In a speech, Wednesday by Lael Brainard, a member of the Board of Governors of the Federal Reserve System, at Stanford University’s Graduate School of Business, the future of digital payments in the U.S. were broadly sketched. But her comments provided more risks and concerns than a path forward.
That afternoon, Ms. Brainard addressed the audience at The Symposium on the Future of Payments.
She acknowledged that technology firms are driving forward innovation in the digitalization of currencies and payments. The new business models are creating fresh review of established conventions. This targets new ideas to reduce transaction costs and faster settlement services for business and interbank systems, i.e., wholesale and retail payments. But more of the speech was dedicated to risks these new services bring, specifically cryptocurrencies, stablecoins and other tokens, like Facebook’s Libra.
“Payments have traditionally been a service provided by trusted intermediaries such as banks.”, Ms. Brainard said. While banks and credit cards operate with regulation, controls and accountability, they can rely on legacy technology, making the process more cumbersome. “BigTechs,” she pointed out, “tend to be established platforms with massive user networks that provide payments in support of core nonfinancial services—ranging from commercial transactions to social engagement to mobile apps to search engines.” Today In: Money
China, an example, processed $37 Trillion in mobile payments, handled by services like Alipay and WeChat Pay in 2018. Consider that China may issue some form of digital currency soon, the opportunity for e-wallets and digital script could be significant.
Other statistics were mentioned, like BIS’ 2019 Digital Currency Survey, where more developing nations have indicated that they plan to issue central bank digital currency (CBDC). The future remains to be seen; it is unclear if CBDC will be a mainstream form of exchange.
But for Ms. Brainard, “Any stablecoin project with global scale and scope face a core set of legal and regulatory challenges. Cryptocurrencies already pose risks associated with fraudulent activity, consumer losses, and illicit activity, and a widely accepted stablecoin could magnify these for general use. Not only is it not clear what protections or recourse consumers would have with regard to their global stablecoin transactions and balances, but it is also not clear how much price risk consumers will face in cases where they do not appear to have claims on the stablecoin’s underlying assets.”
Bitcoins’ lack of mainstream acceptance was mentioned as an example of crypto’s failure to represent a new form of money. This seems shortsighted without considering that crypto is still in its infancy as an industry. Without government and financial industry standards, it may always be limited.
No U.S. federal agency has plenary authority over another. Ms. Brainard said, “The Federal Reserve has broad authority over payment systems that are designated as systemically important by the Financial Stability Oversight Council or that are chartered as entities for which the Federal Reserve is the primary supervisor. These authorities cover two large-value interbank payment systems but no retail payment system to date.” She went on to say that a review of the nation’s retail payment oversight and infrastructure is a good place to start.
Blockchain innovation is one solution for improving and competing globally in retail payment services. FedNow and the Clearing House’s RTP projects are two examples that compete with crypto-style services.
Bitcoin and crypto-style assets, like Libra and other stablecoins, do pose risks. Will they be treated like sovereign currencies? Will they make fraud more difficult? Will the cause unintended consequences? Maybe, but maybe not. The reality is that they are changing the marketplace now. Public policy may need to catch-up.