The cryptocurrency turmoil pushes Brainard to demand strong action for a CBDC

Lael Brainard, vice president of the Federal Reserve, has always spoken out in favor of the US central bank's digital currency (CBDC) and its advantages. 

In February, for example, he stressed the need for a US CBDC to promote financial stability in a future financial system. He also encouraged the country to be a leader in CBDC research and policy in the wake of recent international developments, citing the People's Bank of China pilot program for its digital yuan.

In 2021, he insisted on the need for a digital dollar, saying a central bank-backed cryptocurrency could offer benefits.

Brainard sees the need for a CBDC once again, with recent events to blame

In the wake of the recent collapse of the Terra network, which brought down the prices of LUNA and TerraUSD (UST), Brainard sees the need for regulation of cryptocurrencies or a digital dollar.

In testimony prepared for Thursday's hearing of the House Financial Services Commission, he said that a "clear system of control" is needed to protect financial stability.

"The recent turmoil in the crypto-financial markets makes it clear that the actions we take now - whether it be the regulatory framework or a digital dollar - should be solid for the future evolution of the financial system."

Alternatively, the Fed was not silent when it came to discussing CBDC. In January, the central bank released a report analyzing how a well-designed and regulated stablecoin could support a more efficient and inclusive payment system.

However, the Fed has not made any decisions on whether to pursue a CBDC, nor has it provided any firm timing for its release.

Brainard noted that:

"We recognize that there are risks of not acting, just as there are risks of acting".

He also argued that a digital dollar could safeguard the dollar and the importance of its global presence. 

Not to forget the risks

Brainard said forms of digital money, such as stable coins like Tether (USDT) and USD Coin (USDC), could carry significant counterparty risk in the payment system. Obviously zero risks if you trade with secure trading and platforms such as Bitcoin system.

In such cases, a CBDC could come to the rescue to avoid hurting customers and incurring larger losses in terms of financial stability. He added:

"CBDC could coexist and be complementary to stablecoins and commercial bank money, providing secure central bank accountability in the digital financial ecosystem, just as cash currently coexists with commercial bank money."

Like any digital payment system, the CBDC is also vulnerable to cyber security attacks, account and data breaches, theft and counterfeiting. However, adequate research and testing could typically address these risks.

"If the Federal Reserve were to proceed with the CBDC, it would be important to develop design features that mitigate such risks, such as offering a non-interest bearing CBDC or limiting the amount of CBDC a consumer can hold or transfer."