Yesterday the U.S. House Committee on Financial Services held a hearing on a potential digital dollar. Several Republican representatives quizzed Federal Reserve Vice Chair Lael Brainard about whether or not the issuance of a central bank digital dollar (CBDC) would require legislation.
Governor Brainard repeatedly referred to the working paper on CBDC issued by the Fed in January. It states, “The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.” The use of the terms “ideally” and “intend” were interpreted as caveats by the Republicans.
“It seems like there’s some wiggle room you’re trying to show,” said Patrick McHenry, the Ranking Republican on the Committee. He emphasized that the Fed is constrained by statute, to which Brainard responded that it’s clear that the Federal Reserve is precluded from offering individual accounts.
Representative Luetkemeyer considered the term “ideally” as hedging and tried to clarify what was needed in the absence of legislation. Governor Brainard deferred to the Department of Justice. Congressman Loudermilk asked if the Fed would confirm that it won’t proceed without authorizing legislation but didn’t get a definitive response.
Accelerating a CBDC decision
Separately, Governor Brainard highlighted that democratic debates can slow the launch of initiatives, so there’s a need to have the discussions urgently. A debate could take five years, followed by five years for implementation.
This was in response to a question from Representative Pressley, who pointed to the Federal Reserve being a laggard on faster payments. The UK implemented its platform in 2007 and FedNow is only launching in 2023 at the earliest.
“FedNow didn’t get started for a long time because of public debate of the nature that we’re having here today,” said Governor Brainard. The FedNow formal process started in 2015, with a decision in 2019. “The private sector is quite excited about it (FedNow) at this juncture, although there was a lot of ambivalence in the lead up to that announcement.”
Federal Reserve CBDC motivations, dollar dominance
Governor Brainard outlined the key motivations behind a potential CBDC. The use of cash in the U.S. has declined over the last five years from 31% to 20% of payments. So while a CBDC might not be needed right now, the central bank wants to be prepared for the future.
Stablecoins are considered a risk to financial stability, and with dominant stablecoin firms, there’s a concern about fragmentation of payments. A potential CBDC could provide interoperability between private payment systems.
And finally, there’s the international dimension. With Europe, China and other states potentially issuing a CBDC, it could impact the dollar’s dominance.
“I don’t think we can take the global status of the dollar for granted,” said Governor Brainard. “And in a world where other jurisdictions move to the issuance of their own digital currencies, it is important to think about whether the United States would continue to have the same kind of dominance without also issuing. It’s possible, but it’s a very important question.”
She also mentioned the need to have a seat at the table for internatinoal standard-setting to support American values. And she questioned whether a country with no plans to issue a CBDC would have the same gravitas in the standard-setting process.
The stablecoin debate
Several representatives argued for leaving innovation to the private sector and stablecoins. Representative Foster suggested stablecoins hold their backing reserves at the Federal Reserve. And Congressman Gonzalez believes that stablecoins could be more reliable if they have high quality reserves, liquidity, transparency and strong redemption rights.
In response, Governor Brainard acknowledged that with strong bank-style regulation, it’s possible to solve the instability of stablecoins. However, fragmenting the payment system leads to inefficiencies and this is where a CBDC could play a role in providing interoperability.
The question of privacy and anonymity
The topics of government control and privacy were only emphasized by Representatives Rose and Warren Davidson. Rose pointed to Canada blocking the bank accounts of truckers protesting over Covid. “Would a CBDC make it easier for the Federal government to block individuals it disagrees with from accessing the financial system,” asked Rose. Brainard responded that it would be no different from accessing the banking system because banks would intermediate a CBDC.
Congressman Warren Davidson is concerned about moves by the Treasury to ban self custody of digital currencies. “While cash isn’t illegal yet, there’s an effort to make the digital equivalent of cash illegal,” said Davidson. Brainard deferred to Treasury on the self custody point. She described the topic of anonymity as one of the most “profound” issues made in the working paper, with the tension between anonymity and anti money laundering processes.
Davidson concluded, “if you turn a central bank digital currency into this creepy surveillance tool and don’t preserve the permissionless characteristics of it, it literally is what China is developing. And we shouldn’t imitate them. We should protect America’s way of life.”