For release on delivery
1:30 p.m. EST
February 18, 2022
Preparing for the Financial System of the Future
Remarks by
Lael Brainard
Member
Board of Governors of the Federal Reserve System
at the
2022 US Monetary Policy Forum
New York, NY
February 18, 2022
The financial system is undergoing fast-moving changes associated with
digitalization and decentralization. Some of these innovations hold considerable promise
to reduce transaction costs and frictions, increase competition, and improve financial
inclusion, but there are also potential risks. With technology driving profound change, it
is important we prepare for the financial system of the future and not limit our thinking to
the financial system of today.1
The Evolving Digitalization and Decentralization of Finance
In recent years, there has been explosive growth in the development and adoption
of new digital assets that leverage distributed ledger technologies and cryptography. The
market capitalization of cryptocurrencies grew from less than $100 billion five years ago
to a high of almost $3 trillion in November 2021 and is currently around $2 trillion.2
In parallel, we have seen rapid growth in the platforms that facilitate the crypto
finance ecosystem, including decentralized finance (DeFi) platforms. These crypto
platforms facilitate a variety of activities, including lending, trading, and custodying
crypto-assets, in some cases outside the traditional regulatory guardrails for investor and
consumer protection, market integrity, and transparency.
The growth in the crypto finance ecosystem is fueling demand for stablecoins-
digital assets that are intended to maintain stable value relative to reference assets, such
as the U.S. dollar. Stablecoin supply grew nearly sixfold in 2021, from roughly $29
billion in January 2021 to $165 billion in January 2022. There is a high degree of
1
I am grateful to Alexandra Fernandez, Lacy Douglas, David Mills, Sonja Danburg, and David Pope of the
Federal Reserve Board for their assistance in preparing this text. These views are my own and do not
necessarily reflect those of the Federal Reserve Board or the Federal Open Market Committee.
2
CoinMarketCap, "Total Cryptocurrency Market Cap," last modified on February 16, 2022,
https://coinmarketcap.com/charts/.
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concentration among a few dollar-pegged stablecoins: As of January 2022, the largest
stablecoin by market capitalization made up almost half of the market, and the four
largest stablecoins together made up almost 90 percent.3 Today, stablecoins are being
used as collateral on DeFi and other crypto platforms, as well as in facilitating trading
and monetization of cryptocurrency positions on and between crypto and other platforms.
In the future, some issuers envision that stablecoins will also have an expanded
reach in the payment system and be commonly used for everyday transactions, both
domestic and cross-border. So it is important to have strong frameworks for the quality
and sufficiency of reserves and risk management and governance. As noted in a recent
report on stablecoins by the President's Working Group on Financial Markets, it is
important to guard against run risk, whereby the prospect of an issuer not being able to
promptly and adequately meet redemption requests for the stablecoin at par could result
in a sudden surge in redemption demand.4 It is also important to address settlement risk,
whereby funds settlement is not certain and final when expected, and systemic risk,
whereby the failure or distress of a stablecoin provider could adversely affect the broader
financial system.5
3
"Total Stablecoin Supply," The Block, last modified on February 14, 2022,
https://www.theblockcrypto.com/data/decentralized-finance/stablecoins/total-stablecoin-supply-daily.
4
President's Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and
the Office of the Comptroller of the Currency, Report on Stablecoins (Washington: President's Working
Group on Financial Markets, the Federal Deposit Insurance Corporation, and
the Office of the Comptroller of the Currency, November 2021),
https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf.
5
See "Virtual Hearing - Digital Assets and the Future of Finance: The President's Working Group on
Financial Markets' Report on Stablecoins," February 8, 2022,
https://financialservices.house.gov/events/eventsingle.aspx?EventID=409026.
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The prominence of crypto advertisements during the Super Bowl highlighted the
growing engagement of retail investors in the crypto ecosystem.6 In late 2021, Pew
Research found that 16 percent of survey respondents reported having personally
invested in, traded, or otherwise used a cryptocurrency-up from less than 1 percent of
respondents in 2015.7 There is also rising interest among institutional investors.8 So it is
perhaps not surprising that established financial intermediaries are undertaking efforts to
expand the crypto services and products they offer. If the past year is any guide, the
crypto financial system is likely to continue to grow and evolve in ways that increase
interconnectedness with the traditional financial system.
