A digital dollar could speed up benefit payments and aid 'underbanked" Americans, says Fed Governor Lael Brainard

• Federal Reserve Governor Leal Brainard on Monday outlined some merits and risks of issuing a central bank digital currency.
• A CBDC could foster competition and lower transaction fees for certain retail payments, she said.
• A digital currency could raise the risk of flight out of deposits at weak banks during times of financial stress, she said some research indicates.

The advantages of creating a digital currency backed by the Federal Reserve include accelerating benefits payments to Americans, Federal Reserve Governor Lael Brainard said Monday, highlighting the central bank's potential in issuing virtual money.

Migration to digital payments and concerns about financial exclusion are among four developments sharpening the focus on central bank digital currencies, and the Fed this summer plans to publish a paper on its thinking about digital payments, said Brainard in remarks for a conference run by cryptocurrency media site Coindesk.

A CBDC is a type of central bank liability - like the US dollar - issued in digital form. Federal Reserve Chairman Jerome Powell last week said that its discussion paper on the matter is on the way.

There's a high cost linked to Americans being unbanked and underbanked and the COVID-19 pandemic illustrated the importance for people to have access to safe and timely payments, Brainard said in outlining some merits and risks of a CBDC.

"While the large majority of pandemic relief payments moved quickly via direct deposits to bank accounts, it took weeks to distribute relief payments in the form of prepaid debit cards and checks to households who did not have up-to-date bank account information with the Internal Revenue Service," she said.

"The challenges of getting relief payments to these households highlighted the benefits of delivering payments more quickly, cheaply, and seamlessly through digital means," Brainard said.

A CBDC would also promote competition and lower transaction costs among retail payments as certain transaction costs are high and not always transparent to end-users, she said. "By providing access to a digital form of safe central bank money, a CBDC could provide an important foundation on which private-sector competition could flourish," she assessed.

She did, however, point that such a move could also contribute to the fragmentation of the current payments system.

Brainard also noted that some research indicates the introduction of a CBDC could raise the risk of a flight out of deposits at weak banks in favor of CBDC holdings at times of financial stress. "Thus, the design of any CBDC would need to include safeguards to protect against disintermediation of banks and to preserve monetary policy transmission more broadly."

The sharp increase in interest and investment in the cryptocurrency market by retail investors and institutions has spurred some central banks to explore CBDCs. China began a test pilot of an electronic payment CBDC in 2020 and the UK said it's coordinating exploratory work on a CBDC dubbed "britcoin.