A digital dollar could be a huge challenge for retail banking
Next week the House Committee on Financial Services will hold a hearing on Central bank digital currencies (CBDC). This is not the first Congressional hearing on CBDCs, and it will not be the last. The concept of a digital dollar, issued by a central bank, is a hot topic for policymakers. Although the Note for the Hearing, as well as the people testifying before the Committee, have not been published, the title is appropriate: The promises and perils of central bank digital currencies.
For proponents, a digital dollar can remove some of the friction between transfers and payments while perhaps allowing better access for the under-banked. Of course, these benefits are associated with deep political questions about how government officials should handle digital currency, not to mention the possibility of cyber risks and privacy intrusions.
Before the committee hearing, Crowdfund Insider connected with a lawyer Gregory Zerzan, shareholder of Jordan Ramis, who previously worked in the US Department of the Treasury, the US Department of the Interior and acted as legal counsel to the House Committees on Agriculture, Financial Services and Energy and Commerce as well as the Committee financial services. Zerzan understands the machinations of Washington, DC fairly well. We discussed his thoughts on the potential of CBDCs and what policymakers will do with regards to a digital dollar. Our conversation is shared below.
Recently, Federal Reserve Chairman Jerome Powell said he believes the United States is not behind the rest of the world in the pursuit of a digital dollar. Do you agree with him? Can you explain why or why not?
Gregory Zerzan: It depends on what is meant by “digital dollar”. For rounding purposes, almost all US dollar transactions are virtual; some people like to distinguish these virtual dollars as “electronic” rather than “digital,” but the bottom line is that the US dollar mostly exists as a notional mark on a digital ledger. The real question is who controls this ledger; with a digital yuan, the People’s Bank of China gives individual users the equivalent of digital personal accounts. Obviously, this is something the Fed has yet to do.
China has been testing a digital yuan for some time now, with some speculating executives hoping to strengthen its currency as a reserve currency. Is this a possibility?
Gregory Zerzan: China appears to give users the ability to disintermediate the banking system from the use of its currency. This could be an attractive option for those who dislike the way the US government has used anti-money laundering sanctions and tools to exclude disadvantaged parts of the global financial system. However, the success of the digital yuan is directly linked to user confidence that the Chinese government will not abuse its power as the ultimate custodian of user accounts. It remains to be seen.
Powell also said that a CBDC could eliminate the need for stablecoins, as well as other cryptocurrencies. What do you think about this? Could this be the end of Tether, etc.?
Gregory Zerzan: If a CBDC means the Fed now has better access to every dollar transaction because it now controls the central ledger, it could make stablecoins more attractive. A digital dollar won’t kill stablecoins, but overly aggressive regulation could.
Enforcement measures would likely wreak havoc on the market. Even when it is questionable whether such actions could survive a legal challenge, the uncertainty alone would have a chilling effect. At least part of the appeal of stablecoin is that it offers a largely anonymous alternative to traditional accounts like money market funds and bank deposits.
Beyond cybersecurity issues, what are the biggest policy questions regarding a digital dollar?
Gregory Zerzan: The bigger political question is whether people are comfortable disrupting the banking system as it has existed in the United States since at least the early 1900s. Banking as we know it today is still conceived of. around the idea that money is a physical thing that needs to be stored somewhere. Of course, that ceased to be a reality when dollars went virtual and were no longer backed by anything tangible.
Any true “digital dollar” requires users to have direct and disintermediated access to their money, which likely requires individual accounts at the FFederal Reserve. Private banking might still exist, but it should now compete with the interest that users of the digital dollar might earn in the Fed.
A digital dollar would be the kingdom of the US Federal Reserve. Should we be concerned about confidentiality issues? BSA-style AML / KYC expected – will the government have too much information?
Gregory Zerzan: It could be argued that digital dollar transactions would pose no greater privacy concerns than today’s largely electronic transactions. Whether in our current system or with a digital dollar, people who wish to remain anonymous in their dollar transactions are largely limited to the use of cash.
Often, alongside discussions about a CBDC, there is the opportunity to better serve the under-banked segments of the population. Do you think this is true? Why or why not?
Gregory Zerzan: Individual accounts at the Fed would make it easier for Americans to receive a bank account as they receive a social security number. Like a Social Security number, a Fed account could be set up with little paperwork. The account number can be required information on an I-9 or W-4 so that when a person starts a job, the employer knows where to send payments. All of this would require very little effort on the part of the individual.
What about the need for current accounts and retail banking? Some time ago the Bank of England wrote an interesting article on the impact of a CBDC and retail banks. Do these businesses need to change?
Gregory Zerzan: A digital dollar based on individual Fed accounts could pose a huge challenge for retail banking. They should compete with the Fed on interest rates and with other banks for attractive lending opportunities.
In the short term, the introduction of individual Fed accounts could prove to be very disruptive to credit. It is likely that the Fed will have to develop new mechanisms to provide liquidity to banks that are less connected to a bank’s deposit base.
The Fed is working with MIT on a potential CBDC. Any idea when a digital dollar can be alive and wild? Thoughts on the tech stack?
Gregory Zerzan: A digital dollar would likely require congressional action. Already this year there has been a lot of talk and a few congressional hearings on a CBDC, but it would be surprising if anything happened in the short term.
the House Committee on Financial Services, The Subcommittee on National Security, International Development and Monetary Policy will hold the CBDC hearing on Tuesday, June 27 at 10 a.m. ET. The hearing will be webcast live on the Committee’s website.