Fed’s Brainard to Tell Panel Digital Dollar Could Coexist With Stablecoins

Thursday’s testimony comes as the Fed debates a potential new form of money to keep pace with private-sector payments innovations, including stablecoins, a type of cryptocurrency intended to be pegged to the dollar or another national currency.

Ms. Brainard is scheduled to testify at noon before a House Financial Services Committee hearing on the benefits and risks of a central bank digital currency. Unlike private cryptocurrencies such as bitcoin, a Fed-issued central bank digital currency would be issued by and backed by the U.S. central bank, a government entity, as are U.S. paper dollar bills and coins.

The idea has divided Fed officials, making it unlikely they will decide soon on whether to create a digital dollar. The Fed is considering the issue amid a proliferation of digital assets including stablecoins.

Stablecoins gained renewed attention from regulators this month after TerraUSD, at the time one of the largest stablecoins, saw its value fall far below a dollar.

“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,” Ms. Brainard said in her prepared testimony.

She added that a central bank digital currency could ensure the dollar’s continued global reserve status. A digital dollar 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 U.S. currency to transact and conduct business in the digital financial system,” she said in her prepared testimony.

The central bank in January sought public comment on an in-house report designed to spark debate on whether and how a U.S. digital dollar could improve the domestic payments system. The paper doesn’t favor any policy outcome, and the Fed said the release of the report wasn’t meant to signal any imminent decision.

The report comes as central banks around the world contend with the rise of numerous private electronic alternatives to traditional money and weigh creating their own versions. Private offerings of digital currencies have been extremely volatile, and in many cases have been associated with criminal activities. They also have so far failed to be adopted widely for daily transactions, such as for buying groceries or movie tickets.

China has created its own government-issued digital currency and has prohibited transactions using cryptocurrencies issued by nonmonetary authorities, naming bitcoin, ether and tether as examples. El Salvador, meanwhile, became the first country in the world to adopt bitcoin as a national currency alongside the U.S. dollar.

Banks and their trade groups say the idea has several drawbacks in the U.S., among them potentially disrupting the financial system by attracting deposits away from traditional commercial banks, resulting in higher loan costs for households and businesses.

“Current research overwhelmingly undermines the purported benefits of a CBDC and instead indicates that a CBDC would seriously disrupt the financial system, significantly harming consumers and businesses,” said

Greg Baer,

the head of the Bank Policy Institute, an industry group, in a written statement last week.

Advocates of the idea say a Fed digital dollar could make it faster and cheaper to move money around the financial system, bring into it people who lack bank accounts, and provide an efficient way for the government to distribute financial aid.

However, Fed Chairman

Jerome Powell

has indicated he sees reason for caution. He has said it is more important to get the digital dollar right than to be first to market, in part because of the dollar’s critical global role.

Other officials have voiced more skepticism about the need for a Fed digital currency. Former governor

Randal Quarles,

who left the Fed in December, said last summer that the U.S. dollar is already “highly digitized” and expressed doubts that a Fed digital currency would help draw people without bank accounts into the financial system or lower financial transaction costs, a goal that can be accomplished through other means, he said.

Write to Andrew Ackerman at andrew.ackerman@wsj.com

Thursday’s testimony comes as the Fed debates a potential new form of money to keep pace with private-sector payments innovations, including stablecoins, a type of cryptocurrency intended to be pegged to the dollar or another national currency.

Ms. Brainard is scheduled to testify at noon before a House Financial Services Committee hearing on the benefits and risks of a central bank digital currency. Unlike private cryptocurrencies such as bitcoin, a Fed-issued central bank digital currency would be issued by and backed by the U.S. central bank, a government entity, as are U.S. paper dollar bills and coins.

The idea has divided Fed officials, making it unlikely they will decide soon on whether to create a digital dollar. The Fed is considering the issue amid a proliferation of digital assets including stablecoins.

Stablecoins gained renewed attention from regulators this month after TerraUSD, at the time one of the largest stablecoins, saw its value fall far below a dollar.

“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,” Ms. Brainard said in her prepared testimony.

She added that a central bank digital currency could ensure the dollar’s continued global reserve status. A digital dollar 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 U.S. currency to transact and conduct business in the digital financial system,” she said in her prepared testimony.

The central bank in January sought public comment on an in-house report designed to spark debate on whether and how a U.S. digital dollar could improve the domestic payments system. The paper doesn’t favor any policy outcome, and the Fed said the release of the report wasn’t meant to signal any imminent decision.

The report comes as central banks around the world contend with the rise of numerous private electronic alternatives to traditional money and weigh creating their own versions. Private offerings of digital currencies have been extremely volatile, and in many cases have been associated with criminal activities. They also have so far failed to be adopted widely for daily transactions, such as for buying groceries or movie tickets.

China has created its own government-issued digital currency and has prohibited transactions using cryptocurrencies issued by nonmonetary authorities, naming bitcoin, ether and tether as examples. El Salvador, meanwhile, became the first country in the world to adopt bitcoin as a national currency alongside the U.S. dollar.

Banks and their trade groups say the idea has several drawbacks in the U.S., among them potentially disrupting the financial system by attracting deposits away from traditional commercial banks, resulting in higher loan costs for households and businesses.

“Current research overwhelmingly undermines the purported benefits of a CBDC and instead indicates that a CBDC would seriously disrupt the financial system, significantly harming consumers and businesses,” said

Greg Baer,

the head of the Bank Policy Institute, an industry group, in a written statement last week.

Advocates of the idea say a Fed digital dollar could make it faster and cheaper to move money around the financial system, bring into it people who lack bank accounts, and provide an efficient way for the government to distribute financial aid.

However, Fed Chairman

Jerome Powell

has indicated he sees reason for caution. He has said it is more important to get the digital dollar right than to be first to market, in part because of the dollar’s critical global role.

Other officials have voiced more skepticism about the need for a Fed digital currency. Former governor

Randal Quarles,

who left the Fed in December, said last summer that the U.S. dollar is already “highly digitized” and expressed doubts that a Fed digital currency would help draw people without bank accounts into the financial system or lower financial transaction costs, a goal that can be accomplished through other means, he said.

Write to Andrew Ackerman at andrew.ackerman@wsj.com