The US House of Representatives passed a bill this week that could pour cold water on the Federal Reserve’s exploration of a central bank digital currency (CBDC), showcasing the growing concerns of lawmakers for financial privacy and government overreach in the digital age.
On Thursday, lawmakers voted 216-192, largely along party lines (but with marginal support from Democrats), to approve the CBDC Anti-Surveillance State Act, sponsored by House Majority Whip Tom Emmer (R-MN). The legislation forbids the Federal Reserve from issuing a CBDC directly to individuals or indirectly through intermediaries without explicit congressional authorization.
Also read: CBDCs Are as Unpopular as Ever: A Pitiful 16% of Americans Support Them
Proponents argue that the bill is necessary to prevent unelected bureaucrats from developing a “financial surveillance tool” that could undermine civil liberties and America’s core values.
Critics, however, warn that it could stifle innovation and jeopardize the US dollar’s long-standing reign in the field of international finance.
A High-Stakes Debate Over Financial Privacy
The idea of a CBDC, a digital form of fiat money, has gained traction worldwide as cashless payments become widely adopted. Other nations, including China, have made advancements in issuing their own CBDC projects. Those who are in favor of these initiatives believe that they can result in faster payments, financial inclusion, and easier policy implementation.
However, detractors like Rep. Emmer fear that CBDCs could hand the federal government unprecedentedly invasive powers to monitor personal finances and “choke out politically unpopular activity.” They point to examples like China’s digital yuan, which has been reportedly used for the creation of social credit scores and spending controls (though these claims are often overblown at best).
“It is naïve to believe that your government won’t weaponize the tools it has to control you,” Emmer warned during his speech on the House’s floor. “If China embraces it, you know it’s something worth standing against.” Despite the obviously partisan and anti-China nature of these arguments, there are certainly some concerns that we should all consider with the launch of any CBDC. They would likely allow for closer surveillance of payments of all kinds (as long as they use the CBDCs), and if built on authoritarian foundations, they could theoretically lead to governments restricting some people’s access to currency.
The Fed has moved cautiously on CBDC research and has repeatedly stated that it would not proceed to launch a product without the necessary legal authority. Even so, the White House’s pro-CBDC stance and latest calls for urgency on the issue spurred Emmer and others to act preemptively.
“This bill is designed to prevent the federal government from following in the footsteps of authoritarian regimes that use digital currencies for surveillance,” Emmer added.
Only a Handful of Democrats Favored the Bill
While nearly all House Republicans backed the bill, they picked up support from just three moderate Democrats: Reps. Jared Golden (ME), Mary Peltola (AK), and Marie Gluesenkamp Perez (WA).
Most Democrats opposed the legislation, voicing concerns that it could undermine the US’ leadership in the financial industry by banning a potentially key innovation that could be adopted one way or the other to facilitate payments and reduce transaction costs.
“By prohibiting all CBDCs, the bill threatens the very primacy of the US dollar and the power that affords our nation,” argued Rep. Maxine Waters (D-CA), the top Democrat on the House Financial Services Committee.
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“Today, the U.S. dollar is the global reserve currency, with more than half of all international trade done in dollars. But the world is looking at how to speed up transactions and reduce costs, including by issuing their own central bank digital currencies,” she added.
Waters added that over a dozen nations, including US allies, are already racing ahead with CBDC development while the bill would make America “the only country in the world to ban a CBDC.”
Meanwhile, analysts from TD Cowen voiced similar concerns.
“We view such a ban as negative for the global dominance of US banks and for the global role of the US dollar,” they commented in a report issued on Thursday. They argued that “This is because the ban would apply to wholesale as well as consumer use. That could give the Euro or other currencies that are digitalized an edge in being used for global trade as stable coin digital dollars could lose value if there is a redemption run while a digital Euro would not face that threat.”
Are Stablecoins a Better Alternative than CBDCs?
Given the absence of bipartisan support, the CBDC Anti-Surveillance State Act faces a Sisyphean battle in the Democrat-controlled Senate, where no companion bill has been introduced. Even if it receives marginal support from a handful of Democrats, the bill is unlikely to pass. This is because bills in the Senate can be filibustered, where lawmakers speak constantly to delay the vote. Filibusters can only be ended involuntarily through a cloture vote, which requires a three-fifths vote (60 of 100 Senators).
Even if Congress gives it the nod, the White House has given no hint that President Biden would sign such legislation into law, especially as his administration is known for its ambitions of fast-tracking CBDC research and development.
Still, the House vote represents a forceful rebuke of the Fed’s digital currency ambitions and it could foster more robust congressional oversight and public debate over the societal impact of CBDCs before any issuance.
On the opposite side of the aisle, President Trump has already shown his discomfort with this type of financial product.
“As your president, I will never allow the creation of a central bank digital currency,” the Republican candidate commented during a rally in New Hampshire.
He added: “Such a currency would give a federal government, our federal government, the absolute control over your money.”
Meanwhile, the Federal Reserve has argued that they are not ready – or even willing – yet to pursue this endeavor.
“The last thing we would want — we, the Federal Reserve, would want — would be to have individual accounts for all Americans, or any Americans for that matter,” commented Chairman Jerome Powell in March this year.
“Only banks have accounts at the Fed and that’s the way we’re going to keep it,” he stressed.
An anti-CBDC bill could directly benefit the adoption of existing decentralized cryptocurrencies like Bitcoin (BTC) that operate beyond government control. The decentralized nature of these blockchain-based digital currencies makes them an appealing choice for individuals who are against a growing trend of government overreach when it comes to their personal finances.
Others believe in the potential for stablecoins, blockchain-based tokens pegged to fiat currencies, to fill the void that CBDCs would leave if they are designed with appropriate safeguards for investors including adequate oversight by financial regulators.
Crypto Industry Praises the House’s Nod to the FIT21 Bill
While the CBDC Anti-Surveillance State Act has been deemed by some as “anti-innovation,” the legislation’s passing comes on the hills of a landmark bipartisan accord to pass another relevant piece of legislation for the crypto market called FIT21.
The Financial Innovation and Technology for the 21st Century Act (FIT21) has been considered an important initial step toward developing a comprehensive regulatory framework for the crypto market that pertains to the operations of exchanges, investment offerings, and commercialization of digital assets within the United States.
The Blockchain Association, a leading industry lobby, applauded the passing of FIT 21 and deemed the event “a watershed moment and badge of Congressional validation for the crypto industry.”
What seems clear is that lawmakers’ interest in regulating the crypto space is growing by the month, possibly as fresh billions of dollars are being poured into this market every year and, also, possibly amid the approval of easily accessible investment vehicles that offer exposure to popular assets like Bitcoin and Ether (ETH).