What does Lael Brainard’s rise in the Fed mean for crypto?

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The U.S. Fed­er­al Reserve and cryp­to mar­kets rarely see things in the same light, but on one impor­tant devel­op­ment — the ele­va­tion of Lael Brainard to Fed vice chair, or sec­ond-in-com­mand of the most impor­tant cen­tral bank in the world — both may have an oppor­tu­ni­ty to benefit.

Crit­i­cal­ly, on the position’s tra­di­tion­al demands, Brainard is high­ly qual­i­fied. By all accounts, she is well-regard­ed, smart, thought­ful and impor­tant­ly, she under­stands the intri­ca­cies of and risks in the finan­cial sys­tem. Although deemed by some mar­ket par­tic­i­pants as a “dove” — an offi­cial who con­sis­tent­ly advo­cates for low­er rates and more stim­u­lus than their “hawk­ish” col­leagues — all else equal, her pol­i­cy record does not dif­fer sig­nif­i­cant­ly from the cen­trist views of Fed Chair Jerome Powell.

So what makes her unique amongst those at the very top of the glob­al finan­cial sys­tem? A spe­cial focus on inno­va­tion, inclu­sion, pay­ments, and yes — on cryp­to. Brainard has shown that she’s been ahead of the curve over the past few years at the Fed, and has stat­ed that she will con­tin­ue to press for inno­va­tion and respon­si­ble devel­op­ment in pri­vate indus­try. “The Fed­er­al Reserve has oper­at­ed along­side the pri­vate sec­tor, pro­vid­ing a sta­ble cur­ren­cy and oper­at­ing key aspects of the pay­ments sys­tem, while also sup­port­ing pri­vate-sec­tor inno­va­tion,” Brainard recent­ly said to the House Finan­cial Ser­vices Com­mit­tee. “The rapid ongo­ing evo­lu­tion of the dig­i­tal finan­cial sys­tem at the nation­al and inter­na­tion­al lev­els should lead us to frame the ques­tion not as whether there is a need for a cen­tral-bank-issued dig­i­tal dol­lar today, but rather whether there may be con­di­tions in the future that may give rise to such a need.” 

Indeed, as pol­i­cy­mak­ers in Wash­ing­ton D.C. have recent­ly come to real­ize, the U.S. being a glob­al cen­ter of finan­cial inno­va­tion cre­ates jobs and helps rein­force the U.S. dol­lar as the world’s most impor­tant reserve cur­ren­cy, dig­i­tal or oth­er­wise. From U.S. pol­i­cy­mak­ers’ per­spec­tives, the “exor­bi­tant priv­i­lege” con­veyed through a dom­i­nant reserve cur­ren­cy should be guard­ed as a com­pet­i­tive strength. 

Brainard will now have a unique oppor­tu­ni­ty to bridge impor­tant gaps, both real and per­ceived, and help fos­ter a health­i­er debate on the mer­its of cryp­to broad­ly and of cen­tral bank dig­i­tal cur­ren­cies (CBD­Cs) specif­i­cal­ly. The chal­lenges are not insignif­i­cant. Deep skep­ti­cism of cryp­to lies among tra­di­tion­al­ists, includ­ing at cen­tral banks and oth­er impor­tant finan­cial insti­tu­tions. For instance, Euro­pean Cen­tral Bank Pres­i­dent Chris­tine Lagarde recent­ly offered point­ed crit­i­cism of the cryp­to indus­try and its risks, say­ing “it is worth noth­ing” and is with­out an anchor of safe­ty. Brainard her­self in ear­li­er years not­ed that cryp­to has “no trust­ed insti­tu­tion stand­ing behind it” and can exhib­it extreme volatility. 

The recent Ter­ra deba­cle, which mir­rored sim­i­lar tra­di­tion­al finance (Trad­Fi) events in the past, gave more ammu­ni­tion to crit­ics. Oth­er offi­cials have been down­right hos­tile toward the dig­i­tal asset indus­try from the out­set, despite its promise of inclu­sion and the ben­e­fits of inno­va­tion. Cryp­to enthu­si­asts can be even more sharp-elbowed in their cyn­i­cism toward any ele­ments of Trad­Fi, with some argu­ing that the Trad­Fi sys­tem is bro­ken beyond repair. Unfor­tu­nate­ly, trib­al­ism has spread into this debate now as well, with inno­va­tion advo­cates and sta­tus quo clingers each hav­ing set­tled into their own camps. 