As a result, officials in many countries are undertaking efforts to understand and
adapt to the transformation of the financial system. Many jurisdictions are making efforts
to ensure statutory and regulatory frameworks apply like rules to like risks, and some
jurisdictions are issuing or contemplating issuing central bank currency in digital form.9
6
Khristopher Brooks and Aimee Picchi, "Super Bowl ads 2022: Crypto companies are spending millions to
win over viewers," CBS News, February 11, 2022,
https://www.cbsnews.com/news/super-bowl-2022commercials-cryptocurrency/.
7
The 2015 survey focused on Bitcoin use. See "16% of Americans say they have ever invested in, traded
or used cryptocurrency," Pew Research Center, last modified on November 11, 2021,
https://www.pewresearch.org/fact-tank/2021/11/11/16-of-americans-say-they-have-ever-invested-intraded-or-used-cryptocurrency/.
8
Fidelity Digital Assets, "71% of Institutional Investors Plan to Buy or Invest in Digital Assets in the
Fugure," July 20, 2021,
https://www.fidelitydigitalassets.com/binpublic/060_www_fidelity_com/documents/FDAS/digital-asset-survey-2021.pdf.
9
See Financial Stability Board, Regulation, Supervision and Oversight of "Global Stablecoin"
Arrangements: Final Report and High-Level Recommendations (Basel: Financial Stability Board, October
2020), https://www.fsb.org/wp-content/uploads/P131020-3.pdf and International Monetary Fund, Behind
the Scenes of Central Bank Digital Currency (Washington: International Monetary Fund, February 2022),
https://www.imf.org/en/Publications/fintech-notes/Issues/2022/02/07/Behind-the-Scenes-of-Central-BankDigital-Currency-512174.
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Preparing for the Payment System of the Future
The Federal Reserve needs to be preparing for the payment landscape of the
future even as we continue to make improvements to meet today's needs. In light of the
rapid digitalization of the financial system, the Federal Reserve has been thinking
critically about whether there is a role for a potential U.S. central bank digital currency
(CBDC) in the digital payment landscape of the future and about its potential properties,
costs, and benefits.
Our financial and payment system delivers important benefits today and is
continuing to improve with developments like real-time payments. Nonetheless, certain
challenges remain, such as a lack of access to digital banking and payment services for
some Americans and expensive and slow cross-border payments. Growing interest in the
digital financial ecosystem suggests that technology is enabling potential improvements
that merit consideration.10 In addition, it is important to consider how new forms of
crypto-assets and digital money may affect the Federal Reserve's responsibilities to
maintain financial stability, a safe and efficient payment system, household and business
access to safe central bank money, and maximum employment and price stability. It is
prudent to explore whether there is a role for a CBDC to preserve some of the safe and
effective elements of the financial system of the present in a way that is complementary
to the private sector innovations transforming the financial landscape of the future.
The public and private sector play important complementary roles within the
financial system in the United States. From Fedwire to FedNow, the Federal Reserve has
10
Lael Brainard "The Future of Retail Payments in the United States" (speech at the FedNow Service
Webinar, Washington, D.C., August 6, 2020),
https://www.federalreserve.gov/newsevents/speech/brainard20200806a.htm.
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over a century of experience working to improve the infrastructure of the U.S. payment
system to provide a resilient and adaptable foundation for dynamic private sector
activity.11 In parallel, private sector banks and nonbanks have competed to build the best
possible products and services on top of that foundation and to meet the dollar-
denominated needs of consumers and investors at home and around the world. The result
is a resilient payment system that is responsive to the changing needs of businesses,
consumers, and investors.
While the official sector provides a stable currency, operates some important
payment rails, and undertakes regulation and oversight of financial intermediaries and
critical financial market infrastructures, the private sector brings competitive forces
encouraging efficiency and new product offerings and driving innovation. Responsible
innovation has the potential to increase financial inclusion and efficiency and to lower
costs within guardrails that protect consumers and investors and safeguard financial
stability.
