Fed governor: Digital tokens for financial settlement hold promise for central banks

Fed governor: Digital tokens for financial settlement hold promise for central banks

Federal Reserve governor Lael Brainard believes special-purpose digital tokens for wholesale payments and some aspects of distributed ledger technology may hold promise for strengthening traditional financial instruments and markets.

Speaking at a digital currency conference organised by the San Francisco fed, Brainard largely dismissed the notion of central-bank issued crypto coins on the grounds of cybersecurity, money laundering, and risks to the retail deposit industry.

Even though the case for a digital currency for general use may not be compelling, Brainard pointed to a number of private sector experiments in deploying the underlying technologies of digital assets that are native to a particular wholesale platform, such as interbank payments, securities settlements, and cross-border transactions, to help to facilitate finality of settlement.

UBS, for instance, has drawn wide support for the concept of a Utility Settlement Coin, for the settlement of securities transactions. The Bank of Canada has also played a leading role through its Project Jasper initiative.

"It is possible at some point in the future that a limited central bank digital instrument that serves as a settlement asset for wholesale payment and settlement activity may hold some promise," Brainard told the audience. "Several central banks have been studying this issue, and we have been actively watching these developments. We are also interested in work that decouples the underlying distributed ledger technology from cryptocurrencies and attempts to build on the benefits of the technology."

In the latter respect, Brainard holds that the biggest potential benefit for payments, clearing, and settlement of distributed ledger technology may be resiliency.

"Distributed ledger technology may enable a network to continue to operate even if some of the nodes on the network are compromised because of the ability of the other nodes in the network to pick up the slack and continue processing transactions," he says. "One challenge going forward will be to understand the implications that the confidentiality tools and different approaches to consensus under consideration may have on the resilience of the distributed ledger. Given that resiliency is a key potential benefit of distributed ledger technology over existing platforms, it is critical to understand the trade-offs between resiliency and a consensus method that focuses on operational speed, or between resilience and confidentiality."

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