The US Congress Considers Electronic Money as an Alternative to CBDC

On March 11, the President of the United States, Joe Biden, published a Executive Decree in which he encouraged the Federal Reserve to c...

On March 11, the President of the United States, Joe Biden, published a Executive Decree in which he encouraged the Federal Reserve to continue research into a future US central bank digital currency, or CBDC.

The order pointed out that the market capitalization of digital assets exceeded $3 trillion in November – with Bitcoin (BTC) accounting for more than half of the total value of all cryptocurrencies and peaking at over $60,000, up from just $14 billion five years prior. For comparison, the US money supply (M1) in the same month was $20.345 trillion.

Stephen Lynch, Congressman who chairs the FinTech Task Force, introduced the Electronic Money and Secure Material Act March 28, which to develop “an electronic version of the US dollar for use by the American public.” How does this project fit into existing CBDC frameworks in the United States?

Is Lynch e-cash a CBDC or not?

Curiously, the specialists responsible for drafting the concept claim that it is not a real CBDC because it would be issued by the US Treasury rather than the US Federal Reserve, the central banking system.

Rohan Grey, an assistant law professor at Willamette University College of Law who helped draft Lynch’s bill, said in an interview that the Fed does not have the statutory authority to create a CBDC or the ability to to maintain the retail accounts that would be required for this. Instead, he described the digital dollar as something that replicates the privacy, anonymity, and transactional freedom mirroring the properties of physical money.

He noted that he would not use a centralized ledger (like most proposed CBDCs) or a distributed ledger (like crypto) and would maintain its security and integrity through its hardware. According to Gray, beyond that, giving the Fed the power to conduct electronic surveillance of digital currency is not a good idea because of the potential for breaching user privacy. He positioned e-money as a third alternative beyond account-based and crypto-based CBDCs that addresses privacy and surveillance concerns.

Is online banking not enough?

Last summer, crypto critic Senator Elizabeth Warren argued that there was no need for digital cash because US cash is already accessible digitally. Lynch’s proposal reflects a different perspective within the Democratic Party. What attracts him?

In Europe, China and other parts of the world, it is common to transfer money through online applications or with debit card payments. Although these exist in the United States, they supplement an older “legacy” system of paper checks. Although the use of personal paper checks by individuals has declined significantly over the past 20 years, the US government and US businesses still use them to send money.

This makes things difficult for the millions of adults who are “unbankedor “underbanked”: those who do not have a bank account and generally rely on check cashing services, which charge high rates. Many view these additional expenses as too high or disproportionately high, given that these services are considered most essential by the least economically resilient segment of the population. Many American politicians have worried about issues of economic inequality, especially since the 2008 financial crisis and more recently following the 2020 riots.

Additionally, when Americans use credit cards or digital platforms to make payments, retailers must pay third-party fees, which negatively affect the monetary economies of poorer, immigrant-dominated communities. Small businesses, landlords and individuals who provide services often have to rely on paper checks.

Sending paper checks also involves unacceptable transfer, receipt and processing times. The number of banks in the United States numbers in the thousands, while in Canada, only five account for most residents. This means that bank-to-bank transfer fees associated with sending money are essentially unavoidable.

Normally, the United States Bureau of Engraving and Printing (part of the Treasury Department) prints banknotes which are then distributed by the US Federal Reserve. All US banknotes are called Federal Reserve Notes. The proposed digital currency would also enter circulation under the Treasury Department, but it is unclear what role the Federal Reserve would play. The money on offer would be introduced on a trial basis, so there would likely be a cap on issuance, ensuring it wouldn’t have much effect on M1.

The Fed’s view

While the Treasury falls under the executive branch of government, the Federal Reserve enjoys a certain degree of independence. Federal Reserve Chairman Jerome Powell is the chairman of the board of governors, who are appointed by the president and confirmed by the Senate much like judges, except judges can be appointed for life while a governor of the Fed held office for 14 years.

After the Fed released its own white paper on issuing a CBDC in January, not all governors were keen on the idea. Powell pleaded for caution last summer and turned to Congress for new legislation regarding a CBDC.

One of the Fed’s governors, Randal Quarles – vice president of oversight – called the benefits of a CBDC “unclear” last year and the risks “significant and concrete”.

“Bitcoin and its ilk will, therefore, almost certainly remain a risky and speculative investment rather than a breakthrough means of payment, and are therefore highly unlikely to affect the role of the US dollar or require a response with a CBDC” , Quarles mentioned in an address to the Utah Bankers Association, later clarifying that this was his opinion rather than that of the Fed itself.

Interestingly, Powell’s approach to regulator stablecoins was more proactive.

“We have a fairly strong regulatory framework around bank deposits, for example, or money market funds. That doesn’t really exist for stablecoins,” Powell said during a congressional hearing last July. “If they’re going to be a significant part of the payments universe – which we don’t think crypto assets will be, but stablecoins could be – then we need a proper regulatory framework, which , frankly, we haven’t.”

On March 31, Representative Trey Hollingsworth and Senator Bill Hagerty proposed the Stablecoin Transparency Act, which would require stablecoins “to be backed by government securities with maturities of less than 12 months or domestic dollars while requiring stablecoin issuers to publish audited reports on reserves executed by third-party auditors,” according to a financial service newsletter.

All debts, public and private

One of the main differences between prospective e-cash and the US dollar is that the latter is universally accepted. If e-cash reflects the price of the dollar, many people just won’t take it, prefer to get USD the old fashioned way. Historically, these pegs have left central banks at the mercy of speculators.

During the American Civil War, American fiat currency faces its first hurdle when people adamantly preferred gold and silver coins to printed money, which led to price fluctuations. Eventually, the United States returned to gold and silver coinage.

More than a century later, the French government under Charles de Gaulle succeeded in breaking the fixed $35 per ounce exchange rate between the US dollar and gold. established in Bretton Woods in the aftermath of World War II, and in the 1990s, billionaire investor George Soros “broke the Bank of England” by betting big on the UK’s inability to maintain the peg of the sterling to European currencies in view of the introduction of the euro.

This partly helps explain why lawmakers who advocate electronic cash are so interested in making it as close to circulating US cash as possible.

Apples and oranges

The large-scale use of electronic money could require a complete change in the nature of financial regulation in the United States if it is approved and passes the experimental stage. Importantly, it would obviate the need for traditional retail banking, making storing and transferring funds a public service rather than a fee-based service. Federal monetary policy was built around the management of the economy by the commercial banks, which helps to explain the hesitations of certain central bankers like Quarles.

A lot has to do with the volume of e-money generated. Central bankers have a good point: Stablecoins have improved the transaction value of crypto for those whose primary interest is sending money rather than investing. Lawmakers have a lot to lose and little to gain if they risk introducing a national e-money that doesn’t work, especially in an inflationary economy.