As we assess the range of future states of the financial system, it is prudent to
consider how to preserve ready public access to government-issued, risk-free currency in
the digital financial system-the digital equivalent of the Federal Reserve's issuance of
physical currency. The Board recently issued a discussion paper that outlines the Federal
Reserve's current thinking on the potential benefits, risks, and policy considerations of a
11
See Board of Governors of the Federal Reserve System, "Major Events in the History of the Federal
Reserve's Role in the U.S. Payment System," in The Fed Explained: What the Central Bank Does, 11th ed.
(Washington: Board of Governors of the Federal Reserve System, December 2021),
https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf#page=91.
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U.S. CBDC.12 The paper does not advance any specific policy outcome and does not
signal that the Board will make any imminent decisions about the appropriateness of
issuing a U.S. CBDC. It lays out four CBDC design principles that analysis to date
suggests would best serve the needs of the United States if one were created. Those
principles are that a potential CBDC should be privacy-protected, so consumer data and
privacy are safeguarded; intermediated, such that financial intermediaries rather than the
Federal Reserve interface directly with consumers; widely transferable, so the payment
system is not fragmented; and identity-verified, so law enforcement can continue to
combat money laundering and funding of terrorism.
Financial Stability
Given the Federal Reserve's mandate to promote financial stability, any
consideration of a CBDC must include a robust evaluation of its impact on the stability of
the financial system-not only as it exists today but also as it may evolve in the future.
In consideration of the financial system today, it would be important to explore design
features that would ensure complementarity with established financial intermediation. A
CBDC-depending on its features-could be attractive as a store of value and means of
payment to the extent it is seen as the safest form of money.13 This could make it
attractive to risk-averse users, perhaps leading to increased demand for the CBDC at the
12
Board of Governors of the Federal Reserve System, "Money and Payments: The U.S. Dollar in the Age
of Digital Transformation," research paper (Washington: Board of Governors of the Federal Reserve
System, January 2022),
https://www.federalreserve.gov/publications/files/money-and-payments20220120.pdf.
13
Bank for International Settlements, Central bank digital currencies: financial stability implications
(Basel: Bank for International Settlements, September 2021),
https://www.bis.org/publ/othp42_fin_stab.pdf.
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expense of other intermediaries during times of stress. So it is important to undertake
research regarding the tools and design features that could be introduced to limit such
risks, such as offering a non-interest bearing CBDC and limiting the amount of CBDC an
end user could hold or transfer.
As I noted at the start, the digital asset and payment ecosystem is evolving at a
rapid pace. Thus, it is also important to contemplate the potential role of a CBDC to
promote financial stability in a future financial system in which a growing range of
consumer payment and financial transactions would be conducted via digital currencies
such as stablecoins. If current trends continue, the stablecoin market in the future could
come to be dominated by just one or two issuers. Depending on the characteristics of
these stablecoins, there could be large shifts in desired holdings between these
stablecoins and deposits, leading to large-scale redemptions by risk-averse users at times
of stress that could prove disruptive to financial stability. In such a future state, the
coexistence of CBDC alongside stablecoins and commercial bank money could prove
complementary, by providing a safe central bank liability in the digital financial
ecosystem, much like cash currently coexists with commercial bank money. It is
essential that policymakers, including the Federal Reserve, plan for the future of the
payment system and consider the full range of possible options to bring forward the
potential benefits of new technologies, while safeguarding stability.
International Considerations
Analysis of the potential future state of the financial system is not limited to the
domestic implications. The dollar is important to global financial markets: It is not only
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the predominant global reserve currency, but the dollar is also the most widely used
currency in international payments.14
Decisions by other major jurisdictions to issue CBDCs could bring important
changes to global financial markets that may prove more or less disruptive and that could
influence the potential risks and benefits of a U.S. CBDC. Thus, it is wise to consider
what the future states of global financial markets and transactions would look like both
with and without a Federal Reserve-issued CBDC. For example, the People's Bank of
China has been piloting the digital yuan, also known as e-CNY, in numerous Chinese
cities over the past two years.15 The substantial early progress on the digital yuan may
have implications for the evolution of cross-border payments and payment systems. And
it may influence the development of norms and standards for cross-border digital
financial transactions.
