Concept of Central bank digital currency and fintech

US House Financial Services Committee hearing critical of CBDCs

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The U.S. House Subcommittee on Digital Assets heard from five witnesses on a U.S. central bank digital currency (CBDC), most of whom were overwhelmingly negative about a new form of digital national currency. Several bills looking to fend off a CBDC in the U.S. were also up for discussion.

The hearing of the U.S. House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion, saw five expert witnesses give their thoughts on a U.S. CBDC, most of which were overwhelmingly negative.

The hearing was titled “Digital Dollar Dilemma: The Implications of a Central Bank Digital Currency and Private Sector Alternatives,” and the five witnesses were Digital Asset CEO Yuval Rooz, Senior Vice President of the Bank Policy Institute Paige Paridon, Christina Parajon Skinner of the University of Pennsylvania, Norbert Michel from the Cato Institute, and Columbia University lecturer Raúl Carrillo.

In 2023, over 114 countries representing over 95% of global gross domestic product (GDP) are exploring the establishment of a CBDC, with 11 countries already having launched their own digital currencies and a further 21 countries trialing pilot programs, including China, India, and Russia.

Despite this global enthusiasm, the temperature in the U.S. seems to be decidedly cold on the idea of a CBDC.

This was reflected in the opening remarks of subcommittee Chair French Hill (R-AR), who set the tone for the hearing:

“Let me be unequivocally clear here for this audience: there is no support for a CBDC in Congress, except from those on the fringes who think somehow a CBDC might be an amazing solution to many unstated global problems.”

He was also keen to point out that legislation passed by Congress was the only route to any hypothetical CBDC in the United States.

“The Federal Reserve does not have the authority to issue a U.S. CBDC,” said Hill, who went on to say that “while a retail Federal Reserve issued CBDC is not in the cards, there are many significant areas for improvement in our U.S. payments system… Payments can be modernized by modifying the existing payments infrastructure through innovations led by the private sector.”

Partisan divisions were on full display in the hearing as subcommittee ranking member Stephen Lynch, a Democrat, cautioned against “false narratives and fearmongering, much of it coming from the cryptocurrency industry itself,” when it comes to CBDCs.

Uncoincidentally, on the same day as the hearing, Lynch also reintroduced legislation to develop an electronic version of the U.S. dollar and announced the creation of a Congressional Digital Dollar Caucus “to keep Congress updated on critical issues related to the digital dollar.”

Despite accusation of fearmongering, Rep. Warren Davidson (R-OH) suggested that a wrongly structured system of money is “perhaps the biggest existential threat to Western civilization”—clearly, he is also not afraid of hyperbole.

The hearing’s witnesses largely fell on this side of the fence, if perhaps in less dramatic language, one of the principal concerns being around privacy.

Privacy top of the agenda

Much oxygen at the hearing was expended, huffing and puffing over the privacy issue.

Skinner of the University of Pennsylvania pointed to the advantage CBDCs could provide to authoritarian regimes, which “can be expected to use the data gathered from CBDC to perfect their civic control—to monitor speech as expressed through one’s purchases and movement as indicated by one’s substantive and geographic payments patterns.”

This is also a concern for liberal states, said Skinner, because “it may be convenient to imply that constitutional democracies would not cross such lines, but history teaches that individual liberties are often infringed during real or claimed emergencies.”

Dr. Michel of the Cato Institute had a similar take, suggesting that “while a CBDC does not offer any unique benefit to the American people, it does pose serious risks to financial privacy, freedom, markets, and cybersecurity.”

A rare dissenting voice amongst the chorus of CBDC critics, Carrillo, from Columbia University, suggested that U.S. government agencies already “enjoy virtually unfettered access to our financial records and regularly share data, information, and knowledge.” This, he said, means that “crude opposition to CBDC based on surveillance grounds is throwing the baby out with the bathwater.”

This was a view shared by Rep. Lynch, who suggested a CBDC could be designed to protect personal data while including features to counter money laundering and terrorist financing.

“It is counterintuitive that my colleagues should be raising concerns about data privacy while thousands of private companies—domestic and foreign—are surveilling, aggregating, and selling consumer data each and every day,” argued Lynch. “As policymakers, we should be asking questions about how a digital dollar could be designed to maximize privacy and prevent exploitation of personal data.”

