Sen.Elizabeth Warren, D-Mass., speaks during a Senate Finance Committee hearing on the IRS budget request on Capitol Hill in Washington, Tuesday, June 8, 2021.(Evelyn Hockstein/Pool via AP) | Evelyn Hockstein/AP Photo
Democrats have especially been skeptical about crypto assets because there are fewer consumer protections and the currencies can be used for illicit activity.There are also environmental concerns posed by the sheer amount of electricity used to unlock new units of digital currencies like Bitcoin.
Warren suggested the Fed project could resolve some of those concerns.
“Legitimate digital public money could help drive out bogus digital private money, while improving financial inclusion, efficiency, and the safety of our financial system — if that digital public money is well-designed and efficiently executed,” she said at a hearing on Wednesday, which she convened as chair of the Senate Banking Committee’s economic policy subcommittee.
Other senators highlighted the potential for central bank digital wallets to be used to deliver government aid more directly to people who don’t have bank accounts.A digital dollar could also be designed to have more high-tech benefits of some cryptocurrencies, like facilitating “smart contracts” where a transaction is completed once certain conditions are met.
Neha Narula, who’s leading the effort at MIT to work with the Boston Fed on a central bank digital currency, called the project “a once-in-a-century opportunity to redesign the dollar” in a way that supports innovation much like the internet did.
Still, there are a slew of unanswered policy questions around how a digital dollar would be designed, such as how people would get access to the money, or how much information the government would be able to see about individual transactions.
The decision is also tied to a far more controversial policy supported by Democrats like Warren and Senate Banking Chair Sherrod Brown to give regular Americans accounts at the Fed.
“What problem is a central bank digital currency trying to solve? In other words, do we need one? It’s not clear to me yet that we do,” Sen.Pat Toomey (R-Pa.) said.“In my view, turning the Fed into a retail bank is a terrible idea.”
And, “the fact that China is creating a digital currency does not mean it’s inevitable that the yuan would displace the U.S.
dollar as the world’s reserve currency,” he said.
WASHINGTON, DC – MAY 01: Federal Reserve Board Chairman Jerome Powell speaks during a news conference on May 1, 2019 in Washington, DC.Powell said the Fed will not raise interest rates this quarter and no rate hikes are likely anytime soon.(Photo by Mark Wilson/Getty Images) | Mark Wilson/Getty Images
For their part, banks fear a Fed-issued digital currency could make it easier for customers to pull out large amounts of deposits and convert them to digital dollars during a crisis — the virtual equivalent of a bank run — putting financial stress on their institutions and making less money available to provide credit for people, businesses and markets.
It could also potentially deprive them of customers, something the lenders say would interfere with lawmakers’ vision of increased financial inclusion.
“While it is true that deposit accounts are often the first step towards inclusion, the benefits of a long-term banking relationship go well beyond a deposit account,” the ABA said in its statement.“The same is not true of a [central bank digital currency] account with the Federal Reserve, which would not grow into a lending or investing relationship.”
The Bank Policy Institute, which represents large banks, has also argued that many of the benefits of a digital dollar are “mutually exclusive (because they are predicated on different program designs) or effectively non-existent (because the program design that produces them comes with costs that are for other reasons unbearable).”
“The decision on whether to adopt a central bank digital currency in the United States is appropriately a long way off,” BPI President and CEO Greg Baer said.“There are also complex and serious costs that will need to be considered.”
But many lawmakers think it’s worth the effort to look into it.
“The Federal Reserve should continue to explore a digital [currency]; nearly every other country is doing that,” Sen.Bill Hagerty (R-Tenn.) said at the hearing, citing the risk for the U.S.to lose its ability to deploy economic sanctions as effectively with decreased usage of the dollar.
Filed Under: Federal Reserve , Elizabeth Warren , Elizabeth Warren 2020 , Banks , John N.Kennedy , Jerome Powell POLITICO
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