Federal Reserve Board ("FRB") Governor Lael Brainard highlighted market benefits and risks as technology firms lead the digital transformation of payments.
Governor Brainard said customers can expect to see an increase in competition, improved product offerings and lower transaction costs. She also noted that the transformation expands financial inclusion and makes financial services more accessible and consumer-friendly. However, she cautioned that the integration of payments with consumer services creates risks. These involve (i) data security risks on payment methods, (ii) the potential for improper use of consumers' financial data, and (iii) unauthorized disclosure to third parties.
"Real-Time" Retail Payments
Governor Brainard affirmed the FRB's commitment to "closing the gap" between transaction capabilities in the digital economy and the underlying payment and settlement capabilities. She stated that it is crucial to invest in a real-time retail payments infrastructure that ensures the same speed, efficiency and security as traditional deposit account providers. In particular, she touched on the FedNow Service, which was announced by the FRB in 2019 to upgrade the U.S. payment system and provide payment-by-payment interbank settlements in real time (see previous coverage). Governor Brainard explained that with FedNow, consumers and businesses will be able to settle retail transactions in real time and have greater flexibility in managing their money.
Digital Transformation of Payments
Governor Brainard explained that the payment evolution extends to mediums of exchange for central bank money, commercial bank money and certain types of nonbank private money. Governor Brainard attributed the widespread use of commercial bank money (i.e., money held in deposits at commercial banks) to its heavy regulation and supervision by federal banking regulators. She warned that since issuers of nonbank money are not subject to the same regulations, consumers are at greater risk.
In addition, Governor Brainard raised several questions regarding the design choices for cryptocurrencies, including (i) whether a digital currency is account-based or token-based, (ii) the method for authenticating the asset owner and (iii) the currency's convertibility.
Central Bank Digital Currency ("CBDC")
Governor Brainard highlighted the intensified pressure on central banks to issue digital currencies as a response to the rapid adoption of global stablecoin payment systems. She emphasized the importance of the United States remaining at the frontier of research and policy developments for CBDCs in light of China "moving ahead rapidly" to release a CBDC. She stated that first, regulators must assess the potential effects of releasing a CBDC within the context of the U.S. economy and recommended that regulators consider certain policy and design issues and legal implications. She questioned:
- what form of digital central bank liability would support the payment system;
- if a new form of central bank liability would minimize operational vulnerabilities;
- if a CBDC would simplify payments and enhance end-to-end processing or recordkeeping procedures; and
- what would be required to achieve cross-border cooperation for CBDCs and mitigate current frictions.
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