Last month, the U.S. House of Representatives passed a bill that may prohibit the Federal Reserve from issuing a central bank digital currency (CBDC). Warnings from the American Banking Association about “unacceptable risks and costs to the U.S. financial system.” While I don’t deny the concerns of the American Banking Association, and otherI advocate a more measured approach that permits for exploration and experimentation with guard rails.
HR5403 – the CBDC Anti-Surveillance State Act – has been referred to the Senate Committee on Banking, Housing, and Urban Affairs for consideration. I hope lawmakers will undertake an objective review of the professionals and cons of CBDCs and keep the door open for a pilot program that would potentially secure our position as a world financial leader.
To have a look at things from a world perspective, 134 countries and regions are currently exploring the opportunity of a CBDC, with 68 of them within the advanced exploration phase, that’s, in development, pilot or within the implementation phase.
The BRICS countries (China, Russia, India, Brazil and South Africa) are currently testing their very own CBDCs. China is currently running the most important CBDC pilot project on the planet: 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, the variety of wholesale cross-border CBDC projects (i.e. projects utilized by financial institutions for remittances and settlements) has roughly doubled to 13.
The lack of U.S. leadership in setting global standards could have geopolitical consequences. There are also national security implications, because the U.S. will not give you the chance to trace cross-border flows and implement sanctions.
Perhaps moderately than banning a CBDC altogether within the US, it could be preferable to fastidiously weigh the advantages against the prices and even perhaps consider conducting a pilot project sooner or later.
Advantages
One advantage can be greater efficiency, lower transaction costs and greater resilience within the US payments market. Another advantage can be the opportunity of creating programmable money tied to smart contracts.
CBDC would also increase financial inclusion for individuals with no or limited access to banking services. Not only could fiscal policy be optimized, but monetary policy is also implemented more effectively, thereby improving financial stability.
According to a Bank for International Settlements (BIS) PaperThe transmission mechanism of CBDCs makes it a very effective tool for mitigating the consequences of domestic financial shocks.
The BIS researchers also indicate that the impact of worldwide financial shocks might be mitigated, as optimized CBDC policies could significantly reduce each exchange rate volatility and the volatility of cross-border gross bank balances. Finally, CBDCs could help curb global and native illicit activities.
Issue
I don’t deny that there are legitimate concerns about CBDCs. One of them is that traditional banks could get into trouble if too many individuals withdraw their deposits without delay. This could trigger a bank run, which could escalate right into a banking panic. This can be particularly relevant for countries with unstable financial systems.
In addition, CBDCs might be vulnerable to cyberattacks and there are privacy concerns as a result of the transparency and traceability of CBDCs. However, legal safeguards might be put in place to handle confidentiality concerns.
Wouldn’t or not it’s higher to create clear and enforceable legal guardrails for a CBDC within the US moderately than banning it outright? Then we could deal with one in all our biggest competitive strengths – innovation.
