The U.S. Federal Reserve is actively investigating distributed ledger technologies and how they might be used for digitizing the dollar.

Federal Reserve Board Governor Lael Brainard said the U.S. central bank has been testing DLT over the past several years to study what a digital currency might do to the existing payments ecosystem, monetary policy, financial stability and the banking sector.

“With these important issues in mind, the Federal Reserve is active in conducting research and experimentation related to distributed ledger technologies and the potential use cases for digital currencies,” Brainard said Thursday at the Federal Reserve Bank of San Francisco’s Innovation Office Hours.

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Brainard cited the ongoing COVID-19 pandemic as one issue that reinforced the need for “immediate and trusted access to funds,” noting that recipients of emergency stimulus funds spent them quickly, indicating they urgently needed access.

“The COVID-19 crisis is a dramatic reminder of the importance of a resilient and trusted payments infrastructure that is accessible to all Americans,” she said. “It was notable that after a sharp reduction in spending early in the COVID-19 crisis, many households increased their spending starting on the day they received emergency relief payments.”

The idea of a digital dollar as a tool to distribute emergency stimulus funds is not new. Congress has been kicking the idea around since at least March. However, no concrete public efforts have been made to create a blockchain-based central bank digital currency in the U.S.

U.S. lawmakers have asked Federal Reserve Chairman Jerome Powell about the potential benefits to a digital dollar in the past. The regulator said last November that the central bank is “carefully analyzing” the potential benefits as well as the costs.

At the time, Powell said the Fed was not actively developing a digital dollar, that it might not offer the same benefits to U.S. consumers that other nations’ central bank digital currencies would offer their citizens and that there are questions about privacy and consumer protection.

Brainard echoed these questions in her speech Thursday, but her remarks indicate the Fed is further along in its experimentation than has previously been confirmed.

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“To enhance the Federal Reserve's understanding of digital currencies, the Federal Reserve Bank of Boston is collaborating with researchers at the Massachusetts Institute of Technology in a multiyear effort to build and test a hypothetical digital currency oriented to central bank uses,” Brainard said.

The code from these experiments will be published under an open-source license for the general public to experiment with it.

Brainard said the existence of other CBDCs and private cryptocurrencies, like bitcoin and libra, underscore the need for the U.S. to evaluate cryptocurrencies. 

“Digital currencies, including central bank digital currencies (CBDCs), present opportunities but also risks associated with privacy, illicit activity, and financial stability,” she said. “This prospect has intensified calls for CBDCs to maintain the sovereign currency as the anchor of the nation's payment systems.”

She also singled out one country in particular, noting “China has moved ahead rapidly on its version of a CBDC.”

The Fed needs to “remain on the frontier of research and policy development” given the dollar’s role in the world, she said. 

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Her views have been echoed in the past by former Commodity Futures Trading Commission (CFTC) Chairman Chris Giancarlo, who is now a director with the Digital Dollar Project, which has called for tokenizing the dollar. Giancarlo has appeared before Congress three times this summer to advocate this approach.

Like Brainard, Giancarlo has said a digital dollar would benefit the U.S. both in terms of quickly distributing or transferring funds when needed, as well as continue to maintain the dollar’s dominance in the global economy.

Many questions remain before the U.S. can even consider a CBDC, Brainard said Thursday. They include whether a CBDC issued by the Fed would be legal tender under the law.

“A significant policy process would be required to consider the issuance of a CBDC, along with extensive deliberations and engagement with other parts of the federal government and a broad set of other stakeholders,” she said. 

“... The Federal Reserve has not made a decision whether to undertake such a significant policy process, as we are taking the time and effort to understand the significant implications of digital currencies and CBDCs around the globe.”