OVERVIEW
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Today, the Senate Banking Subcommittee on Economic Policy held a hearing entitled, “Building a Stronger Financial System: Opportunities of a Central Bank Digital Currency (CBDC).”
Key Takeaways
- Dr. Neha Narula, MIT Digital Currency Initiative, and Professor Darrell Duffie, Stanford University Graduate School of Business, said that inefficiencies in the banking system and in financial regulations have led to calls for a digital currency that offers the potential to rebuild the payment system in a way that is more inclusive, less expensive, and more efficient. Narula noted that a U.S. CBDC should have strong standards of privacy for its users, which could provide it with a large competitive advantage over instruments like the digital yuan.
- Former CFTC Chairman Christopher Giancarlo, The Digital Dollar Project, said that a CBDC could lead to more money moving into the banking system and could even be more energy efficient than the current process of minting physical money. Lev Menand, Columbia Law School, said that a CBDC could help deal with the problems presented by current deposit substitutes like cryptocurrencies, stablecoins, and Eurodollars, such as exclusion, costliness, and slow speeds. Menand and Duffie said that a CBDC could also help push undesirable cryptocurrencies out of the market.
- Menand said that cryptocurrencies enable illicit activities, threaten financial stability, and are energy inefficient. He suggested that Congress give the CFTC and the SEC authority over crypto exchanges and prevent federally-backed banks from storing crypto assets.
- Giancarlo and Narula acknowledged the risks of cryptocurrencies, but both said cryptos have many advantages. Giancarlo said that wherever there is money, there will be crime, but blockchain technology actually offers powerful tools to law enforcement agencies to track illicit transactions and recover illegal money. Narula said that there are many exciting innovations in cryptocurrency that should be incorporated into a CBDC project.
- Giancarlo said that the digital yuan could pose competitive risks to the USD. He said that a digital yuan is likely to be used to extend China’s geopolitical influence throughout the world and evade U.S. sanctions. Giancarlo emphasized that China could use a digital yuan, its extensive blockchain infrastructure, and its large futures markets to facilitate the entire process of logistics, payments, and price hedging for key world ag commodities on one Chinese-controlled blockchain.
SUMMARY
Opening Statements and Testimony
Subcommittee Chair Elizabeth Warren (D-MA)
There has been an explosion of private cryptocurrencies that has illustrated the values and risks of digital payment systems. Both the government and banks have delayed adopting new innovations. CBDCs have great promise if they are well designed and efficiently executed, which are two big “ifs.”
None of the promises of cryptocurrencies have come to pass. They are a fourth-rate alternative to real currencies. They are a poor medium of exchange, have wildly volatile values, are terrible investments without any form of consumer protections, are plagued with fraud, and contribute to illicit activities.
Subcommittee Ranking Member John Kennedy (R-LA)
The influx of non-legal tender in the U.S. will continue to explode. These forms of payments operate outside of the traditional payments infrastructure and have proved speculative, volatile, and vulnerable to manipulation. We need to examine the risks posed by decentralized currencies.
We must preserve the USD’s role as the world’s reserve currency. We must understand who would benefit the most from a CBDC and who is most at risk. China uses the digital yuan to broaden its massive surveillance of citizens and to expand its monetary and political influence around the world. Proposals that would use a CBDC to fundamentally change our banking system are concerning and must be explored more thoroughly.
Committee Chair Sherrod Brown (D-OH)
The U.S. cannot be left behind in the digital currency race. We should lead the way on innovation and monetary policy.
Committee Ranking Member Pat Toomey (R-PA)
It is not yet clear that the U.S. needs a CBDC. It is a bad idea to turn the Federal Reserve (Fed) into a retail bank; the Fed should not be able to track our banking information and transaction history. We should not pursue a CBDC just because China has one; its motivation is to tighten its grip on its economy and increase surveillance at home and abroad.
We should encourage the development of private cryptocurrencies, especially stablecoins. Private cryptocurrencies increase access to financial services for all Americans while increasing consumer privacy. We should consider developing a better regulatory framework, but we should not dismiss the many advantages offered by cryptocurrencies.
