For release on delivery
9:00 a.m. EDT
May 24, 2021
Private Money and Central Bank Money as Payments Go Digital: an Update on CBDCs
Remarks by
Lael Brainard
Member
Board of Governors of the Federal Reserve System
at the
Consensus by CoinDesk 2021 Conference
Washington, D.C.
(via webcast)
May 24, 2021
Technology is driving dramatic change in the U.S. payments system, which is a vital
infrastructure that touches everyone.1 The pandemic accelerated the migration to contactless
transactions and highlighted the importance of access to safe, timely, and low-cost payments for
all. With technology platforms introducing digital private money into the U.S. payments system,
and foreign authorities exploring the potential for central bank digital currencies (CBDCs) in
cross-border payments, the Federal Reserve is stepping up its research and public engagement on
CBDCs. As Chair Powell discussed last week, an important early step on public engagement is a
plan to publish a discussion paper this summer to lay out the Federal Reserve Board's current
thinking on digital payments, with a particular focus on the benefits and risks associated with
CBDC in the U.S. context.2
Sharpening the Focus on CBDCs
Four developments-the growing role of digital private money, the migration to digital
payments, plans for the use of foreign CBDCs in cross-border payments, and concerns about
financial exclusion-are sharpening the focus on CBDCs.
First, some technology platforms are developing stablecoins for use in payments
networks.3 A stablecoin is a type of digital asset whose value is tied in some way to traditional
stores of value, such as government-issued, or fiat, currencies or gold. Stablecoins vary widely
in the assets they are linked to, the ability of users to redeem the stablecoin claims for the
1
I am grateful to Alexandra Fernandez, Sonja Danburg, David Mills, and David Pope of the Federal Reserve Board
for their assistance in preparing this text. These are my own views and do not necessarily reflect those of the
Federal Reserve Board or the Federal Open Market Committee.
2
See Jerome Powell, "Federal Reserve Chair Jerome H. Powell Outlines the Federal Reserve's Response to
Technological Advances Driving Rapid Change in the Global Payments Landscape," Board of Governors of the
Federal Reserve System news release, May 20, 2021,
https://www.federalreserve.gov/newsevents/pressreleases/other20210520b.htm.
3
See Lael Brainard, "The Digitalization of Payments and Currency: Some Issues for Consideration," remarks at the
Symposium on the Future of Payments, Stanford University, California, February 5, 2021,
https://www.federalreserve.gov/newsevents/speech/brainard20200205a.htm.
- 2 -
reference assets, whether they allow unhosted wallets, and the extent to which a central issuer is
liable for making good on redemption rights. Unlike central bank fiat currencies, stablecoins do
not have legal tender status. Depending on underlying arrangements, some may expose
consumers and businesses to risk. If widely adopted, stablecoins could serve as the basis of an
alternative payments system oriented around new private forms of money. Given the network
externalities associated with achieving scale in payments, there is a risk that the widespread use
of private monies for consumer payments could fragment parts of the U.S. payment system in
ways that impose burdens and raise costs for households and businesses. A predominance of
private monies may introduce consumer protection and financial stability risks because of their
potential volatility and the risk of run-like behavior. Indeed, the period in the nineteenth century
when there was active competition among issuers of private paper banknotes in the United States
is now notorious for inefficiency, fraud, and instability in the payments system.4 It led to the
need for a uniform form of money backed by the national government.
Second, the pandemic accelerated the migration to digital payments. Even before the
pandemic, some countries, like Sweden, were seeing a pronounced migration from cash to digital
payments.5 To the extent that digital payments crowd out the use of cash, this raises questions
about how to ensure that consumers retain access to a form of safe central bank money. In the
United States, the pandemic led to an acceleration of the migration to digital payments as well as
increased demand for cash. While the use of cash spiked at certain times, there was a
pronounced shift by consumers and businesses to contactless transactions facilitated by
4
See, for instance, Joshua R. Greenberg, Bank Notes and Shinplasters: The Rage for Paper Money in the Early
Republic (Philadelphia: University of Pennsylvania Press, 2020).
