Back to General Resources

HFSC CBDC Hearing

House Financial Services Committee

Digital Assets and the Future of Finance: Examining the Benefits and Risks of a U.S. Central Bank Digital Currency

Thursday, May 26, 2022

Topline

  • The hearing focused on the international implications of a CBDC, the development of a CBDC, and financial inclusion and access.
  • Brainard confirmed Comptroller Hsu’s statement that no real discussions have begun amongst the regulators about a CBDC.

Witnesses

  • Dr. Lael Brainard, Vice Chair of the Board of Governors of the Federal Reserve System

Opening Statements
Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters highlighted the risk of cryptocurrency, including significant volatility in stablecoins, citing the collapse of Terra, and stated that central bank digital currency (CBDC) has the potential to harness the efficiency of cryptocurrency while protecting the U.S. dollar. She added that the U.S. should not be left behind in the race to implement a CBDC and that a CBDC should promote financial inclusion.  

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry said for more than a year the Committee has been exploring the impact of a CBDC on monetary policy. He stated that there is potential harm to the financial system if Congress does not explore the impact of a CBDC and recognize the important tradeoffs of such. He concluded by saying that Congress nor the Fed should rush to issue a digital currency adding that Congress first should explore the risks and benefits digital currency.

Testimony

Dr. Lael Brainard, Vice Chair of the Board of Governors of the Federal Reserve System

In her testimony, Brainard said as Congress assess the future digital financial system, it is prudent to consider how to preserve ready public access to safe central bank money, perhaps through the digital analogue of the Federal Reserve’s issuance of physical currency. She added that new forms of digital money such as stablecoins that do not share these same protections could reintroduce meaningful counterparty risk into the payments system. She stated that if private monies, in the form of either stablecoins or cryptocurrencies, were to become widespread, we could see fragmentation of the U.S. payment system into so-called walled gardens. She concluded by saying that an intermediated system, in which private intermediaries, including banks, would offer accounts or digital wallets to facilitate the management of U.S. CBDC, would leverage the private sector’s existing identity frameworks and service provision to consumers while mitigating the risk of disintermediation.

Question & Answer

International

Waters asked if a U.S. CBDC is essential to protecting the international role of the U.S. Dollar. Brainard explained the benefits of the power of the U.S. Dollar and developments of CBDC in other countries and said our ability influence international standards will be influenced by our ability to bring a U.S. CBDC to the table. Rep. Jim Himes (D-Conn.) asked if the U.S. could be at an innovative disadvantage if other countries advance a CBDC before the U.S. and that others might move away from the Dollar. Brainard said yes to both. Rep. Joyce Beatty (D-Ohio) asked how the U.S. failing to establish a CBDC would impact the U.S. on the global stage. Brainard said we cannot take the global status of the Dollar for granted. Rep. Jesus “Chuy” Garcia (D-N.M.) asked if a CBDC would provide a safer, lower cost alternative to remittances. Brainard said remittances is a significant benefit of CBDC and has incentives other countries to establish a CBDC. Rep. Anthony Gonzalez (R-Ohio) asked if other central banks have reached out to the Fed and expressed concern if the U.S. does not establish a CBDC. Brainard said other central banks have asked the U.S. to participate in their work and help establish values around digital currency. Rep. Bryan Steil (R-Wis.) asked how other countries are working through their implementation of a CBDC. Brainard said financial inclusion is a problem many central banks are working to address as well as the concern of fragmentation.

Interagency Cooperation

Waters asked if the Comptroller of the Currency Hsu’s statement that there has been no real discussion on CBDC is true. Brainard said the Executive Order on digital assets has a role for Treasury in bringing together the banking agencies and that the Fed will fulfill its role in the Executive Order and expects to have discussions on CBDC convened by Treasury. She acknowledged that those discussions have not happened yet.

FedNow

Rep. Emanuel Cleaver (D-Mo.) asked what will happen with the research the Fed is doing on FedNow. Brainard said the Fed is learning about cyber security and settlement time and that there is relevance there for a CBDC.

Investor and Consumer Protection

Rep. Brad Sherman (D-Ill.) asked what the Fed can do to protect investors who think they are buying a stable asset by buying stablecoins. Brainard said she has been focused on the instability of stablecoins but that the first, best answer is for Congress to legislate around stablecoins. Sherman asked how a CBDC would impact loans. Brainard said the right design features could avoid the negative impact on lending of CBDCs and not impeded the lending function of the banking system.

