This week, Rep. Tom Emmer (MN–R) introduced legislation prohibiting the Federal Reserve from issuing a central bank digital currency (CBDC) for retail use. A CBDC of this nature goes by many names, but it is only a private account for individual customers at the central bank, an institution that historically serves commercial banks.
In his press release, Emmer noted that “to maintain the status of the dollar as the world’s reserve currency in the digital age, it is important that the United States leads with a posture that prioritizes innovation. and is not intended to compete with the private sector”. Emmer deserves praise for taking such a principled stance in favor of the private sector over greater government centralization and control.
He clearly understands what is at stake with a CBDC, and Americans can only hope that many other members of Congress share his sympathies. Hopefully, Federal Reserve researchers working on the Fed’s next CBDC report — which could be out any day — are paying very close attention to this.
This report, among other things, is supposed to “assess whether to issue a CBDC and, if so, in what form.” This question of what form that a CBDC could take is particularly important, and that’s why Emmer’s bill is such a positive step.
CBDC proposals vary widely, but it is the retail account-based CBDC that poses the greatest risk to personal and economic freedom. (Larger overviews of CBDC proposals can be found here, here, here, here and here.)
So far, Fed officials have argued that the central bank only has the power to offer accounts and payment services to commercial banks, as opposed to individuals, but no one should doubt the creativity of the Federal Reserve. Its propensity to create special facilities, for example, is particularly concerning given the details of some retail CBDC proposals.
In a recent NBER article, for example, Michael Bordo and Andrew Levin propose that:
…following the approach of Dyson and Hodgson (2017), CBDC could be provided to the public via specially designated accounts in supervised commercial banks, which would hold the corresponding amount of funds in separate reserve accounts at the central bank. [Emphasis added.]
In this version, the Fed would only hold the funds and the commercial banks would serve the customers. In their paper, Dyson and Hodgson refer to the specially designated account at the central bank as a Digital Cash Account (DCA). Any bank (or non-bank) providing the account
are responsible for providing account statements, payment cards, balance checks, sort codes, account numbers, internet and/or mobile banking, and customer support by phone or email . They would also be responsible for allowing DCA holders to make payments through the normal payment networks – BACS, FasterPayments, Visa, MasterCard, etc. This would allow DCA holders to spend digital cash the same way they can spend bank deposits.
Yet these DCA balances “would not be held on the balance sheet” of commercial banks. In other words, the funds will be owned, and ultimately controlled, by the central bank. Either way, this arrangement is meant to provide “a more competitive incentive to encourage businesses to innovate to improve and expand the services they provide.”
Of course, this arrangement does not further incentivize private companies to innovate and develop their services. unless the government agrees to cover the costs of managing these accounts. If supporters don’t want to refer to this arrangement as providing subsidized bank accounts, that’s fine, but that doesn’t change the facts.
Emmer’s bill, aptly, ensures that the Fed cannot easily use this trick to get into retail. The legislation reads as follows:
Except as expressly authorized under this Act, a Federal Reserve Bank may not offer any products or services directly to an individual, maintain an account in an individual’s name, or issue central bank digital currency directly to an individual. particular.
I’m sure someone at the Fed could still twist the phrase “maintain an account in the name of an individual” to allow support for retail accounts at commercial banks, but Emmer’s intent is Claire. He wants to ban these kinds of CBDC proposals because they extend government control over Americans and force private banks to compete or curry favor with the Federal Reserve, which doesn’t help foster innovation or economic opportunities offered by private enterprises.
CBDC proponents argue that these accounts will help bring the unbanked into the mainstream of finance and that they can be designed to protect privacy. As I pointed out earlier, both arguments ignore reality.
The so-called “unbanked problem” is a broader economic problem – most high-income people use banks. And the idea that a government-controlled blockchain (or even simple digital accounts at the Fed) would offer Following privacy than the existing rules of the Bank Secrecy Act allow is bizarre.
Would the Federal Reserve turn a blind eye to the identities of people using retail CBDCs? If so, and they are willing to provide a regulatory exemption for existing anti-money laundering/know your customer rules, then it is an admission that the current regulatory framework is unnecessary.
I wouldn’t hold my breath for either event.
Fortunately, some members of Congress are resisting this effort to further extend government control over people’s economic decisions. (Senator Toomey (R-PA) also stands out as a strong advocate for the benefits of freedom and private enterprise.)
Representative Emmer said it perfectly when he introduced his new bill:
Not only would this CBDC model centralize Americans’ financial information, leaving them vulnerable to attack, but it could also be used as a surveillance tool that Americans should never tolerate from their own government.
Requiring users to open a Fed account to access a US CBDC would set the Fed down an insidious path akin to China’s digital authoritarianism.
The Fed is unlikely to relinquish its role of providing money to the public anytime soon, leaving payment systems entirely to the private sector, no matter how beneficial such a move might be for millions of ordinary Americans. But that’s just another reason to enact policies like those in Rep. Emmer’s bill.