5
Codruta Boar and Róbert Szemere, "Payments go (even more) digital" (Basel: Bank for International Settlements,
January 2021), https://www.bis.org/statistics/payment_stats/commentary2011.htm.
- 3 -
electronic payments.6 The Federal Reserve remains committed to ensuring that the public has
access to safe, reliable, and secure means of payment, including cash. As part of this
commitment, we must explore-and try to anticipate-the extent to which households' and
businesses' needs and preferences may migrate further to digital payments over time.
Third, some foreign countries have chosen to develop and, in some cases, deploy their
own CBDC. Although each country will decide whether to issue a CBDC based on its unique
domestic conditions, the issuance of a CBDC in one jurisdiction, along with its prominent use in
cross-border payments, could have significant effects across the globe. Given the potential for
CBDCs to gain prominence in cross-border payments and the reserve currency role of the dollar,
it is vital for the United States to be at the table in the development of cross-border standards.
Finally, the pandemic underscored the importance of access to timely, safe, efficient, and
affordable payments for all Americans and the high cost associated with being unbanked and
underbanked. While the large majority of pandemic relief payments moved quickly via direct
deposits to bank accounts, it took weeks to distribute relief payments in the form of prepaid debit
cards and checks to households who did not have up-to-date bank account information with the
Internal Revenue Service. The challenges of getting relief payments to these households
highlighted the benefits of delivering payments more quickly, cheaply, and seamlessly through
digital means.
Policy Considerations
In any assessment of a CBDC, it is important to be clear about what benefits a CBDC
would offer over and above current and emerging payments options, what costs and risks a
6
Kelsey Coyle, Laura Kim, and Shaun O'Brien, Consumer Payments and the COVID-19 Pandemic: The Second
Supplement to the 2020 Findings from the Diary of Consumer Payment Choice (San Francisco: Federal Reserve
Bank of San Francisco, February 2021),
https://www.frbsf.org/cash/publications/fed-notes/2021/february/consumerpayments-covid-19-pandemic-2020-diary-consumer-payment-choice-supplement-2/.
- 4 -
CBDC might entail, and how it might affect broader policy objectives. I will briefly discuss
several of the most prominent considerations.
Preserve general access to safe central bank money
Central bank money is important for payment systems because it represents a safe
settlement asset, allowing users to exchange central bank liabilities without concern about
liquidity and credit risk. Consumers and businesses don't generally consider whether the money
they are using is a liability of the central bank, as with cash, or of a commercial bank, as with
bank deposits. This is largely because the two are seamlessly interchangeable for most purposes
owing to the provision of federal deposit insurance and banking supervision, which provide
protection for consumers and businesses alike. It is not obvious that new forms of private money
that reference fiat currency, like stablecoins, can carry the same level of protection as bank
deposits or fiat currency. Although various federal and state laws establish protections for users,
nonbank issuers of private money are not regulated to the same extent as banks, the value stored
in these systems is not insured directly by the Federal Deposit Insurance Corporation, and
consumers may be at risk that the issuer will not be able to honor its liabilities. New forms of
private money may introduce counterparty risk into the payments system in new ways that could
lead to consumer protection threats or, at large scale, broader financial stability risks.
In contrast, a digital dollar would be a new type of central bank money issued in digital
form for use by the general public. By introducing safe central bank money that is accessible to
households and businesses in digital payments systems, a CBDC would reduce counterparty risk
and the associated consumer protection and financial stability risks.
- 5 -
Improve efficiency
One expected benefit is that a CBDC would reduce or even eliminate operational and
financial inefficiencies, or other frictions, in payments, clearing, and settlement. Today, the
speed by which consumers and businesses can access the funds following a payment can vary
significantly, up to a few days when relying on certain instruments, such as a check, to a few
seconds in a real-time payments system. Advances in technology, including the use of
distributed ledgers and smart contracts, may have the potential to fundamentally change the way
in which payment activities are conducted and the roles of financial intermediaries and
infrastructures. The introduction of a CBDC may provide an important foundation for beneficial
innovation and competition in retail payments in the United States.
