Last month, the US House of Representatives passed a bill banning the Federal Reserve from issuing a central bank digital currency (CBDC), heading warnings from the American Banking Association about “unacceptable risks and costs to the US financial system.” While I don’t dismiss concerns raised by the American Banking Association and others, I argue in favor of a more measured approach that allows exploration and experimentation with guardrails.
H.R. 5403 – the CBDC Anti-Surveillance State Act – has been referred to the Senate Committee on Banking, Housing, and Urban Affairs for consideration. My hope is that lawmakers will embark on a dispassionate review of the pros and cons of CBDCs and keep the door open for a pilot program that potentially could preserve our position as a global financial leader.
A CFA Institute global survey of its members provides an objective view of the attitudes of a professional segment of potential CBDC end users. Instead of focusing on the preferences of central banks, the survey explores the demand side of the debate.
To put things in a global perspective, 134 countries and regions now are exploring a CBDC, of which 68 are in the advanced phase of exploration; that is in development, pilot, or launch.
The BRICS (China, Russia, India, Brazil, and South Africa) are piloting their own CBDCs. China is running the largest CBDC pilot in the world: the digital yuan e-CNY reaches 260 million wallets. China is considering expanding cross-border applications.
Since Russia’s invasion of Ukraine and the resulting G7 sanctions, cross-border wholesale CBDC projects (i.e., used by financial institutions for transfers and settlements) have roughly doubled to 13.
The absence of US leadership in setting global standards could have geopolitical consequences, and there are national security implications related to impaired ability to track cross-border flows and enforce sanctions.
Perhaps being open to carefully weighing benefits against the costs — and maybe even considering running a pilot eventually — would be preferable to an outright ban on a US CBDC.
Benefits
One benefit would be in the US payments market, in terms of increased efficiency, lower transaction costs, and enhanced resiliency. Another is the ability to create programmable money bound to smart contracts.
CBDC would also increase financial inclusion for the unbanked/underbanked. Not only could fiscal policy be optimized, but also monetary policy could be carried out more effectively and thus financial stability improved.
According to a Bank for International Settlements (BIS) paper, CBDCs’ transmission mechanism makes it an especially effective tool at smoothing the effects of domestic financial shocks.
The BIS researchers also point out that the effects of global financial shocks could be diminished because optimized CBDC policies could substantially reduce both exchange rate volatility and the volatility of gross cross-border banking balances. Last, CBDCs could help limit global and local illicit activity.
CFA Institute survey respondents across all markets cited the acceleration of payments and transfers as the top reason to support launching a CBDC.
Concerns
I don’t deny that there are justifiable concerns about CBDCs. One is that traditional banks could be disrupted if too many people were to pull their deposits out at once. This could trigger bank runs, which in turn could escalate into a bank panic. This would be of particular importance to countries with unstable financial systems.
In addition, CBDCs could be vulnerable to cyber-attacks, and there are privacy concerns due to CBDC’s transparency and traceability, but legislative guardrails could be put in place to address confidentiality concerns.
Instead of outright banning a US CBDC, wouldn’t it be preferrable to establish clear and enforceable legislative guardrails for a CBDC? We could then focus on using one of our greatest competitive strengths — innovation.