House financial services Committee Hearing
Overview
For questions on the note below, please contact Edmund Perry at (202) 547-3035.
On May 26th, the House Financial Services Committee held a hearing entitled “Digital Assets and the Future of Finance: Examining the Benefits and Risks of a U.S. Central Bank Digital Currency (CBDC).” The sole witness in the hearing was the Board of Governors of the Federal Reserve System (Fed) Vice Chair Lael Brainard.
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Committee Chair Maxine Waters (D-CA) voiced concerns that a foreign CBDC could erode the U.S. dollar’s (USD) status as the world’s reserve currency, but she said that the U.S. must not follow the lead of countries like China in eliminating privacy through a CBDC.
- Committee Ranking Member Patrick McHenry (R-NC) said that he has strong concerns regarding the Fed moving into the retail banking space, and he said that the Fed should only issue a CBDC with the expressed legislative approval of Congress.
- Fed Vice Chair Lael Brainard said that the Fed has made no decision on whether to issue a CBDC at this time. She said that the Fed would only move forward with approval from the White House and Congress, but refused to commit to the Fed only issuing a CBDC if authorized by legislation. Brainard did say, however, that explicit legislative approval would be the ideal path for issuance of a CBDC.
SummarY
Opening Statements and Testimony
Committee Chair Maxine Waters (D-CA)
Cryptocurrencies have the potential to improve payments, but there are clear risks in some cryptocurrencies such as the volatility found even in stablecoins. This was seen in the Terra collapse. A CBDC could harness the efficiencies of cryptocurrencies combined with the full faith and credit of the U.S. dollar. As we explore a potential CBDC, we should remember that we may be in the midst of a digital asset space race. America cannot be left behind its competitors, and we must preserve our status as the world’s reserve currency.
A foreign CBDC could chip away at the dollar’s leadership status because of the potential for lower cost payments. China’s CBDC has many privacy deficiencies that we must avoid when creating our own CBDC. A CBDC should be designed to promote financial inclusion. We should lead in this space so that we can extend American values into the international CBDC conversation.
Committee Ranking Member Patrick McHenry (R-NC)
Real innovation happens outside the walls of bureaucracy in the private sector. I have been exploring whether the Fed even has the authority to launch a CBDC. We are also exploring what impact the CBDC would have on the Fed’s ability to impose its monetary policy goals. Nobody has made a compelling space on why we should expand the Fed’s authority into retail banking or how a CBDC would not further politicize the Fed. There is potential for significant harm to our financial system if we do not closely examine the consequences of a CBDC.
I appreciate Fed Chairman Jerome Powell’s deliberate approach to this issue to ensure that we do things right rather than just prioritizing moving to market quickly. I agree with Chairman Powell’s belief that the Fed should not issue a CBDC without clear support from the Executive Branch and Congress.
Lael Brainard, Vice Chair, Federal Reserve
We have seen massive turmoil in the stablecoin space that makes it clear that we must create a stronger framework for this industry. We should consider not only whether we need a CBDC today, but whether there may be a point where we will need a CBDC. We have made no decision about whether we should issue a CBDC at this time. There are risks from both creating and not creating a CBDC. We are already seeing a massive decline in the use of physical cash. We must ensure robust use of central bank issued currency and avoid fragmented “walled garden” payment systems.
We believe that there is a potential for a digital dollar to improve the existing payment system by coexisting and complimenting stablecoins and commercial bank money.
Discussion
Congressional Authorization
McHenry (R-NC): Is legislation necessary for the issuance of a CBDC? Brainard: We would not move ahead without support from the White House and Congress. Ideally, that would take the form of authorizing legislation.
Luetkemeyer (R-MO): Do you believe that we have to have legislation to authorize the creation of a CBDC? Brainard: Ideally, we would like legislative approval. I believe that the Executive Order gave the Department of Justice the responsibility to opine on this topic. We believe that Congress should be engaged on this issue.
Barr (R-KY): How is Fed coordinating with Treasury? Would you create a CBDC if there is no Congressional authorization? Brainard: I have not been engaged in these conversations. I will not speculate on this hypothetical conversation.
Loudermilk (R-GA): Would you issue a CBDC without an authorizing law from Congress? Brainard: We do not intend to proceed without the support of the Executive Branch and Congress, and it would be ideal to have an authorizing law.
International Competitiveness
Waters (D-CA): Is a U.S. CBDC essential to preserve the role of USD as the world’s reserve currency? How do you view the Fed’s role with other agencies in the President’s Executive Order? Brainard: This is a central question as we explore the potential use of a CBDC. We maintain many benefits from being the dominant payment currency in the world. China has already introduced the digital yuan and the ECB is fairly advanced along this path. If a number of our major economies launch CBDCs, it will be a factor in our consideration of the issue. We are working with other agencies and expect to have strong conversations led by the Department of Treasury (Treasury).
