On Wednesday, Republican Senator Ted Cruz published a Bill that bans the Federal Reserve from issuing a central bank digital currency (CBDC) direct to the public. It’s a companion Bill to one published by Republican Congressman Tom Emmer in January. Earlier this week, Democrat Congressman Stephen Lynch released another digital dollar-related Bill.
Both sets of Bills focus on privacy, but the Democrat’s draft also emphasizes financial inclusion and aims to see digital dollar pilots conducted by the Treasury, not just the Federal Reserve.
The CBDC anonymity problem
The legislators are all concerned about privacy. While cash enables anonymity, we’re not aware of any governments that are willing to support an anonymous CBDC issuance out of concerns over money laundering. Some support the idea of enhanced privacy for smaller transactions.
Even though most central banks say they will continue to support physical cash, retailers and others will become reluctant to accept cash when digital currencies become mainstream. Hence there’s likely to be a loss of financial anonymity.
On the one hand, some people resist the potential of governments to snoop on their transactions. But there’s a far darker risk. What if a central bank is told to enforce government policies to prevent certain groups of people from using its digital currency? Russia explicitly planned such laws for its digital ruble. It’s questionable whether these rules are acceptable for targeting fraudsters or tax evaders. More importantly, it’s a slippery slope.
The Emmer/ Cruz CBDC Bills
Both Emmer’s and Cruz’s Bills are very short. The core text is: “a Federal reserve bank may not offer products or services directly to an individual, maintain an account on behalf of an individual, or issue a central bank digital currency directly to an individual.”
Emmer’s statement highlights concerns over the government using CBDC for surveillance. Governments often argue that their CBDCs will provide greater privacy compared to private money. But the legislative move is also intended to support the cryptocurrency sector.
“The Fed must only craft a CBDC framework that is open, permissionless and private – meaning any digital dollar must be accessible to all, transact on a blockchain that is transparent to all, and maintain the privacy elements of cash. Anything less puts Americans on the road to CCP-style financial authoritarianism,” said Emmer.
However, it would be pretty simple to control how the currency can be used, even on a permissionless blockchain. The core issue is anonymity.
Both Republicans want a CBDC to achieve three goals:
- protect financial privacy
- maintain the dollar’s dominance
- and cultivate innovation.
The Lynch ECASH Act Bill
Lynch’s ECASH Act 28-page Bill prescribes a Treasury (versus Federal Reserve) CBDC pilot within 90 days of passing the legislation and a production digital dollar 48 months after enactment.
Financial inclusion is front and center as a policy objective. “My neighborhood in Chicago is home to one of the strongest immigrant business districts in the country, and it couldn’t run without cash,” said Congressman Jesús “Chuy” García. “Cash remains our strongest tool to promote financial inclusion while preserving privacy and security, and new digital tools should emulate it – not replace it.”
Lynch’s bill calls for both anonymity of digital currency transactions, as well as anti money laundering (AML) compliance. At first glance, these two demands appear mutually exclusive. However, CBDC models are being discussed that require AML at the point of issuing the digital currency, but once the money is in a wallet, the transactions are anonymous. Hence, the payer cannot be identified.
However, AML is often challenging for the underbanked. And this model does not address the risk of a future government preventing certain groups from having access to a digital dollar.
Meanwhile, the Biden administration published an Executive Order requiring a detailed report on a CBDC from the Federal Reserve within six months. And the Fed issued a discussion paper in January.