Stablecoins could exist alongside a digital dollar as CBDCs could help secure global payments systems, Fed Vice Chair Lael Brainard says

• A US digital dollar could someday operate alongside stablecoins, Fed Vice Chair Lael Brainard said Thursday.
• Her Capitol Hill testimony followed an eruption in the cryptocurrency market surrounding the collapse of algorithmic stablecoin terraUSD.

A digitized US dollar could someday operate alongside stablecoins, Federal Reserve Vice Chair Lael Brainard told lawmakers on Thursday, after the cryptocurrency market was roiled earlier this month when privately issued stablecoins lost their pegs to the dollar.

"In some future circumstances, CBDC could coexist with and be complementary to stablecoins and commercial bank money by providing a safe central bank liability in the digital financial ecosystem, much like cash currently coexists with commercial bank money," Brainard said in prepared remarks for testimony on Capitol Hill. A CBDC is a digital banknote issued by a central bank.

There's been "explosive growth" in an emergent digital financial system, and if private monies, in the form of either stablecoins or cryptocurrencies, were to become widespread, there could be fragmentation of the US payment system into so-called walled gardens, she said. Brainard, who in April won Senate confirmation for a four-year term as the central bank's vice chair, testified before the House Financial Services Committee.

Stablecoins have been a hot topic in the financial markets, particularly in recent days as investors watched the collapse of algorithmic stablecoin terraUSD and its sister coin luna. Terra earlier this month lost its peg to the US dollar and the market's turbulence spread to stablecoin Tether, sending the market's third most valuable cryptocurrency briefly below its $1 peg before it regained parity.

News came Thursday that Terra supporters voted to approve founder Do Kwon's plan for a new blockchain for its luna cryptocurrency, without reviving the failed terraUSD.

"The recent turmoil in crypto financial markets makes clear that the actions we take now—whether on the regulatory framework or a digital dollar—should be robust to the future evolution of the financial system," said Brainard.

The Federal Reserve in January published a report laying out the potential benefits and risks of fully digitizing the US dollar but hasn't sided for or against a CBDC.

The US dollar is the most widely used currency in international payments and investments, and Brainard said US officials should consider how the potential absence or presence of a US CBDC could affect the usage of the dollar in global payments.

"A US 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 the US currency to transact and conduct business in the digital financial system," she said.