In a hearing today of the U.S. House Committee on Financial Services, Federal Reserve Chairman Jerome Powell indicated that Facebook's work on a digital currency through Libra has shaped the U.S. central bank's progress on a central bank digital currency (CBDC).

In the hearing, Rep. Bill Foster of Illinois asked Powell about recent comments from his colleague, Federal Reserve Governor Lael Brainerd. Foster took Brainerd's speech to mean that establishing a digital dollar would help preserve the role of a sovereign U.S. dollar in the global financial system. That touched off a short exchange about the Federal Reserve's work on a U.S. digital dollar.

Powell affirmed that he shared Brainerd's goals but stopped short of endorsing a CBDC: "Preserving the centrality of a central, widely accepted currency…that is trusted is an enormously important thing. I think whether a digital currency moves us along that path or not is an open question." 

He said that the Federal Reserve Bank, like most other major central banks, is looking to answer that open question. "We're working hard on it," he said, before pointing out that the U.S. economy is a bit different from the European economies where CBDC talks seem most active (e.g., Sweden), because Americans haven't moved away from cash payments to the same degree.  

Foster pushed back that the curve of adoption could change the fiat landscape in a matter of years. Powell agreed, citing Facebook's recent efforts to create a digital currency. "Libra lit a fire under that and was a bit of a wake-up call that this is coming fast and could come in a way that is quite widespread and systemically important fairly quickly," he said.

But that doesn't mean the U.S. will rush the process, he concluded. "We have not decided to do this, though," he made clear. "I think there are many questions that need to be answered around a digital currency for the United States, including…cyber issues, privacy issues—many, many operational alternatives present themselves, so we're going to be working through all that." 

Facebook unveiled Libra, its private digital currency, back in June 2019. Since then, however, the project has been shedding partners, including a single day in October when eBay, Stripe, Mastercard, and Visa all pulled out. Many believed congressional pressure played a role. Regardless of that particular project's prospects for success, the Fed is paying close attention.