CRS Frames Policy Debate on Central Bank Digital Currencies
Commentary by Steven Lofchie
The Congressional Research Service ("CRS") identified policy issues in the current debate on whether the Federal Reserve ("FRB") should create a central bank digital currency ("CBDC").
In its latest In-Focus Report, CRS reviewed the 2022 FRB report on a potential CBDC, which it defined as "a digital liability of a central bank that is widely available to the general public." (See related coverage.) The FRB report identified four characteristics necessary "to best serve the needs of the United States." They include that a CBDC should be (i) privacy-protected to the extent compatible with deterring criminal use, (ii) intermediated (i.e., retail services would be offered through financial institutions), (iii) widely transferable among holders and (iv) identity-verified (i.e., not anonymous). CRS also highlighted President Biden's March 2022 Executive Order on digital assets, which stated that the U.S. government "should prioritize timely assessments of potential benefits and risks [of a U.S. CBDC] under various designs to ensure that the United States remains a leader in the international financial system."
CRS cited reports that 134 jurisdictions around the world were engaged in CBDCs at some level (researching, piloting, or launching) as of March 2024. Countries that have issued CBDCs include the Bahamas, Jamaica and Nigeria. CRS also highlighted that China has progressed in CBDC development after piloting the digital yuan. CRS stated that central banks in advanced economies, including the European Central Bank, the Bank of England and the Swiss National Bank, are conducting research on and/or piloting CBDCs.
CRS highlighted the following key policy considerations for Congress, including that CBDCs could:
- raise more legal and practical challenges in cross-border payments than domestic use;
- displace private activity by partially displacing crypto and maintaining the government’s role in issuing money;
- promote financial inclusion which would "depend largely" on whether CBDCs were less expensive and easier to access than traditional banking services;
- prevent bank runs through a "partial shift" from private bank accounts, or because of a consumer’s option to switch to an alternative to CBDC accounts during periods of bank distress;
- prevent illicit activity, such as tracking and storing information regarding users and transactions;
- reduce user privacy, but ultimately curb criminal activity, including money laundering; and
- potentially cause the U.S. dollar to decline if central banks in other countries offer cross-border payment options via CBDC initiatives.
Commentary
There is no little irony to the CRS quoting President Biden's statement that the United States should remain a leader in the international finance system, when one considers that the SEC and other agencies have put up roadblocks on the development of a regulatory framework for digital assets for the entirety of the President's administration.
The SEC's war on digital assets may be best illustrated by its accounting bulletin requiring banks that provide custodial services with respect to digital assets to take the custodied assets onto their balance sheets, which makes it absolutely impractical for banks to provide custody. The theory behind the SEC's position is that it is inherently unsafe to provide custody as to digital assets, and therefore putting the custodied assets on the bank's balance sheet accurately reflects the riskiness of the activity. (See, House Votes Thumbs Down on SEC Crypto Accounting Bulletin.) But the concern that it is impossible to custody digital assets somehow vanishes when the topic is the development of a CBDC. This makes it seem more likely that the SEC's position on accounting is not really concern over safe custody, but rather a deliberate attempt by the SEC to discourage the use of private cryptocurrencies in advance of the launch of a U.S. government sponsored CBDC.
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In a new report, the Federal Reserve Board considered the merits of a potential U.S. central bank digital currency and invited public comment on both a proposed U.S. CBDC and the current domestic payments system.
