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Anti-CBDC bills are gaining traction in the US, driving debate on the potential impacts of bringing in a digital currency. Although they could threaten international US dollar dominance, firms eye the opportunities and risks of introducing central bank digital currencies (CBDCs).
Former US President and current presidential candidate Donald Trump is raising the issue of CBDCs on the campaign trail, most recently giving credit to former candidate Vivek Ramaswamy for bringing the issue to his attention.
Trump reiterated previous comments that he would “never allow the creation of a central bank digital currency” if re-elected.
“Such a currency would give the federal government, our government, the absolute control over your money. They could take your money and you wouldn’t even know it was gone. This would be a dangerous threat to freedom and I will stop it from coming to America,” Trump said.
Another former candidate, Florida Governor Ron DeSantis, had also pledged to ban CBDCs, having signed a bill last March to prohibit their use within his state.
The rise of anti-CBDC bills
The US Federal Reserve worked on several initiatives in 2022 to pave the way for the issuance of a digital dollar. However, the collapse of the FTX cryptocurrency exchange in November 2022 and the failure of Silicon Valley Bank in March 2023 shifted the policy landscape, and the momentum behind the move lost steam.
Fed officials have since become increasingly ambivalent about the potential for a CBDC.
Several Republicans have introduced bills to Congress and state legislatures aiming to curb or outright prohibit the implementation of CBDCs. Critics argue that government-issued digital currencies threaten citizens’ privacy and the stability of the financial system.
At the Congressional level, the CBDC Anti-Surveillance State Act, introduced to the House of Representatives by Republican Majority Whip Tom Emmer, passed out of the Financial Services Committee to the House floor in September 2023.
The bill prevents the Fed from issuing a retail CBDC directly or indirectly to individual citizens, so that it cannot collect US citzens' personal financial information or use a CBDC to implement monetary policy. It also emphasises that the central bank and the US Treasury do not have the authority to issue a CBDC without Congressional approval.
The bill is co-sponsored by 60 Republican members of Congress and groups including the Independent Community Bankers Association, the American Bankers Association, Club for Growth, Heritage Action and the Blockchain Association.
At the state level, legislatures in South Carolina, South Dakota, Tennessee and Utah have introduced bills to exclude CBDCs from the definition of money in their Uniform Commercial Code (UCC).
In addition to Florida, which has already passed such legislation, Indiana passed similar legislation in 2023. A state’s UCC forms the legal foundation for contracts, so excluding CBDCs from the definition of money aims to discourage businesses from using them.
“What we see over and over again is a very deep concern about individual privacy,” Jennifer Lassiter, executive director at the non-partisan Digital Dollar Project, told Vixio. “There is a very necessary and critical focus on privacy and understanding how that manifests both in our financial system today but also in our financial system of the future.”
The Digital Dollar Project, which supports research and public discussion on the potential advantages and challenges of a US CBDC, works with various stakeholders with different perspectives.
“Some of them say no to a CBDC because we haven’t fully researched, realised and understood how individual privacy is reflected and enhanced in that future system,” Lassiter said. The project’s technical pilot programmes have indicated how programmability and data minimisation that separate personal data from transaction data can be used to protect user privacy.
The US is not alone in expressing concerns, as surveys in other countries around CBDCs and other forms of digital money rank privacy and surveillance as top concerns, Lassiter noted.
The US should play a role at an international level by participating in standards setting to ensure that “US democratic principles are represented, and that privacy is clearly defined and prioritised as we think about building these globally connected digital monetary systems”.
Some of the countries currently exploring CBDCs are likely to issue them in wholesale or retail form by the end of the decade. In 2023, policymakers moved past the proof-of-concept stage to piloting projects and collaborating on interoperability across a range of jurisdictions. That has implications for the dominant role of the US dollar in the global financial system.
“I would hope to say that our elected leaders are very interested in the economic prosperity and stability that comes from the US dollar as the world’s reserve currency,” Lassiter said.
“A shared sentiment would be that we all agree that the United States will not emulate authoritarian values such as surveillance. Certainly, that is a priority in our current monetary system that holds for our future monetary systems.”
Risks to US dollar dominance
Geopolitical resistance to the continued use of the dollar globally has increased in recent years, but there has so far been a lack of viable alternatives. But CBDC fragmentation globally creates a risk that the dollar’s role in the international payment system will be diminished in three ways, according to the Atlantic Council:
Clusters of interoperable CBDCs will reinforce the already growing tendency to use local currencies in bilateral and multilateral cross-border payments, reducing reliance on the dollar as an intermediary in executing exchanges between currency pairs.
Lower demand for the dollar in foreign exchange trading can trigger a parallel decrease in central bank holdings of the dollar as a reserve currency.
The rapid rise of cryptocurrencies provides an alternative for parties who do not support US foreign and security policy that restricts permissible counterparties for US dollar-denominated transactions.
“Failure to initiate a digital dollar strategy domestically creates a significant risk that the US will be missing in action regarding cross-border payments interoperability,” the Council stated.
The adoption of Bitcoin beyond speculative purposes and the US Securities and Exchange Commission’s approval this month of Bitcoin exchange-traded funds (ETFs) represents “a potential paradigm shift in the global perception and use of digital assets,” according to a note by Morgan Stanley.
The BRIC countries are leading the push towards de-dollarisation.
Chinese oil and gas firm PetroChina completed the first cross-border settlement transaction for international crude oil using the digital yuan in October 2023, and the Bank of China’s Shanghai branch completed the first settlement of a precious metals trade using the Chinese CBDC in December.
“The US dollar’s dominance as the cornerstone of the international financial system is now being reconsidered in the face of evolving geopolitical shifts and the growing U.S. twin deficits,” according to Morgan Stanley.
“As CBDCs become more widely adopted and technologically advanced, they hold the potential to establish a unified standard for cross-border payments, which could diminish the reliance on traditional intermediaries like SWIFT and the use of dominant currencies such as the dollar.”
Payment firms weigh commercial impact
While the debate over CBDCs continues, payments companies in the US are operating in an uncertain regulatory environment when it comes to digital assets.
Some payments companies view the potential introduction of a CBDC as a catalyst for innovation and competition, and an opportunity to develop a more efficient and inclusive financial system. Others express concerns about the operational challenges associated with adapting existing infrastructure to accommodate the integration of CBDCs.
“What we have found with our stakeholders from the payment industry and the financial industry broadly is there is a lot of interest around what the impact to their strategy and operations is going to be because there is an acknowledgement that stores of value are changing and taking on different forms,” Lassiter said.
“If you’re a multinational, if you’re doing any sort of cross-border payment participation, you certainly are dealing with other countries that are moving forward with various forms of digital money.”
“To them, it’s less about the politics around it” and more about the potential impact on company efficiencies, hiring to meet new skills requirements, governance changes and the costs associated with infrastructure upgrades.
User behaviour around relationships with money — both from a trust and access perspective — is changing. Following the acceleration in the adoption of digital payments during the COVID-19 pandemic, “companies are looking to meet their customers where they’re at and provide a safe and efficient system for them to operate in. If that means that the needs are changing and therefore their products have to change, then they’re going to innovate to do that,” Lassiter said.
Striking the balance between government control and private-sector innovation remains key.
“We are in favour of digital currencies, but we are also unsure as to whether the central bank should initiate and fulfil the task of launching digital currencies, as the private sector tends to have better innovation, implementation and efficiency,” Frank Hu, chief operating officer of Web3-focused infrastructure builder ByteTrade Lab, told Vixio.
