Banks, crypto lobby clash with lawmakers over Fed’s digital dollar
A central bank digital currency, or CBDC, would mimic cash in many respects — allowing consumers to transact using digital wallets that would likely be maintained by banks or other financial intermediaries. These services promise to offer faster, cheaper and more secure services than what is currently available through commercial banks, fintechs or crypto.
Its arrival is hardly assured. But as lawmakers from both sides of the aisle rally behind the idea, they are on a collision course with the banks, crypto firms and private stablecoin issuers who say it would be disastrous.
“There is a ‘don’t take my cheese’ resistance coming mainly from the banks who see CBDC as a potential disruption to their highly profitable payment systems,” said Rep. Jim Himes (D-Conn.), who released a Fed digital dollar proposal earlier this year. “It’s not a coincidence that pretty much every single bank and every single banking association has been in my office.”
Private stablecoin issuers have the same “parochial objection that banks do,” Himes added. “They see CBDC — and I think rightfully so — as a potential threat.”
Banks and credit union groups have deluged the Fed, Treasury and Commerce Departments with letters calling CBDCs risky, unnecessary or — depending on the design — a slow-moving torpedo that would drain deposits from commercial banks. Digital asset groups and stablecoin companies make similar arguments, arguing that a digital dollar would disrupt the development of blockchain-based payment systems that facilitate trading of popular cryptocurrencies.
A CBDC could “end up being the equivalent of the FAA flying airplanes and building jet engines as opposed to designating competition rules based on safe behavior in the sky,” said Dante Disparte, chief strategy officer and head of global policy at Circle, the world’s second-largest stablecoin issuer .
It’s “a solution looking for a problem,” he added.
That problem could be pressure from abroad. At least 25 countries have launched or piloted their own central bank digital currencies — a list that includes China, Russia and Saudi Arabia, according to the Atlantic Council. About one in five Chinese citizens had downloaded a digital wallet linked to a pilot version of the digital yuan by the end of last year.
Last month, Waters said the bill she and McHenry are sponsoring would “require the Federal Reserve to research and develop a digital central bank currency so we remain competitive globally.”
The banking and crypto sectors are politically strange bedfellows.
Even as banks launch blockchain projects and digital asset partnerships, they have pressured Congress and federal agencies to take a tougher line against lightly regulated digital exchanges and lenders. For their part, crypto industry leaders say their products will eventually compete with banks when it comes to payment systems and financial services.
Their shared skepticism about a CBDC stems from what might happen if the Fed collects customer deposits linked to widely used payment systems, said Paul Merski, who oversees congressional affairs and strategy at Independent Community Bankers of America.
“Whether it’s private commercial banks or private companies dealing in cryptocurrencies, the Fed is seen as competition to these projects,” he said.
The Fed, along with the Federal Reserve Bank of Boston, has spent more than a year examining the technical and financial plumbing necessary for a CBDC to function. Although the central bank has not ruled on whether the U.S. should move forward, Fed Deputy Chair Lael Brainard warned the House Financial Services Committee in May that delays could be dangerous if other countries develop successful, widely used CBDCs that can be used at scale across borders transactions.
“I would hate for Congress to decide five years from now, ‘You, the Federal Reserve, you have to take it. China is out there [European Central Bank] is out there, she said at the time.
Fed officials say they have no intention of moving forward without “clear support” from Congress and the executive branch. But they released a discussion paper in January — ahead of President Joe Biden’s executive order directing exploration of a digital dollar — that offers clues about how the central bank might proceed if given the green light.
The Fed made it clear that it does not envision consumers holding deposit accounts directly with the central bank. Instead, it suggested that banks or other regulated financial firms would offer electronic wallets to manage balances and process payments
Unlike money deposited into commercial checking or savings accounts, which banks can then lend and invest, customers’ digital dollars will be the equivalent of a black box; the banks couldn’t touch it. These holdings would be considered a liability of the Fed — like cash — meaning they would not need deposit insurance.
The banking industry fears that this “intermediate” model could prompt customers to withdraw money from their checking and savings accounts and pour it into new digital wallets, eliminating funding that banks use to distribute mortgages, car loans and other credit products. A retail model in which the Fed issued digital dollars directly to customers — completely bypassing the banks — could be even more dangerous.
“A CBDC will remain a liability of the Federal Reserve — remain on the balance sheet of the Federal Reserve — regardless of how it is distributed,” said Brooke Ybarra, head of the American Bankers Association’s Office of Innovation. “Because this liability remains on the Federal Reserve’s balance sheet, it effectively competes with retail bank deposits and limits the ability of that money to be loaned back into the economy.”
These challenges are not insurmountable, said Jessica Renier, the Institute of International Finance’s executive director of digital finance. They do, however, reflect how much the design of a digital dollar will ultimately affect the health of traditional financial institutions.
Many Republicans—as well as some Democrats—are equally concerned about what a digital dollar could mean for the domestic development of crypto-payments businesses and reserve-backed stablecoins. These products are widely used on digital asset exchanges and decentralized financial platforms, but some companies – including Circle – are pushing to incorporate their dollar-pegged tokens into commercial payment systems.
Last year, GOP members of the House Financial Services Committee — chaired by McHenry — released a statement saying that any digital asset issued by the Fed “should not impede the development and use” of stablecoins like Circle or other dollar-pegged digital tokens that have yet not developed.
And while the Fed’s outline included language to ensure customer privacy, there are concerns about surveillance and the potential to block digital transactions.
“The prospect of government monitoring of Americans’ individual financial transactions through a CBDC and Fed account raises serious privacy concerns, not to mention concerns about government control and politicization of loans, online payments, credit scores, tax compliance, federal contracts, monetary policy and the like,” said Rep. Andy Barr (R-Ky.), who also sits on the finance committee.
While stablecoins are unlikely to be beloved by many in the banking sector, there are questions about the extent to which a CBDC will solve problems already being solved by existing programs like FedNow — a central bank-run system for near-instant payments set to go live next year, three said banking industry experts to POLITICO.
At least one key member of the Fed has had the same thought.
“FedNow will help transform the way payments are made through new services that allow consumers and businesses to make payments easily, in real time, on any day, and with immediate availability of funds to recipients,” Federal Reserve Governor Michelle Bowman said in a speech on Wednesday. “My expectation is that FedNow addresses the issues that some have raised about the need for a CBDC.”