Most immediately, we are taking a critical step to build a strong foundation with the
introduction of the FedNowSM Service, a new instant payments infrastructure that is scheduled to
go into production in two years. The FedNow Service will enable banks of every size and in
every community across America to provide safe and efficient instant payment services around
the clock, every day of the year. Through the banks using the service, consumers and businesses
will be able to send and receive payments conveniently, such as on a mobile device, and
recipients will have full access to funds immediately.
Promote competition and diversity and lower transactions costs
Today, the costs of certain retail payments transactions are high and not always
transparent to end users.7 Competition among a diversity of payment providers and payment
7
Marie-Hélène Felt, Fumiko Hayashi, Joanna Stavins, and Angelika Welte, Distributional Effects of Payment Card
Pricing and Merchant Cost Pass-through in the United States and Canada, Federal Reserve Bank of Boston
Research Department Working Papers No. 20-13 (Boston: FRB Boston, 2020),
https://www.bostonfed.org/publications/research-department-working-paper/2020/distributional-effects-paymentcard-pricing-merchant-cost-pass-through-united-states-canada.aspx.
- 6 -
types has the potential to increase the choices available to businesses and consumers, reduce
transactions costs, and foster innovation in end-user services, although it could also contribute to
fragmentation of the current payments system. By providing access to a digital form of safe
central bank money, a CBDC could provide an important foundation on which private-sector
competition could flourish.
Reduce cross-border frictions
Cross-border payments, such as remittances, represent one of the most compelling use
cases for digital currencies. The intermediation chains for cross-border payments are notoriously
long, complex, costly, and opaque. Digitalization, along with a reduction in the number of
intermediaries, holds considerable promise to reduce the cost, opacity, and time required for
cross-border payments. While the introduction of CBDCs may be part of the solution,
international collaboration on standard setting and protections against illicit activity will be
required in order to achieve material improvements in cost, timeliness, and transparency.8
We are collaborating with international colleagues through the Bank for International
Settlements, Committee on Payments and Market Infrastructures, and the G7 to ensure the U.S.
stays abreast of developments related to CBDC abroad. We are engaging in several international
efforts to improve the transparency, timeliness, and cost-effectiveness of cross-border payments.
It will be important to be engaged at the outset on the development of any international standards
that may apply to CBDCs, given the dollar's important role as a reserve currency.
Complement currency and bank deposits
8
See Bank for International Settlements, Committee on Payments and Market Infrastructures, Enhancing
crossborder payments: building blocks of a global roadmap Stage 2 report to the G20 (Basel: BIS, July 2020),
https://www.bis.org/cpmi/publ/d193.pdf; and Financial Stability Board, Enhancing Cross-border Payments: Stage 3
Roadmap (Washington: FSB, October 13, 2020), https://www.fsb.org/wp-content/uploads/P131020-1.pdf.
- 7 -
A guiding principle for any payments innovation is that it should improve upon the
existing payments system. Consumers have access to reliable money in the forms of private
bank accounts and central bank issued currency, which form the underpinnings of the current
retail payments system. The design of any CBDC should complement and not replace currency
and bank accounts.
Preserve financial stability and monetary policy transmission
The introduction of a CBDC has the potential to have wide-reaching effects, and there are
open questions about how CBDC could affect financial stability and monetary policy
transmission. Some research indicates that the introduction of a CBDC might raise the risk of a
flight out of deposits at weak banks in favor of CBDC holdings at moments of financial stress.9
Other research indicates that the increase in competition could result in more attractive terms on
transactions accounts and an overall increase in banking system deposits.10 Banks play a critical
role in credit intermediation and monetary policy transmission, as well as in payments. Thus, the
design of any CBDC would need to include safeguards to protect against disintermediation of
banks and to preserve monetary policy transmission more broadly. While it is critical to consider
the ways in which a CBDC could introduce risks relative to the current payments system, it may
increase resilience relative to a payments system where private money is prominent.