How­ev­er, there is com­mon ground and much that stake­hold­ers across the spec­trum can learn from each oth­er. As Fed vice chair, Brainard is in a posi­tion to advo­cate for a healthy sym­bi­ot­ic rela­tion­ship between gov­ern­ment, the inde­pen­dent cen­tral bank, and the inno­v­a­tive pri­vate sec­tor. She has spo­ken reg­u­lar­ly on cryp­to and on the mer­its and risks that ancil­lary inno­va­tions like decen­tral­ized finance (DeFi) are bring­ing to mar­ket. The Fed itself, typ­i­cal­ly slow and method­i­cal, is quick­en­ing its pace of research in dig­i­tal pay­ments, dis­in­ter­me­di­a­tion and CBDC design. Brainard has not­ed that the Boston Fed “is col­lab­o­rat­ing with researchers at MIT in a mul­ti­year effort to build and test a hypo­thet­i­cal dig­i­tal cur­ren­cy ori­ent­ed to cen­tral bank uses.” More­over, new pay­ment tech is final­ly being oper­a­tional­ized with­in the Fed, with­out crowd­ing out pri­vate sec­tor inno­va­tion. For instance, the Fed intends to oper­ate its new retail real-time gross set­tle­ment sys­tem, Fed­Now, start­ing in 2023, not­ing that it will “oper­ate along­side pri­vate-sec­tor real-time gross set­tle­ment ser­vices for instant pay­ments.” More­over, the Fed isn’t alone in pay­ments and CBDC research. The Euro­pean Cen­tral Bank, Bank of Eng­land, Bank of Japan and Bank for Inter­na­tion­al Set­tle­ments all have ded­i­cat­ed resources and effort to the area. 

The dig­i­tal asset indus­try needs more seri­ous-mind­ed advo­cates in posi­tions of pow­er and trust. To date, Brainard has been cau­tious but has shown an increas­ing opti­mism toward cryp­to. Going for­ward, she has an oppor­tu­ni­ty to whole­heart­ed­ly push back on vest­ed inter­ests that have not served the pub­lic inter­est well. That includes more direct­ly address­ing hold­outs with­in gov­ern­ment try­ing to pro­tect the sta­tus quo as well as stodgy finan­cial firms jeal­ous­ly shield­ing their rent-seek­ing busi­ness mod­els.  

Sup­port from cen­tral bank lead­ers will inspire more respon­si­ble devel­op­ment while acknowl­edg­ing that inno­va­tion is messy, non-lin­ear and absolute­ly essen­tial to a well-func­tion­ing econ­o­my. It’s been said before that cryp­to would ben­e­fit by hav­ing more “adults in the room” as its cham­pi­ons — this is Brainard’s opportunity.

The Fed, too, stands to ben­e­fit as it will show the pub­lic that a tra­di­tion-mind­ed insti­tu­tion near­ly 110 years old can still thought­ful­ly adapt to change and reflect the mind­set of the peo­ple that it serves. To date, the pace has been slow, since skep­ti­cism is nat­ur­al for pol­i­cy­mak­ers who tend to be more evi­dence-based and out­come-ori­ent­ed. How­ev­er, mov­ing the Fed toward sup­port­ing a “stake­hold­er econ­o­my” with broad-based growth aligns well with the utopi­an goals of many in the cryp­to com­mu­ni­ty. An effec­tive dig­i­tal dol­lar, func­tion­ing along­side pri­vate cryp­to assets, would assuage con­cerns about trans­mit­ting mon­e­tary pol­i­cy effec­tive­ly while still achiev­ing broad pol­i­cy goals. “It is impor­tant for the Unit­ed States to play a lead role in the devel­op­ment of stan­dards gov­ern­ing inter­na­tion­al dig­i­tal finance trans­ac­tions involv­ing CBD­Cs con­sis­tent with the norms of pri­va­cy, acces­si­bil­i­ty, inter­op­er­abil­i­ty, and secu­ri­ty,” Brainard has said.

Though it would be years away, some in tra­di­tion­al finance, in the gov­ern­ment, and even, iron­i­cal­ly, in cryp­to itself fear and will resist a CBDC or any involve­ment of the Fed in cryp­to. We can expect to hear spec­u­la­tion of dystopi­an out­comes and a new sur­veil­lance mech­a­nism for cen­tral­ized author­i­ties to wield against the ordi­nary peo­ple. On pri­va­cy, these con­cerns have some mer­it, and it’s yet to be addressed how to cre­ate a CBDC that’s pri­va­cy-cen­tric. Any poten­tial CBDC must be care­ful­ly designed, thought­ful­ly imple­ment­ed, and take into account legit­i­mate issues of over­reach. That said, pol­i­cy­mak­ers should not be dis­suad­ed by disin­gen­u­ous claims that are actu­al­ly meant to pro­tect incum­bents. Nor should the cryp­to indus­try accept a solu­tion that is sim­ply the sta­tus quo dis­guised as change.

Over the past few years, numer­ous intel­li­gent and dri­ven pro­fes­sion­als have moved from tra­di­tion­al finance to cryp­to because they see a once-in-a-gen­er­a­tion oppor­tu­ni­ty to pos­i­tive­ly influ­ence, if not remake alto­geth­er, the finan­cial sys­tem. The promise is for a fair­er, more trans­par­ent, more resilient and bet­ter finan­cial sys­tem, though that change could still be a long way off. In the mean­time, the Fed has an impor­tant role to play in help­ing to advo­cate for pri­vate sec­tor inno­va­tion and col­lab­o­ra­tion, includ­ing in cryp­to. Lael Brainard should seize this opportunity.

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