Much has happened — in public health and in central banking — since our last post spelling out some key questions on Central Bank Digital Currencies (CBDCs). Congress is holding hearings, the Federal Reserve and other central banks are actively publishing CBDC research, and foreign and private sector projects are moving ahead.
It’s no coincidence that all this activity is occurring now. We see three main causes: China’s push towards rolling out its CBDC (though many details remain unverified), the continued development of Libra (with mixed reactions), and, more pressingly, the COVID-19 pandemic. In the United States, our struggle to quickly disperse funds to many millions of Americans has exposed our public financial infrastructure as outdated and ill-equipped for this crisis or crises to come.
At a fundamental level, CBDCs represent an opportunity to “fill gaps in the payment landscape,” as the Bank of Canada explained in research released this week. From a consumer and commercial perspective, a CBDC provides a “digital cash” alternative to today’s high-fee, low-privacy electronic payments. With CBDCs, individuals can pay electronically (in person or online) without sacrificing their privacy, and merchants can accept these payments at lower cost. From a policy perspective, a CBDC could offer a variety of other tools and benefits, especially for the one in four American households that are currently unbanked or “underbanked.”
Broadly, the debate over the U.S. digital dollar has quickly shifted from a question of if, to when and how. More pointedly, we see these as the three big questions to be hashed out next:
1. How private will the CBDC be?
Privacy in payments is a public good that promotes social welfare and protects against price discrimination, as the Bank of Canada recently highlighted. To address the “current trend of declining privacy in payments,” the Bank’s research proposes designing CBDC as “‘enhanced cash’—to reduce the carrying and handling costs associated with cash and enable electronic transfers, while retaining cash’s distinctive desirable features [such as privacy, universal accessibility, and no transaction fees].” Yet several prominent central banks, including the Bank of England, essentially assume that any CBDC won’t have cash-like privacy guarantees. Why not? As the Financial Times recently reported, fears over privacy “are a massive obstacle to switching to CBDCs,” and, given some central bank communications, these fears seem justified.
At the same time, it is important to underscore that CBDC privacy (or lack thereof) is a political question. Whether the digital dollar protects privacy may come down to whether the voting public and other stakeholders demand that CBDCs carry the same privacy guarantees as cash — or if they will accept a CBDC where everyone’s transaction data is recorded with their identities (and/or sold to third parties). For what it’s worth, we think a CBDC without at least some cash-like privacy, especially if accompanied by efforts to phase out paper cash, could quickly turn into a political firestorm and sour public perception on CBDCs. It is also worth highlighting what former CFTC Chairman Christopher Giancarlo told Congress this week: “It may turn out that the United States has an ace to play in the contest for the future of digital money: privacy rights. Coding traditional American ideals of economic freedom and balanced privacy into a digital dollar will surely enhance its global appeal.” We agree — the U.S. has plenty to gain from preserving privacy in its digital dollar.
2. What role will Congress play?
The legislative branch should play an essential role in CBDC design. As we highlighted in December, the U.S. Constitution empowers Congress with the ultimate authority to oversee and regulate money, and some of CBDC decisions involve policy decisions that should not be left to the Federal Reserve. More specifically, Congress has plenty of tools at its disposal, including funding local pilot programs, issuing CBDC design parameters to the central bank, beginning a trial rollout of U.S. Post Office Banking, or even minting $1 trillion coins to ship reloadable debit cards to every American. Big decisions about the future of money — particularly amid a historic pandemic and economic shocks — should be met by a Congress willing to think and act big, too.
3. How will the private sector be involved?
Federal Reserve Chairman Jerome Powell recently dismissed the idea of private sector involvement in the development of a CBDC, but other current and former senior officials, such as Brian Brooks (Acting Comptroller of the Currency) and Christopher Giancarlo (former CFTC Chairman) disagree. Will we see the Federal Reserve launch a CBDC wholly on its own? Or will we see a few different Fed-endorsed “digital dollars” piloted simultaneously, perhaps some issued by the Fed and others by private companies or banks? It may be worth exploring a hybrid licensing framework whereby the federal government sets out technical, regulatory, and oversight requirements for the private sector to issue competing “digital dollars,” while still preserving the benefits of a Fed-run “public option.”
All told, CBDCs remain a fast-moving policy area with far-reaching implications, both in a pandemic and beyond. As Chairman Powell testified, “we owe it to the public that we serve to be up to speed [on CBDCs].” In the meantime, we’ll continue to monitor further developments in this space (as part of our CBDC practice) and are always interested in hearing from potential stakeholders.