US Lawmakers And ABA Cast Doubt On Digital Dollar Use Case

May 24, 2022
In two separate letters, Republican lawmakers and the banks’ lobby group question whether the potential benefits of a US central bank digital currency (CBDC) outweigh the risks it poses.

In two separate letters, Republican lawmakers and the banks’ lobby group question whether the potential benefits of a US central bank digital currency (CBDC) outweigh the risks it poses.

In an open letter addressed to Federal Reserve chair Jerome Powell, Republican members of the House Financial Services Committee asked the Fed to carry out further analysis to understand whether the benefits of a CBDC outweigh its risks.

“We believe the Fed should first identify the challenges presented by the current payment system infrastructure and whether those challenges are best addressed by a CBDC,” the lawmakers wrote.

The letter follows the Fed’s consultation on policy questions related to a potential US CBDC and comes ahead of this week’s congressional hearing on the matter.

As the Fed considers its next steps, the legislators say the it should first understand the problems a CBDC would solve and whether those could be addressed by alternative means.

The US has already taken significant steps to modernise its payment infrastructure. Many of the country’s largest banks provide instant payments to their customers via The Clearing House’s RTP service and they offer same-day automated transfers via the ACH network.

Meanwhile, the Fed is expected to launch its FedNow instant payment service in 2023, which will bring real-time payments to banks, particularly smaller banks, not currently served by TCH.

As the discussion on a CBDC moves forward, lawmakers urge the Fed to assess how the risks and benefits of a CBDC would compare to these initiatives and whether other use cases cited in the paper, such as cross-border payments and financial inclusion, could be addressed better via alternative methods.

They also raised concerns about how a digital dollar would affect private initiatives, such as stablecoins.

The Committee Republicans argue that the value-pegged digital currencies have the potential to make payments more efficient, faster and less expensive for consumers and small businesses.

They request the Fed provide a detailed analysis on any potential impact to the stablecoin market of a CBDC, including the impact on competition and innovation. This information will help Congress evaluate whether a CBDC and privately-issued stablecoins can coexist within the payment system and ensure innovation.

These concerns have been shared by the American Bankers Association (ABA) in a comment letter submitted to the CBDC discussion.

The banks’ group has gone as far as to state there are no “compelling use cases where CBDC delivers benefits above those available from other existing options”.

“As we have evaluated the likely impacts of issuing a CBDC, it has become clear that the purported benefits of a CBDC are uncertain and unlikely to be realised, while the costs are real and acute,” the group says.

It argues that even if a CBDC would be intermediated through financial institutions, as suggested by the Fed, every model requires moving funds from banks to the Fed.

In effect, it means that a CBDC would serve as an advantaged competitor to retail bank deposits, moving money away from banks into Fed accounts where the funds cannot be lent back into the economy.

“Contrary to popular belief, a US CBDC is not necessary to ‘digitise the dollar,’ as the dollar is largely digital today. However, the issuance of a CBDC would fundamentally rewire our banking and financial system by changing the relationship between citizens and the Federal Reserve,” the ABA stresses.

As an alternative, it proposes a bank-issued stablecoin, which could help bring fiat currency onto the blockchain without introducing the deposit disintermediation concerns associated with CBDCs.

“If we can provide regulatory clarity that allows for the issuance of well-regulated stablecoins, they will offer any potential benefits of a programmable form of money without disintermediating bank deposits,” the group says.

Therefore, the banking association concludes that although the potential benefits of a US CBDC are uncertain, its costs would be acute and there are better alternatives to achieve its goals.

The letter concludes: “There are strong efficiency interests that suggest CBDC should only be pursued as a final option to meet clearly defined public policy goals that cannot be achieved through payments innovations that leverage existing digital dollars.

“As of today, those use cases have not emerged.”

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