Why the US government is backing away from CBDCs

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Although the GENIUS Act seemed to be the piece of digital currency legislation that got the majority of the press during Crypto Week, two other bills also moved through the House: the CLARITY Act and the Anti-CBDC Surveillance State Act.

The CLARITY Act is self-explanatory; it aims to define which digital assets fall under the Securities and Exchange Commission’s (SEC) oversight and which fall under the Commodity Futures Trading Commission’s (CFTC) oversight; this would settle a long-standing debate that has been going on in the industry for years. However, when it comes to the Anti-CBDC Surveillance State Act, its content is true to its name (anti-surveillance), but it also deserves a closer look, mainly because the proposed bill is a steep departure from the federal government’s previous tone on central bank digital currencies (CBDCs).

From research to rejection

Just a few years ago, the U.S. government, specifically the Federal Reserve, was actively exploring the possibility of launching a CBDC. In 2020, the Boston Fed partnered with MIT on “Project Hamilton,” a technical research initiative designed to answer one question: could a digital dollar handle fast, secure, private transactions at scale? By the end of Phase One, the answer was yes.

Two years later, the Fed published “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” a paper that laid out the potential benefits, risks, and design considerations of a CBDC. The Fed said its goal was to spark public dialogue, and it invited comment from the public, academics, and financial institutions alike to further advance this conversation.

Although at that point, while nothing was set in stone, it seemed like the federal government was at least open to the idea of launching a CBDC, but now, that window of opportunity appears to have been slammed shut.

What the anti-CBDC bill actually says

The Anti-CBDC Surveillance State Act would prohibit the Federal Reserve or any of its regional banks from doing three things without explicit Congressional approval:

1. Launching or offering a retail CBDC (directly or indirectly).
2. Using a CBDC to conduct monetary policy.
3. Developing, testing, or even studying a CBDC.

In other words, this bill would stop the Fed from rolling out a digital dollar to the public, prevent it from experimenting with CBDC tools behind the scenes, and block it from using a digital currency to control things like interest rates or money supply mechanisms.

The bill’s name says it all: surveillance. Lawmakers worry that a government-issued digital dollar could become a financial surveillance tool, allowing the state to track, restrict, or even freeze accounts based on spending habits or political behavior.

As Rep. Tom Emmer put it, a CBDC is “government-controlled, programmable money that could give the federal government the ability to surveil and restrict Americans’ financial activity. Every dollar you spend, where you spend it, and who you spend it with would all be visible to and tracked by the watchful eyes of Washington.”

That said, it becomes clear that the bill is a preemptive attempt at ensuring there isn’t a future where the U.S. government has direct access to and control over people’s money.

The real economic risk of CBDCs: bank runs 

Beyond the surveillance angle, valid economic concerns, particularly around financial stability during moments of panic, run the risk of occurring due to a Fed-issued CBDC.

A CBDC would make it easy for people to pull their money out of commercial banks and store it in a private, self-custodied digital wallet backed by the Fed. In times of crisis, this convenience could accelerate a bank run before traditional financial systems have time to react.

Because banks operate on fractional reserves, they lend out most money people deposit and only hold a small portion in cash. If too many people withdraw their funds at the same time, the bank could run out of cash and subsequently fail to meet its obligations (pay its liabilities), which could result in the bank itself failing and having to shut down.

We’ve already seen this happen; a bank run played a major role in the collapse of Silicon Valley Bank in 2023, and that’s the kind of scenario lawmakers are trying to avoid, especially when a CBDC could make it 10x easier for people to withdraw their money at the first sign of trouble.

Stopping CBDCs won’t stop financial surveillance

The economic risk of a CBDC causing a bank run is valid; however, the surveillance concerns might be a bit overblown.

Governments already have the power to freeze accounts and seize assets, CBDC or not. Canada did it during the 2022 trucker protests, freezing bank accounts of drivers and donors. In digital currency, law enforcement has worked with exchanges to block the movement of stolen assets numerous times.

So, if the primary goal of the Anti-CBDC Act is to prevent government overreach, the truth is that this ship has already sailed; the surveillance genie is out of the bottle. The financial system already allows for account freezes, asset seizures, and transaction monitoring. Whether it’s CBDCs or traditional bank accounts, the infrastructure to “watch” your money already exists, so trying to prevent it from happening again may have little success.

The Anti-CBDC Surveillance State Act is still in the early innings. It has passed the House and is now awaiting its first vote in the Senate. The proposed bill is so early in its journey that it could stall out, could be rewritten, or it could pass and permanently block the Fed from ever issuing a CBDC. As time goes on and we see how the bill is progressing, we will have a better understanding of which route it takes.

However, it is clear that the government has changed its tone regarding CBDCs. The same government that once explored CBDCs as a technological upgrade to the dollar is now treating them like a threat to civil liberties and economic stability. Unfortunately, this means that the era of unchallenged, low-resistance, CBDC exploration in the U.S. appears to be over. The path to a CBDC in the USA will most likely be a rocky road with many challenges along the way.

Watch: Finding ways to use CBDC outside of digital currencies