private-sector digital
currencies as well as foreign central bank digital currencies. In many respects, these effects may
be the digital version of "dollarization," with the potential for a faster pace and wider scope of
adoption.
Central Bank Digital Currencies
The prospect for rapid adoption of global stablecoin payment systems has intensified
calls for central banks to issue digital currencies in order to maintain the sovereign currency as
the anchor of the nation's payment systems. In a Bank for International Settlements survey of 66
central banks, more than 80 percent of central banks report being engaged in some type of
central bank digital currency (CBDC) work.12 The motivations for this work range from
payments safety and robustness for advanced economies to payments efficiency for emerging
economies. The latest survey suggests there is greater openness to issuing a CBDC than a year
ago, and a few central banks report that they are moving forward with issuing a CBDC. Building
on the tremendous reach of its mobile payments platforms, China is reported to be moving ahead
rapidly on plans to issue a digital currency.13
Given the dollar's important role, it is essential that we remain on the frontier of research
and policy development regarding CBDC. Like other central banks, we are conducting research
and experimentation related to distributed ledger technologies and their potential use case for
digital currencies, including the potential for a CBDC. We are collaborating with other central
banks as we advance our understanding of central bank digital currencies.
In assessing CBDC in the U.S. context, there are policy and design issues to explore, as
well as legal considerations. It is important to consider whether a new form of digital central
bank liability might improve the payment system, taking into account the innovations offered by
the private sector. We would need to consider whether adding a new form of central bank
liability would reduce operational vulnerabilities from a safety and resilience perspective.
Another consideration is whether a CBDC would reduce complexity in payments, improve end-
to-end processing, or simplify recordkeeping. With regard to cross-border payments, it is
important to consider what would be required in terms of cross-border cooperation for CBDCs to
address current frictions and reduce costs.
It is also vital to consider the implications for the broader financial system of the issuance
of a CBDC. In light of considerations of privacy and guarding against illicit activity, issuance of
a digital currency would raise important questions about what kinds of intermediaries might
provide CBDC transaction accounts for consumers. While some proposals are centered on
commercial bank intermediaries, others propose new types of intermediaries that might develop
with a narrow focus on payments. New types of intermediaries in turn could create a need for
new types of accounts and new forms of oversight.
Related to this, the design of any CBDC needs to address important questions
surrounding financial stability. A variety of approaches have been put forward to address the
potential run risk associated with the ability to convert commercial bank deposits into CBDC
with a simple swipe.14
There are also important legal considerations. It is important to understand how the
existing provisions of the Federal Reserve Act with regard to currency issuance apply to the
CBDC. It is also important to consider whether CBDC would have legal tender status,
depending on the design. While the legal framework is well-established with regard to the rights
and protections for Federal Reserve notes in the current system, it is untested for new
instruments such as CBDC and, more generally, other digital currencies. A different approach
may be necessary to ensure that holders of CBDC have appropriate protections, including
privacy rights, fraud protection, digital identity safeguards, and data protection.
These are some of the issues that would need to be addressed before deciding to issue a
CBDC in the United States. Some of the motivations for a CBDC cited by other jurisdictions,
such as rapidly declining cash use, weak financial institutions, and underdeveloped payment
systems, are not shared by the United States. Physical cash in circulation for the U.S. dollar
continues to rise because of robust demand, and the dollar plays an important role globally. We
have a robust and diverse banking system that provides important services, along with a widely
available and expanding variety of digital payment options.
Agenda Ahead
The digitalization of currencies and payments is being driven by technology players that
are bringing new business models to this space and fresh attention to age-old questions. While
the potential for seamlessly integrated and lower-cost transactions brings important benefits,
digitalization also brings risks. 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.