Systemic Risk

Himes asked if it is possible that an intermediated system with digital wallets that are capped and non-interest bearing could create no risk for the existing financial system. Brainard confirmed Himes’ comments, saying that caps and lack of interest would protect against disintermediation of deposits. Rep. Bill Posey (R-Fla.) asked if Americans getting paid in digital currency would threaten the viability of commercial banks using deposits to funds their lending activities. Brainard said it is important to have a resilient banking system with banks of all sizes adding that anything that is done should support such a banking system. She said Congress must recognize that banks should remain intermediaries and that there has been increased use of mobile banking which has led to a reduction of bank deposits. Gonzalez asked would a well-regulated stablecoin solve stability issues for stablecoins. Brainard said it would address bank run instability issues regarding stablecoins.

Private Stablecoins

Rep. Bill Foster (D-Ill.) asked about private stablecoins. Brainard said they are growing in use everyday and that a stablecoin with proper guardrails would prevent against risk and highlighted the risk of fragmentation in the payments system. Reps. Ted Budd (R-N.C.) and Blaine Luetkemeyer (R-Mo.),  asked if the private sector could make digital currency more competitive more quickly. Brainard said the Fed operates alongside the private sector which is one of the great strengths of the financial system adding that the Fed wants the private sector to innovate more rapidly and effectively. Reps. French Hill (R-Ark.) and Bill Huizenga (R-Mich.) asked Brainard is she would prefer a U.S. government CBDC issued through an intermediary overseen by the government rather than stablecoins. Brainard said she sees the digital dollar as being complementary to a financial system that includes stablecoins.

Banking

Rep. Sean Casten (D-Ill.) asked if from a money supply perspective, the availability of CBDC is limited by the money supply. Brainard said it would be akin to cash. Casten followed up by asking why the private banking sector would find CBDC’s valuable if they cannot lend against CBDC deposits. Brainard said banks would want to continue to be active in the payment space.

Regulation

Casten asked if stablecoin should have the same protections as money market funds. Brainard said stablecoin could be thought of as a money market fund. Casten asked if there is enough regulatory protection to protect digital assets from pump and dump schemes. Brainard said the Federal Reserve does not and that other regulators might share that concern. Rep. Josh Gottheimer (D-N.J.) asked if non-bank entities can be reliable issuers of stablecoin if they can prove their backing. Brainard said yes. Gottheimer asked what regulations should be in place for non-bank issuers. Brainard said any set of stablecoins would need a strong set of protections regarding assets, consumer and investor protections, transparency, cybersecurity, and other requirements.

CBDC Development

Rep. Ayanna Pressley (D-Mass.) asked why we should trust the Fed’s bad track record to establish a CBDC given the time it has taken to establish FedNow. Brainard said FedNow did not get started for a long time because of public debate. Pressley asked if the responsibility for CBDC architecture should be shared with other agencies. Brainard said the Fed already partners with other agencies and agreed with Pressley. Rep. Sylvia Garcia (D-Texas) asked how long it will take to develop a CBDC. Brainard said she is not sure what the right number of years is but that it took China about six years, and Congress still needs to act to support a CBDC. Reps. Barry Loudermilk (R-Ga.), Luetkemeyer, and McHenry asked if legislation is necessary for the Fed to issue digital currency. Brainard said the Fed would not proceed without support from Congress and the Executive branch in the form of legislation. McHenry asked what specific problems a CBDC would solve. Brainard said Congress should think about the future state of the financial system and examine the risks and benefits of creating a CBDC and the time it would take to establish one, which could possibly be up to five years.

Climate Risk and Energy

Rep. Rashida Tlaib (D-Mich.) asked how the Fed is addressing energy consumption challenges when approaching a CBDC. Brainard said some aspects of blockchain are energy intensive and that the Fed’s system would not require all of the servers involved and not require as much energy usage.

Financial Inclusion and Access

Reps. David Scott (D-Ga.), Garcia, and Tlaib asked how a CBDC can facilitate financial inclusion. Brainard said a CBDC would require non-profits or public partners to be intermediaries and that the Fed has and will continue to focus on financial inclusion in its research. Rep. John Rose (R-Tenn.) asked how individuals who lack access to broadband utilize a CBDC. Brainard said the Fed is committed to continuing to provide cash, adding that an important thing to think about is providing store value cards in an effort to make sure there is 24/7 offline access. Rose asked if a CBDC would make it easier for the federal government to block individuals from having access to the financial system. Brainard said a CBDC would not raise questions that are different from traditional deposits and bank accounts.

Cybersecurity

Loudermilk asked how the Fed could ensure that a CBDC would be protected against cyber-attacks. Brainard said cybersecurity risk is an ongoing challenge for all payment systems and that any digital dollar would be the same. She added that the Fed is responsible for providing safe and secure infrastructure for wholesale and payment systems in collaboration with the private sector.

Privacy

Budd asked what steps the Fed would take to prevent the government from monitoring Americans financial transactions or preventing legal transactions from occurring that the government deems high risk. Brainard said privacy should be protected and that there would be no direct connection between the Fed and consumers, adding that banks would be the intermediary.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.