Lynn Woosley is a Senior Director with Treliant. She is a seasoned executive with extensive risk management experience in regulatory compliance, consumer and commercial credit risk, credit and compliance risk modeling, model governance, regulatory change management, acquisition due diligence, and operational risk in both financial services and regulatory environments.
- Source: federalreserve.gov
Treliant knows FinTech, payments, and digital risk. While recognizing digital payments’ potential to increase both competition and payment processing speed, Treliant understands the accompanying risks. If your business needs assistance with compliance risk management, Treliant can help.
On February 5, 2020, Federal Reserve Governor Lael Brainard spoke on issues arising from the digitalization of payments and currency at the Symposium on the Future of Payments. In her speech, she highlighted the development of digital currencies, including proprietary digital currencies, cryptocurrencies, stablecoins, and central bank digital currencies. The first generation of non-bank digital currency in the U.S. was closed-loop payment systems, such as prepaid cards and digital wallets. Although these payment types have some consumer protections under federal and state law, the issuers are not regulated to the same extent as banks and the stored value does not carry direct FDIC deposit insurance.
The second generation of digital currency were proprietary cryptocurrencies based on distributed ledger technologies. However, many of these are extremely volatile, hard to redeem for cash, and lack transparency into governance and transaction costs. Stablecoins are intended to overcome some of these risks by linking the value of the digital currency to value of specified assets. However, questions remain regarding redemption, price risk, and consumer recourse. In addition, both stablecoins and their predecessors have substantial inherent risks related to fraud, money laundering and other illicit activities, and consumer protection. As a result, widespread use of proprietary digital currencies could contribute to financial instability.
Today, approximately 80 percent of the 66 central banks surveyed by the Bank of Internal Settlements are engaged in some type of effort related to central bank digital currencies (CBDC). Although consumer risk would appear lower in CBDC than private digital currencies, there are a number of outstanding questions, including:
- Would CBDC reduce or increase payment system complexity and resiliency?
- What impact would CBDC have on payment system operational efficiency and recordkeeping?
- Could CBDC reduce frictions and costs in cross-border payments?
- What types of intermediaries might provide CBDC transaction accounts for consumers?
- How would those intermediaries address privacy and other consumer protection issues?
- How do you guard against illicit activity in a CBDC system?
- How would a CBDC fit into the U.S. regulatory system?
Answers to these questions and successful development of a digital currency that incorporates stability and consumer protection while avoiding illicit activity will require an ongoing partnership between the public and private sectors.