Congressman’s Bill To Ban Fed’s CBDC Will Heat Up Debate

Last week, Republican Congressman Tom Emmer introduced a bill prohibiting the Federal Reserve from issuing a central bank digital currency (CBDC) directly to individuals.

The proposal contains one single amendment to the Federal Reserve Act, extending section 13 to ban the Federal Reserve from offering products or services directly to an individual, maintaining an account on behalf of an individual or issuing a CBDC directly to an individual. 

This proposal comes at a crucial moment as the Federal Reserve is expected to publish its position on CBDCs in the next weeks or months. The debate over whether the U.S. needs to have their own CBDC will likely heat up during the first half of 2022. The bill doesn’t seek to ban a U.S. CBDC, just to limit the role of the Federal Reserve in issuing and controlling one. 

A U.S dollar CBDC is an electronic representation of a U.S. dollar paper bill.

CBDCs have been compared to cryptocurrencies, but there are significant differences between the two. Unlike cryptocurrencies, CBDCs don’t fluctuate as wildly, and their value is exactly like the currency they represent. CBDCs are backed by a government entity and controlled by a public authority, and usually operate in a centralized, permissioned blockchain. In some cases like China, the country built its own network to ensure that nobody could operate without their supervision. 

Allowing central banks to create their own CBDC could facilitate instantaneous transactions 24 hours a day, 7 days a week, for a fraction of the current costs. However, there are also challenges, like building a reliable network that could handle millions of transactions per second, is resilient to cyber attacks and outages and offers the same level of anonymity as cash. 

“As other countries, like China, develop CBDCs that fundamentally omit the benefits and protections of cash, it is more important than ever to ensure the United States’ digital currency policy protects financial privacy, maintains the dollar’s dominance and cultivates innovation,” said Congressman Emmer. 

See also: More Central Banks Announced CBDC Plans to Defend Monetary Home Turf vs Cryptos 

Technical developments may offer a significant degree of privacy on a blockchain, but its very nature makes complete anonymity very difficult to achieve as everything is recorded. Arguably, the entity controlling a centralized and permissioned blockchain could have access to very granular data on financial transactions. If it is a central bank, this could enable authorities to better fight fraud, but it would also allow them to monitor citizen’s spending habits. As congressman Emmer noted, “Not only would this CBDC model centralize Americans’ financial information, leaving it vulnerable to attack, but it could also be used as a surveillance tool that Americans should never tolerate from their own government.” 

Another additional hurdle for the Federal Reserve is how to become a retail bank overnight. From an operational point of view, central banks don’t have experience or resources to hold millions of accounts from individuals, offer customer service and resolve potential issues with identification and cyber-attacks, but commercial banks do.

The second hurdle, which could affect the whole economy, is the disintermediation of banks or credit card networks. A U.S. dollar CDBC will likely steer consumers from banks and card networks in big numbers, given the lower transaction costs, convenience and speed. Arguably, this decline in banks’ revenues could affect their capacity to offer other products like loans or mortgages. 

A CDBC will automatically pit the Federal Reserve against private banks in the payment sector. This concern has been raised not only in the U.S., but in other western countries too. In the U.K., the House of Lords recently issued an opinion questioning the usefulness of a CBDC but left the door open for an alternative option of a “wholesale” CBDC rather than a retail one. A wholesale CBDC would be accessible only to financial institutions and other authorized stakeholders, minimizing the risk of bank disintermediation while eliminating operational challenges.

Read more: UK Parliament Committee Sees More Risks Than Benefits in CBDCs 

Regardless of the fate of this bill, the debate on how to build a good CBDC or even if the U.S. needs a CBDC at all will likely intensify in the next months.