On May 15, 2018, Federal Reserve Governor Lael Brainard spoke at the Decoding Digital Currency Conference in San Francisco. In her remarks, Brainard addressed the unusual nature of cryptocurrencies, highlighting their decentralized consensus mechanisms and the absence of liability. She also explained how a Fed-issued digital currency seems to present greater risks and challenges than advantages.
In the first section of her speech, Brainard provided some background information on cryptocurrencies. "This combination of a new asset, which is not a liability of any individual or institution, and a new recordkeeping and transfer technology, which is not maintained by any single individual or institution, illustrates the powerful capabilities of today's technologies," she said. "But there are also serious challenges."
The governor discussed how volatility makes existing cryptocurrencies undesirable as mediums of exchange. Brainard reminded the audience of the irreversibility of cryptocurrency transactions and expounded her concerns about theft and money laundering:
"Although the cryptographic technology may be robust to some events, such as the fraudulent double spending of the same units of the cryptocurrency for more than one transaction, the large number of breaches at some cryptocurrency exchanges and wallet providers suggest that significant vulnerabilities may remain with respect to security protections around customers' accounts."
Despite the swell of media coverage and investor interest, Brainard noted that cryptocurrencies remain a tiny segment of the global economy. "The still relatively small scale of cryptocurrencies in relation to our broader financial system and relatively limited connections to our banking sector suggest that they do not currently pose a threat to financial stability," she stated (a view that is shared by the IMF). "Of course," Brainard said, "if cryptocurrencies were to achieve wide-scale use, or their impact were greatly magnified through leverage, the effects could be broader."
The governor seemed concerned that "adverse developments and shifts in sentiment could cause a global rush to exit this market" and she expressed reservations about price fluctuations as well as possible trading difficulties. "We will continue to monitor cryptocurrencies as they evolve, with particular vigilance for any signs of growing materiality to the broader financial system," she promised.
Central Bank Digital Currencies (CBDCs)
In the simplest terms, Brainard said that a CBDC doesn't seem to offer additional advantages because our society already has electronic versions of money that function effectively (even if they rely on trusted central authorities). She raised doubts about the security of a CBDC, suggesting that identity protocols would need to be reworked dramatically to abide by KYC and AML requirements. Furthermore, the governor astutely pointed out that a CBDC might become a "very attractive target for cyberattacks by giving threat actors a prominent platform on which to focus their efforts."
Brainard also discussed how a CBDC might alter or consolidate the lending industry and could conceivably increase the chances of a bank run. In essence, if you cut out the retail banking industry, the central bank would be acting as a direct lender, and that's probably not for the best.
"There is no compelling demonstrated need for a Fed-issued digital currency," Brainard concluded. "Most consumers and businesses in the U.S. already make retail payments electronically using debit and credit cards, payment applications, and the automated clearinghouse network. Moreover, people are finding easy ways to make digital payments directly to other people through a variety of mobile apps."
So, for all the hype about stablecoins and CBDCs, don't hold your breath. The Fed isn't convinced of their value.