Protect privacy and safeguard financial integrity
The design of any CBDC would need to both safeguard the privacy of households'
payments transactions and prevent and trace illicit activity to maintain the integrity of the
9
Christian Pfister, Monetary Policy and Digital Currencies: Much Ado about Nothing? Banque de France Working
Paper 642 (Paris: Banque de France, 2017),
https://publications.banquefrance.fr/sites/default/files/medias/documents/dt-642.pdf.
10
John Barrdear and Michael Kumhof, The Macroeconomics of Central Bank Issued Digital Currencies, Bank of
England Working Paper No. 605 (London: BOE, July 18, 2016),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2811208.
- 8 -
financial system, which will require the digital verification of identities. There are a variety of
approaches to safeguarding the privacy of payments transactions while also identifying and
preventing illicit activity and verifying digital identities. Addressing these critical objectives will
require working across government agencies to assign roles and responsibilities for preventing
illicit transactions and clearly establishing how consumer financial data would be protected.
Increase financial inclusion
Today 5.4 percent of American households lack access to bank accounts and the
associated payment options they offer, and a further 18.7 percent were underbanked as of 2017.11
The lack of access to bank accounts imposes high burdens on these households, whose financial
resilience is often fragile. At the height of the pandemic, the challenges associated with getting
relief payments to hard-to-reach households highlighted that it is important for all households to
have transactions accounts. The Federal Reserve's proposals for strengthening the Community
Reinvestment Act emphasize the value of banks providing cost-free, low-balance accounts and
other banking services targeted to underbanked and unbanked communities.12 And a core goal
of FedNow is to provide ubiquitous access to an instant payments system via depository
institutions.
CBDC may be one part of a broader solution to the challenge of achieving ubiquitous
account access.13 Depending on the design, CBDC may have the ability to lower transaction
11
Federal Deposit Insurance Corporation, How America Banks: Household Use of Banking and Financial Services
(Washington: FDIC, October 19, 2020), https://www.fdic.gov/analysis/household-survey/; and Federal Deposit
Insurance Corporation, FDIC National Survey of Unbanked and Underbanked Households (Washington: FDIC,
2017), https://www.fdic.gov/analysis/household-survey/2017/index.html.
12
See, for instance the Bank On National Account Standards,
https://2wvkof1mfraz2etgea1p8kiy-wpengine.netdnassl.com/wp-content/uploads/2020/10/Bank-On-National-Account-Standards-2021-2022.pdf.
13
See Jesse Leigh Maniff, Inclusion by Design: Crafting a Central Bank Digital Currency to Reach All Americans,
Payments System Research Briefing, Federal Reserve Bank of Kansas City (Kansas City: FRB Kansas, December 2,
2020), https://www.kansascityfed.org/documents/7583/psrb20maniff1202.pdf; and John Crawford, Lev Menand,
and Morgan Ricks, "FedAccounts: Digital Dollars," George Washington Law Review, Vol. 89, p. 113, January 28,
2021, https://www.gwlr.org/wp-content/uploads/2021/01/89-Geo.-Wash.-L.-Rev.-113.pdf.
- 9 -
costs and increase access to digital payments. In emergencies, CBDC may offer a mechanism
for the swift and direct transfer of funds, providing rapid relief to those most in need. A broader
solution to financial inclusion would also need to address any perceived barriers to maintaining a
transaction account, along with the need to maintain up-to-date records on active accounts to
reach a large segment of the population.14
To explore these broader issues, the Federal Reserve is undertaking research on financial
inclusion. The Federal Reserve Bank of Atlanta is launching a public-private sector
collaboration as a Special Committee on Payments Inclusion to ensure that cash-based and
vulnerable populations can safely access and benefit from digital payments.15 This work is
complemented by a new Federal Reserve Bank of Cleveland initiative to explore the prospects
for CBDC to increase financial inclusion. The initiative will identify CBDC design features and
delivery approaches focused on expanding access to individuals who do not currently use
traditional financial services.
Technology Considerations
Multidisciplinary teams at the Federal Reserve are investigating the technological and
policy issues associated with digital innovations in payments, clearing, and settlement, including
the benefits and risks associated with a potential U.S. CBDC. For example, the TechLab group
at the Federal Reserve Board is performing hands-on research and experimentation on potential
future states of money, payments, and digital currencies. A second group, the Digital
14
For more information, see the Federal Reserve Community Reinvestment Act Proposed Rulemaking at
https://www.federalreserve.gov/consumerscommunities/community-reinvestment-act-proposed-rulemaking.htm.
