Senate Subcommittee Considers Benefits of a Central Bank Digital Currency

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.”

LOFCHIE COMMENT

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

Money Growth Falls – Inflation Threat Remains…

CFS broad money growth slowed to 12.1% on a year-over-year basis in the latest reading for April down from 23.8% in March.

The initial response might be to assume that the large expansion of money is reaching an end. This would be a mistake. The “base effect” elevating monetary growth on a year-over-year basis began to end in March 2021 and fully finished in April 2021. A few issues include:

  • CFS Divisia monetary growth of 12.0% in April dwarfs average growth of 5.6% since 1967 (DM4- excluding Treasury bills).
  • A high frequency reading of CFS monetary data stretching back over 54 years portrays a radically different perspective regarding the performance of broad money and its implications for inflation. It highlights how broad money growth and inflation risks are actually beginning to accelerate (chart available on request).

On April 22, 2020, we were early and clear in our email message “CFS Money Growth Soars to double digits.” The initial impulse embedded in the signal from CFS broad money would be a period of disinflation followed by inflation.

Going forward, inflation will likely continue its upward ascent and stretch beyond the Fed’s comfort zone.

The present global macro backdrop for investors and officials is one of the most challenging and complex in decades. We look forward to any comments you might have.

For more on CFS Divisia money and inflation:
http://www.centerforfinancialstability.org/research/Modernize_Money_042621.pdf
http://www.centerforfinancialstability.org/research/Post_Pandemic_Economic_Risks_050521.pdf

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Apr21.pdf

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) ALLX DIVM
2) ECST T DIVMM4IY
3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’