Senate Subcommittee Considers Benefits Of A Central Bank Digital Currency – Finance and Banking – United States – Mondaq News Alerts

United States: Senate Subcommittee Considers Benefits Of A Central Bank Digital Currency

14 June 2021

Cadwalader, Wickersham & Taft LLP

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The U.S. Senate Banking Subcommittee on Economic Policy considered testimony on the benefits of
issuing a central bank digital currency (“CBDC”).

Subcommittee Chair Senator Elizabeth Warren (D-MA) expressed support for a “well-designed” and “efficiently executed” CBDC
because of its potential to “drive out bogus digital private
money while improving financial inclusion, efficiency, and the
safety of our financial system.” By contrast, Ms. Warren
criticized cryptocurrencies, calling them a “fourth-rate
alternative to real currency” and asserting that they are:

• a “lousy” means of transacting, since their value
  substantially fluctuates as a result of speculative day
  trading;
• a poor investment, given that there are currently no consumer
  protections for crypto investors, and pump-and-dump schemes “have become routine in crypto trading”;
• substantial facilitators of illegal activity, as the secrecy
  component of cryptocurrencies has enabled criminals to more easily
  move money; and
• “staggering” consumers of energy; she pointed to (i)
  the amount of energy required in “proof-of-work” mining
  for new cryptocurrency tokens, and (ii) the fact that
  Bitcoin-related energy consumption is higher than the yearly energy
  consumption of the Netherlands.

The Subcommittee heard testimony from the following
individuals:

• Dr. Neha Narula, MIT Digital Currency Initiative Director. Ms.
  Narula testified that a CBDC is not the only
  method for addressing the issues associated with underbanking in
  the traditional financial system, noting that a requirement on
  banks to provide free, no-minimum accounts to users might address
  the issue. Considering that the U.S. dollar plays a significant
  role in the global economy, Ms. Narula cautioned against too
  quickly adopting a U.S. CBDC without thoroughly determining (i) how
  it should be accessed and managed, and (ii) what data it makes
  visible, to whom and under what circumstances.
• Lev Menand, Columbia Law School Academic Fellow and Lecturer in
  Law. Mr. Menand described shortcomings of the current
  U.S. banking system, including: (i) inaccessibility for certain
  U.S. households, (ii) the high cost of overdraft, deposit and
  minimum balance fees, (iii) slow processing times for check
  deposits, wire transfers and credit card payments, and (iv)
  complexity with respect to differing bank ledgers. Mr. Menand
  stated that the advent of a CBDC could address these shortcomings
  by, among other things, (i) expanding mainstream banking
  eligibility, (ii) decreasing the clearing time for payments, (iii)
  reducing the fees associated with banking, (iv) enhancing financial
  stability for businesses and institutions, and (v) decreasing
  regulatory complexity, considering that many of the regulations
  promulgated following the 2008 financial crisis were aimed at
  deposit substitutes.
• Dr. Darrell Duffie, Stanford University Graduate School of
  Business Professor of Management and Finance. Mr. Duffie urged the United States to invest in the
  development of a CBDC, considering the progress that has been made
  internationally in similar ventures, particularly that of
  China’s eCNY. Mr. Duffie recommended that the United States (i) “take a leadership position” in international
  conversations regarding the cross-border use of CBDCs, and (ii)
  enhance the competitiveness and efficiency of the existing U.S.
  payment system.
• J. Christopher Giancarlo, Willkie Farr & Gallagher Senior
  Counsel. Mr. Giancarlo promoted the Digital Dollar Project’s “champion model” proposal for a CBDC, which would involve
  the Federal Reserve issuing “Digital Dollars” to
  regulated banking entities. The former CFTC Commissioner stated
  that the champion model would enable the continuation of the
  two-tiered commercial bank and regulated money transmitter model
  through its deployment and recording of the Digital Dollar
  transition on a “new transactional infrastructure informed by
  distributed ledger technology.” Mr. Giancarlo asserted that
  the Digital Dollar would be “far superior” to Bitcoin
  with respect to environmental sustainability because it would not
  have to be mined. Rather, the Digital Dollar would be created by
  the Federal Reserve cryptographically and distributed
  electronically. Additionally, Mr. Giancarlo contended that the
  existence of a Digital Dollar during the earlier stages of the
  COVID-19 crisis would have provided a means of instant monetary
  relief to targeted beneficiaries. Mr. Giancarlo also noted that a
  Digital Dollar could be superior to competing financial instruments
  of foreign jurisdictions, particularly those with anti-democratic
  regimes that could use those instruments for surveillance purposes.
  He explained that it would be “in the best national interest
  of the United States and . . . in the interest of the world
  economy” to create a well-designed U.S. CBDC. One challenge,
  Mr. Giancarlo observed, is the ability of the United States to take
  a leadership role in the innovation of a CBDC, considering that “this global wave of digital currency innovation is quickly
  gaining momentum.”

Commentary

A U.S. dollar CBDC seems inevitable. When Senator Warren and
former CFTC Chair Giancarlo agree on something, on anything,
it is probably time to act. At what point does continuing
to conduct studies create delays that may weaken the competitive
position of the dollar in the global economy (or at least fail
to capitalize on its strengths)?

Primary Sources

1. U.S. Senate Financial Services Subcommittee
   Hearing: Building a Stronger Financial System – Opportunities of a
   Central Bank Digital Currency
2. Senator Elizabeth Warren Testimony: Building a
   Stronger Financial System – Opportunities of a Central Bank Digital
   Currency
3. Neha Narula, MIT Digital Currency Initiative
   Testimony: Building a Stronger Financial System – Opportunities of
   a Central Bank Digital Currency
4. Lev Menand, Columbia Law School Testimony:
   Building a Stronger Financial System – Opportunities of a Central
   Bank Digital Currency
5. Darrell Duffie, Stanford Business School
   Testimony: Building a Stronger Financial System – Opportunities of
   a Central Bank Digital Currency
6. J. Christopher Giancarlo, Willkie Farr &
   Gallagher Testimony: Building a Stronger Financial System –
   Opportunities of a Central Bank Digital Currency

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