Banking

Lawmakers aren’t ready to rubber-stamp Fed digital dollar

WASHINGTON — The Federal Reserve has indicated it would need congressional help if the central bank moves ahead with a plan to create a digital dollar. But lawmakers aren’t yet ready to give their stamp of approval.

At a hearing Wednesday, Senate Banking Committee members raised questions about how a Fed-designed digital currency would be structured, how it would complement the private sector and whether a digital dollar is even necessary, among other concerns.

Some Democrats have appeared opened to the idea of a central bank digital currency, especially if a digital dollar is paired with a proposal to provide free digital wallets. Yet they pleaded for caution at the hearing.

“It could help improve financial inclusion, efficiency, and the safety of our financial system — if that digital public money is well-designed and efficiently executed, which are two very big ‘if’s,'” said Sen. Elizabeth Warren, D-Mass., who chairs the economic policy subcommittee.

“It could help improve financial inclusion, efficiency, and the safety of our financial system — if that digital public money is well-designed and efficiently executed, which are two very big ‘if’s,'” said Sen. Elizabeth Warren, D-Mass.

Bloomberg News

Republicans, meanwhile, warned that the creation of the central bank digital currency would turn the Fed into a direct competitor of private banks.

“We don’t need a state-sponsored bank interfering with this successful free enterprise system,” said Sen. Pat Toomey, R-Pa., the ranking member of the full committee.

In a video message last month, Fed Chair Jerome Powell said the central bank would publish a discussion paper this summer detailing its current thinking on central bank digital currency and digital payments.

Although the decision to move forward with a central bank digital currency in the U.S. lies with the Fed, most believe that the central bank would need authorization from Congress in order to maintain “wallets” or digital accounts to store a digital dollar. Powell has also pledged to seek congressional support before the Fed would issue a digital dollar, or even launch a pilot program.

But senators said there were still too many unanswered questions about central bank digital currency.

Sen. John Kennedy, R-La., the ranking member of the subcommittee, said a digital dollar should be narrowly defined so it would not supplant existing currency.

“I’m not convinced that CBDC should be used to replace the paper dollar, or to replace bank deposits,” Kennedy said. “If the U.S. chooses to hold the CBDC, it needs to do so, it seems to me, in a way that complements our current financial system.”

Numerous nations are exploring a central bank digital currency as cryptocurrencies such as Bitcoin and Ethereum gain popularity. One of the major players is China, which is farther ahead of the U.S. in developing a CBDC.

With private cryptocurrencies having proven volatile and having facilitated illegal activity, Warren said the Fed does have an opportunity to offer a better alternative.

“In theory, a digital currency issued and backed by a central bank could provide the advantages of cryptocurrency without those risks,” said Warren. “The Federal Reserve, a trusted institution, could provide a digital version of cash to the public that is secure, stable and accepted everywhere.”

Separate from a digital dollar, Senate Banking Committee Chairman Sherrod Brown, D-Ohio, has called for the creation of free FedAccounts that any American could access at a bank, credit union or post office. He has previously called the Fed’s study of a central bank digital currency a “natural complement” to his plan.

But on Wednesday, he made clear he is not sold on the concept of cryptocurrencies in general.

“We hear all kinds of promises about how crypto and digital currencies would be more inclusive alternatives to the current banking system, but the approaches offered by crypto companies, so often are just simply not solutions they’re just another volatile risky asset for Wall Street speculation and putting people’s hard earned money, and essentially our entire financial system at risk.”

Powell said in the video message that regardless of the Fed’s decision about developing a digital dollar, the Fed would “expect to play a leading role in developing international standards for CBDC.”

Proponents of the U.S. creating a central bank digital currency argue that it could expand financial inclusion to those shut out of the conventional banking system and provide long-awaited access to instant payments.

“If you’re poor today, a bank account can be dangerous for you. It has a lot of fees [and] you might not understand when those fees are going to be levied,” said Lev Menand, an academic fellow and lecturer at Columbia Law School and a witness at the hearing. “One of the benefits of a CBDC account offered by the Federal Reserve [is] it would be provided to the public without profitability concerns.”

But others were skeptical that a digital dollar effort could actually achieve that purpose.

“In my view, turning the Fed into a retail bank is a terrible idea. Our retail banks do a great job of serving the needs of consumers because they compete with one another in the private sector,” said Toomey.

Sen. Bill Hagerty, R-Tenn., echoed Toomey, questioning whether the central bank digital currency is the right answer for unbanked populations.

“Can we better help those who are unbanked and underbanked by removing costly regulations or by continuing to encourage banks to expand their coverage rather than providing a public-run banking option at the Fed?” he said.

A growing number of financial institutions and trade groups are angling to play a facilitating role in a central bank digital currency as discussions on the issue heat up in the U.S. One concern is that blockchains will replace the transaction processing steps that generate fee income for banks.

It remains to be seen how a central bank digital currency would be designed in the U.S., but one of the open questions is how or if the banking system would be involved in processing and storing digital dollars.

“We shouldn’t take steps that could threaten to disintermediate, destabilize or drain significant deposits from the private sector lenders that underpin the strongest and most exceptional economy in the world,” Hagerty said.

However, several lawmakers also expressed concern that China’s effort to develop a digital yuan would leave the U.S. behind if the Fed chooses not to create a central bank digital currency. That could threaten to displace the dollar as the world’s reserve currency, they said.

China is testing its digital yuan with major retail chains such as Starbucks and McDonald’s, and has distributed the currency directly to consumers in an attempt to boost adoption ahead of a launch that could come as early as this year.

“Even beyond the digital yuan, it’s no secret that China and many other countries are well ahead of us with regard to financial innovation,” said Sen. Steve Daines, R-Mont. “While I’m not yet convinced we need a digital dollar, I strongly support further exploration in this area for this reason.”

Christopher Giancarlo, former chairman of the Commodity Futures Trading Commission and a witness at the hearing, agreed that China’s ambitions to be a leader in the digital currency space is “of critical importance.”

“Whether we eventually want a digital dollar or not — it’s almost a second order of magnitude issue,” he said. “The first issue is that we lead in the technological development [and] we lead in the standard setting.”


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