Luetkemeyer (R-MO): Is the Fed moving fast enough to compete with other countries that are planning to issues CBDCs? Would you benefit from more involvement with private innovators? Brainard: We work alongside the private sector to ensure that we are taking in the best possible ideas to develop this project at an appropriate pace.
Beatty (D-OH): How do you think about this issue in terms of international competitiveness? Brainard: We cannot take the global status of the dollar for granted. We must remain competitive. The administration plans to expand broadband coverage and also offer offline systems so that this can meet the needs of all Americans.
Steil (R-WI): Will this address threats to the dollar’s role as the world’s reserve currency? Brainard: This will allow us to continue America’s payment dominance on the international stage. We have to remain competitive, and we cannot allow our role as the world’s reserve currency for granted.
Stablecoins
Sherman (D-CA): What should the Fed do to protect stablecoin investors? Brainard: We are focused on the unstable nature of stablecoins. Congress should legislate a regulatory regime for stablecoins. There are significant concerns over underlying assets and runs on stablecoins.
Gonzales (R-OH): Can stablecoins be successful with proper reserves? Brainard: Yes. A well-regulated stablecoin with high standards could be beneficial. We believe that these regulations should be extremely robust and akin to bank regulations. A CBDC could still be potentially complimentary to these stablecoins.
Gottheimer (D-NJ): How would this interact with existing stablecoins? Brainard: Stablecoins should be subject to strong prudential regulations. Having a digital currency that is backed by the faith of the government would be unique.
Budd (R-NC): What are you trying to solve that is not already being solved by stablecoins? Brainard: The full faith and backing of the government makes a CBDC play a different role than private currencies. We hope to play a role alongside the private sector.
Auchincloss (D-MA): If a stablecoin is fully backed with currency, how does it not have the backing of the U.S. government? Brainard: This is akin to money market funds. We have seen runs on money market funds. A CBDC would improve the interoperability of stablecoins.
CBDC Benefits/Risks
McHenry (R-NC): What problems would a CBDC solve for? Brainard: We are focusing on the future state of our financial system. There are risks of creating a CBDC, and there are risks in not having one. This could address the declining use of central bank-issued cash. There is also a risk that private stablecoins could become the primary form of the digital dollar, leading to fragmentation of the payment system.
Himes (D-CT): What are the inefficiencies in the current payment system? Brainard: Many people, mostly marginalized communities, are still wary of our traditional payment system.
Scott (D-GA): How would a CBDC address financial inclusion? Brainard: The primary concern is price and fee concerns. There are other products trying to address this such as lower cost accounts. Consumers are moving to online banking payment methods. A CBDC could be part of a payment system that lowers transaction costs.
Casten (D-IL): Does a CBDC have to be a liability of the Fed? Does that mean that it is always limited to M1 money supply issues? Why would commercial banks find this valuable? Brainard: Yes. It would be a digital analogue of cash. Consumers are moving away from using deposit accounts for payments. We do not know yet how banks will respond to this.
CBDC Structure
Posey (R-FL): If people were paid in a CBDC, would it threaten the ability of commercial banks to fund their lending activities through deposits? Brainard: Anything we did in this space would have to allow for banks to remain important intermediaries in our financial system. We believe that if it were designed without interest, it would not diminish deposits in the banking system. This is something we are considering as we think about designing a CBDC.
Davidson (R-OH): Would it be essential for a CBDC to work like cash in offering permissionless peer-to-peer transactions? Brainard: That is a primary question in our work. We are working to balance privacy concerns with AML and KYC concerns.
Budd (R-NC): How do you plan to protect privacy? Brainard: One of our core principles would need to be privacy protection. We would not have deposits at the Fed. Instead, we would look to create an intermediated system where the banks play a similar role as they do now.
Rose (R-TN): Is the Fed trying to move away from the use of cash? Would this lead to more politicization of the Fed? Brainard: No. This is a shift in market trends that is being seen around the world. A CBDC would not raise any political questions that are different than deposits in bank accounts. This would not expand the political power of the Fed.
Foster (D-IL): Do you feel that there should be additional legislation on verifying digital identities before issuing a CBDC? Brainard: We want to strike a balance between privacy and identification by using banks as intermediaries similar to the current system.
Cryptocurrencies
Hill (R-AR): Are blockchain transactions cheap? Brainard: They are typically quite expensive, and settlement times are not instantaneous.