It is prudent to consider how the potential absence or issuance of a U.S. CBDC
could affect the use of the dollar in payments globally in future states where one or more
major foreign currencies are issued in CBDC form. A U.S. CBDC may be one potential
way to ensure that people around the world who use the dollar can continue to rely on the
strength and safety of U.S. currency to transact and conduct business in the digital
financial system. More broadly, it is important to consider how the United States can
14
Carol Bertaut, Bastian von Beschwitz, Stephanie Curcuru, "The International Role of the U.S. Dollar,"
October 6, 2021,
https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-sdollar-20211006.htm.
15
Coco Feng, "China's digital currency: e-CNY wallet nearly doubles user base in two months to 261
million ahead of Winter Olympics," South China Morning Post, January 19, 2022,
https://www.scmp.com/tech/tech-trends/article/3163953/chinas-digital-currency-e-cny-wallet-nearlydoubles-user-base-two. See also Working Group on E-CNY Research and Development of the People's
Bank of China, "Progress of Research & Development of E-CNY in China," white paper (Beijing: People's
Bank of China, July 2021),
http://www.pbc.gov.cn/en/3688110/3688172/4157443/4293696/2021071614584691871.pdf.
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continue to play a lead role in the development of standards governing international
digital financial transactions involving CBDCs consistent with norms such as privacy and
security. Given the dollar's important role as a payment instrument across the world, it is
essential that the United States be on the frontier of research and policy development
regarding CBDC, as international developments related to CBDC can have implications
for the global financial system.
Technology Research and Experimentation
Given the range of possible future states with significant digitization of the
financial system, it is important that the Federal Reserve is actively engaging with the
underlying technologies. Our work to build 24x7x365 instant payments rails leverages
lessons from some of today's most resilient, high-performing, and large-scale technology
platforms across the globe. It is providing important insights on the clearing and
settlement models associated with real time payments as well as on fraud, cyber
resilience, cloud computing, and related technologies.
In parallel with the Board's public consultation on CBDC, the Federal Reserve
Bank of Boston, in collaboration with the Massachusetts Institute of Technology, has
developed a theoretical high-performance transaction processor for CBDC.16 They
recently published the resulting software under an open-source license as a way of
engaging with the broader technical community and promoting transparency and
verifiability.17
16
Federal Reserve Bank of Boston, "Project Hamilton Phase 1 A High Performance Payment Processing
System Designed for Central Bank Digital Currencies," news release, February 3, 2022,
https://www.bostonfed.org/news-and-events/press-releases/2022/frbb-and-mit-open-cbdc-phase-one.aspx.
17
"A transaction processor for a hypothetical, general-purpose, central bank digital currency," GitHub,
https://github.com/mit-dci/opencbdc-tx.
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Moreover, the Board is studying how innovations, such as distributed ledger
technology, could improve the financial system. This work includes experimentation
with stablecoin interoperability and testing of retail payments across multiple distributed
payment ledger systems. The Federal Reserve Bank of New York recently established an
Innovation Center, focused on validating, designing, building, and launching new
financial technology products and services for the central bank community.18
These technology research and development initiatives are vital to our
responsibilities to promote a safe and efficient payment system and financial stability,
whatever the future may bring.
Conclusion
The financial system is not standing still, and neither can we. The digital
financial ecosystem is evolving rapidly and becoming increasingly connected with the
traditional financial system. It is prudent for the Board to understand the evolving
payment landscape, the technological advancements and consumer demands driving this
evolution, and the consequent policy choices as it seeks to fulfill its congressionally-
mandated role to promote a safe, efficient, and inclusive system for U.S. dollar
transactions.19 To prepare for the financial system of the future, the Federal Reserve is
engaging in research and experimentation with these new technologies and consulting
closely with public and private sector partners.
18
Federal Reserve Bank of New York, "New York Fed Launches the New York Innovation Center to
Support Financial Technology Innovation in Central Banking," press release, November 29, 2021,
https://www.newyorkfed.org/newsevents/news/aboutthefed/2021/20211129.
19
See Board of Governors of the Federal Reserve System, "Fostering Payment and Settlement System
Safety and Efficiency" in The Fed Explained, 11th ed.