The Honorable J. Christopher Giancarlo, Senior Counsel, Willkie Farr & Gallagher
We have proposed a tokenized bearer instrument issued by the Fed, distributed by a two-tiered banking system, and operated alongside physical currency and commercial bank money. This digital dollar would enjoy all the assurances and advantages of cash but in a digital form. A digital dollar could lead to more money moving into the banking system, especially if a digital dollar offers more inclusion to unbanked Americans. A digital dollar would not only use less energy than bitcoin, but it could use less energy than is used to mint and issue physical cash. A digital dollar could also enable immediate settlement.
Dr. Neha Narula, Director, Digital Currency Initiative, MIT
The high fees, long delays, and inequitable inclusion of our banking system has led to a rise in digital currencies and now CBDCs. A general purpose for a retail CBDC is defined as a digital liability of a nation’s central bank that is accessible to the general public. The promise of a CBDC is a ground-up redesign of payment systems that empowers users and creates a platform for payment innovations.
We are exploring the idea of secure, offline digital transactions. Consumer privacy would be a requirement for a U.S. CBDC and possibly a large competitive advantage, but much work remains to determine how to balance privacy with protections against illicit activities. It would be a mistake to pursue a CBDC without understanding its implications for financial inclusion and privacy.
Mr. Lev Menand, Academic Fellow and Lecturer in Law, Columbia Law School
Congress should empower the Fed to issue a retail CBDC that would be available to any U.S. citizen or business. It should have wallets that have no fees, no minimum balance, and come with direct deposit and bill pay. They should be able to be exchanged instantly at any time and should have security, privacy safeguards, and fraud protection. This CBDC should earn interest at the same rate the Fed pays to banks.
There are a variety of problems with digital dollars already in existence, such as exclusion, costliness, and slow speeds. There is also a problem with deposit substitutes such as Eurodollars, stablecoins, and cryptocurrencies. During good times, these are better than bank digital dollars, but they ultimately undermine financial stability, can lead to recessions, and enable illicit activities. A CBDC cannot solve all these problems immediately, but it can address many of them.
Dr. Darrell Duffie, Professor, Stanford University Graduate School of Business
The Fed should develop a CBDC now; the deployment of the CBDC can be delayed once it is built. While this CBDC is being built, Congress should address the issues with existing U.S. bank payment rails, which are slow and expensive. Regulation should promote a competitive payments market, and the development of a viable CBDC may spur firms to better compete. The U.S. should have a seat at the table for discussions on standards for the design and global use of CBDCs. The U.S. should prepare a strategy for combatting undesirable and invasive cryptocurrencies as they gain traction in U.S. payments, and a CBDC could play a role in this strategy.
China’s CBDC will not be a threat to the USD’s role as the world’s reserve currency, but it will open new markets for China in emerging economies and offer China more leverage around the world. The U.S. should begin international discussions for multilateral CBDC policies.
Discussion
CBDC Development/Characteristics
Warren: What role could a CBDC play in reducing risks to financial stability? Can a CBDC be built that does not consume massive amounts of energy? Menand: A well designed CBDC could reduce the risks of cryptocurrencies; Narula: It is possible to build an environmentally-friendly CBDC.
Kennedy: Does the Fed already have the authority to issue a CBDC? Giancarlo: Chairman Powell has said the Fed would need Congressional authority to issue a CBDC, but they have the power to experiment. There are also many people in the private sector researching this issue.
Reed (D-RI): Is it inevitable that the U.S. will move to a digital currency? Does China have a long-term strategy to deploy its digital yuan to displace the U.S.? Menand: Nothing is inevitable. Going to a digital currency will require a lot of work. The digital yuan poses a significant risk to America’s ability to use sanctions to enforce policy objectives.
Cortez Masto (D-NV): How could a CBDC make it easier to connect to unbanked communities? How should a CBDC be designed to avoid fraud? Narula: It removes sources of friction that create barriers to banking. A digital currency would need to have a wide variety of ways to access it, and it needs to be a platform that other institutions can build upon; Menand: Bank accounts can be dangerous to low-income Americans due to fees. A CBDC has no profitability concerns, so it would be easier for marginalized communities to use; Giancarlo: There are several principles a CBDC needs: economic privacy balanced with law enforcement, absolute security, greater accessibility than banks, and sufficient transparency.