15
Federal Reserve Bank of Atlanta, "New Committee to Advance Safe, Efficient, Inclusive Payments," news
release, May 12, 2021,
https://takeonpayments.frbatlanta.org/news/pressreleases/2021/05/12/new-committee-toadvance-safe-efficient-inclusive-payments.
Innovations Policy program, is considering a broad range of policy issues associated with the rise
of digital payments, including the potential benefits and risks associated with CBDC.
To deepen our research on the technological design of a CBDC, the Federal Reserve
Bank of Boston is partnering with Massachusetts Institute of Technology's (MIT) Digital
Currency Initiative on Project Hamilton to build and test a hypothetical digital currency platform
using leading edge technology design options.16 This work aims to research the feasibility of the
core processing of a CBDC, while remaining agnostic about a range of policy decisions. MIT
and the Boston Fed plan to release a white paper next quarter that will document the ability to
meet goals on throughput of geographically dispersed transactions with core processing and
create an open source license for the code. Subsequent work will explore how addressing
additional requirements, including resiliency, privacy, and anti-money-laundering features, will
impact core processing performance and design.
Banking Activities
Research and experimentation are also occurring at supervised banking institutions to
explore new technology to enhance their own operations and in response to demands from their
clients for services such as custody of digital assets. While distributed ledger technology may
have the potential to improve efficiencies, increase competition, and lower costs, digital assets
pose heightened risks such as those related to Bank Secrecy Act/anti-money laundering,
cybersecurity, price volatility, privacy, and consumer compliance. The Federal Reserve is
16
See Eric Rosengren, "Central Bank Perspectives on Central Bank Digital Currencies,"
remarks at the panel discussion of the Program on International Financial Systems,
Harvard Law School, May 12, 2021,
https://www.bostonfed.org/news-and-events/speeches/2021/central-bankperspectives-on-central-bank-digital-currencies.aspx; Jim S. Cunha, "Boston Fed's Digital Dollar Research Project
Honors 2 Hamiltons, Alexander and Margaret," Federal Reserve Bank of Boston, February 25, 2021,
https://www.bostonfed.org/news-and-events/news/2021/02/how-did-the-feds-digital-dollar-project-get-its-nameproject-hamilton.aspx; and Lael Brainard, "An Update on Digital Currencies," remarks at the Federal Reserve Bank
of San Francisco Innovation Office Hours, August 13, 2020,
https://www.federalreserve.gov/newsevents/speech/brainard20200813a.htm.
actively monitoring developments in this area, engaging with the industry and other regulators,
and working to identify any regulatory, supervisory, and oversight framework gaps. Given that
decisions at one banking agency can have implications for the other agencies, it is important that
regulators work together to develop common approaches to ensure that banks are appropriately
identifying, monitoring, and managing risks associated with digital assets.
Public Engagement
In light of the growing role of digital private money in the broader migration to digital
payments, the potential use of foreign CBDCs in cross-border payments, and the importance of
financial inclusion, the Federal Reserve is stepping up its research and public engagement on a
digital version of the U.S. dollar. Members of Congress and executive agencies are similarly
exploring this important issue. As noted above, to help inform these efforts, the Federal Reserve
plans to issue a discussion paper to solicit public comment on a range of questions related to
payments, financial inclusion, data privacy, and information security, with regard to a CBDC in
the U.S. context.17 The Federal Reserve remains committed to ensuring a safe, inclusive,
efficient, and innovative payments system that works for all Americans.
17
See Jerome Powell, "Federal Reserve Chair Jerome H. Powell Outlines the Federal Reserve's Response to
Technological Advances Driving Rapid Change in the Global Payments Landscape," Board of Governors of the
Federal Reserve System news release, May 20, 2021,
https://www.federalreserve.gov/newsevents/pressreleases/other20210520b.htm.