Other witness arguments

The only other witness at the hearing who seemed to have a more generous take on CBDCs was an industry figure, Rooz, the co-founder and CEO of Digital Asset, the New York-based technology company that created the DAML smart contract language.

“Leveraging blockchain technology to modernize financial infrastructure is critical to ensuring our continued global financial competitiveness and the dollar’s status as the world’s reserve currency,” said Rooz. “It is the rails on which digital value will be transferred.”

He went on to suggest that the costs of falling behind international peers in the space could be dire.

“I believe that the global financial competitiveness of the United States—including the dollar’s position as the world’s reserve currency—is at stake,” Rooz argued.

In contrast, Paridon, from the Bank Policy Institute—a nonpartisan policy, research, and advocacy organization representing the nation’s leading banks—was withering in her assessment of the value a CBDC offers to the U.S.

“On balance, we believe that—at this point—there is little evidence that a CBDC would bring measurable benefits to the U.S. economy or that it is necessary to defend the dollar’s status as the world’s reserve currency,” stated Paridon. “A CBDC comes with a series of difficult policy and operational issues and risks creating financial instability.”

She also noted the restraints a CBDC would put on the banking system. Under the current system, banks use customer deposits to finance loans and other investments in the real economy. Paridon said this is fundamentally different from any future system with a CBDC, “in which customers’ CBDCs could not be used by the bank to make any such loans or investments.”

She concluded that “to date, we have seen little evidence that a CBDC would bring measurable benefits to the U.S. economy or to consumers and substantial evidence that it could present serious risks to financial stability.”

Skinner concurred, outlining various issues a U.S. CBDC could cause, including “to reduce monetary privacy; to alter the nature of the property right conventionally understood to attach to public money; and dilute the version of popular monetary sovereignty that has maintained in the United States since its Founding Era.”

She summed up her testimony by stating that “technology and economic geopolitics can change rapidly, to be sure; but at least right now, the costs of introducing CBDC appear to outweigh the benefits.”

Joining in with the roast of CBDCs, Dr. Michel was similarly damning in his appraisal of the technology.

“It is distinct from both privately issued stablecoins and the faster payment networks recently launched by private banks and the Fed. A CBDC would ultimately usurp the private sector and endanger Americans’ core freedoms; it has no place in the American economy. Congress should explicitly prohibit the Federal Reserve and the Department of the Treasury from issuing a CBDC.”

In fact, one of the pieces of legislation under discussion, H.R. 3402, the “Power of the Mint Act,” would do exactly this by requiring congressional authorization prior to the introduction of a CBDC by the Federal Reserve.

This bill joined two others broadly being discussed at the hearing, H.R. 3712, or the “Digital Dollar Prevention Act,” which would effectively ban CBDC research, and the “CBDC Anti-Surveillance State Act,” spearheaded by Republican Committee member Tom Emmer, who described CBDCs in his opening remarks as “a tool the Communists have.”

But it wasn’t all painful hearing for pro-CBDC advocates. Providing some divergent opinions amongst the witnesses, Carrillo said, “the digital dollar system presents a unique opportunity, I think, to actually build financial privacy and security in this country through public infrastructure that would benefit everyone.”

In his summation, he urged policymakers to “support an array of Digital Dollar pilot programs and develop a steady rhythm of innovation, aiming to build a safe and secure financial system for all.”

As long as the development process is democratic, “so that private actors and obscure public bureaucrats from any agency do not inadvertently become the only official stakeholders and set the terms of the debate for everyone else.”

Despite the passion of opinion on display at the hearing and the urgency of some of the warnings against rushing into a new digital national currency, earlier in September, Federal Reserve Vice Chairman Michael Barr said the U.S. is far from making any decision on a CBDC, and described the Fed as still being in the “basic research” phase.

Whatever the outcome of this research, if it is allowed to continue, it seems certain that the Federal Reserve would need Congressional approval for a CBDC to even be piloted. As of Thursday’s hearing, it seems such approval will not be forthcoming.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

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