Lummis (R-WY): How can privacy initiatives in a digital dollar benefit a U.S. CBDC? How could a CBDC reduce counterparty and settlement risks? Giancarlo: China’s CBDC is built as a form of state surveillance. Only a currency promulgated by the U.S. government could provide the privacy necessary for Americans to be comfortable with a currency; Menand: CBDCs could reduce systemic settlement risks.
Private Cryptocurrencies
Warren: Most people that hold cryptocurrencies are either criminals or speculators. Is the value of bitcoin stable? Why do cryptocurrencies waste so much energy? What should Congress do about cryptocurrencies? Narula: We just watched the value of the crypto ecosystem drop by about 40 percent. Crypto mining requires increasingly complex computing power to write the blocks in the chain, which takes a tremendous amount of energy. There are, however, many exciting innovations in cryptocurrency that should be incorporated into a CBDC project; Menand: Congress should provide more funding to the SEC and CFTC to address cryptocurrency concerns and give these agencies more authority over crypto exchanges. Banking agencies should not allow government-backed banks to warehouse these financial instruments. The environmental costs of cryptocurrencies are devastating, and the benefits are illusory.
Reed: Should there be an international agreement to make private cryptocurrencies illegal and legitimize only CBDCs? Menand: There is a need for international corporation. A ban is one option, but there are other tools that could be used such as taxes and sanctions.
Warner (D-VA): How big of a challenge are the security risks that stem from cryptocurrencies? Narula: Cybersecurity is the top concern with any digital currency. Cryptocurrency is the payment form of choice, but the real issue with cyberattacks is that our data is vulnerable and security is not good enough. Cryptocurrencies can actually be a good tool for law enforcement to track money. A CBDC could have built-in safeguards; Menand: Cryptocurrencies enable a type of ransomware that is impossible with cash; Duffie: A CBDC would actually cut down on the use of cryptocurrencies.
Daines (D-MT): How can we cut down on the illicit use of cryptocurrencies? Giancarlo: Whenever there is money, there is going to be criminal activity. This new technology presents interesting challenges and opportunities. Blockchain offers the possibility to trace transaction histories; Menand: It is not clear that the Department of Justice or the FBI traced the ransomware attack through a distributed ledger.
China’s CBDC Development
Kennedy: Why has China issued a CBDC? How can China get access to new commercial opportunities through the digital yuan? Giancarlo: Many reports say that 90 percent of central banks are investigating CBDCs. China was driven by trying to gain access to more data. There have also been desires for infrastructure innovation, like in Canada. There are issues of financial inclusion that a CBDC could address, like in the Bahamas. There is also the issue of geopolitical influence. If the future of money is digital, there is a race for who will set the standards; Duffie: A CBDC could help eliminate unwanted cryptocurrencies; Menand: Offering non-defaultable money with no maximum amount would be stabilizing for the financial system, and large companies currently do not have access to that.
Hagerty (R-TN): What are the biggest risks to the U.S. caused by the digital yuan? Giancarlo: The most important agricultural commodities are still priced in USD. These are set in deep and liquid American commodity markets. China recognizes this advantage as the largest consumer of many of these commodities, and they would prefer for them to be priced in their currency. China is advanced in blockchain and is leading innovation. It is only a matter of time before they combine blockchain capabilities with their digital currency and their futures markets to facilitate the entire process of logistics, payments, and price hedging for key world commodities on one Chinese-controlled blockchain. The U.S. should create a CBDC with smart contract capabilities to prevent this.
Daines: What will the world look like in five years if we do not catch up with the digital yuan? Giancarlo: There may be a more fractured system of financial networks. We must be able to set the network standards by being a leader in financial innovation or China will define the future.
Stablecoins
Warren: Are private stablecoins as reliable as a Fed-issued digital dollar? Menand: No, they are dangerous to users and, potentially, the financial system in the long run. All deposit substitutes are inherently unstable. If people lose confidence in stablecoins, it will result in significant losses.