Today the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a virtual hearing on the Digitization of Money and Payments with a focus on central bank digital currency (CBDC). Much of senators’ questions focused on the motivation for a digital dollar, the two key ones being the international status of the U.S. dollar, and whether or not a CBDC would enable inclusion for the unbanked and underbanked. While privacy and anonymity were mentioned, the other main issue addressed was the steps needed to make it happen.
Talking about stablecoins and digital currencies, Committee Chair, Senator Crapo noted in his opening remarks that “these and other similar innovations are inevitable, beneficial and the U.S. should be the lead in their development.”
World status of the U.S. dollar
Senator Crapo’s first question was about what other central banks are doing, followed by whether this is a threat to the dominance of the U.S. dollar. Chris Giancarlo, former U.S. Chair of the U.S. Commodity Futures Trading Commission (CFTC) and founder of the Digital Dollar Project, responded.
“The dollar’s strength internationally as a reserve currency is built on many pillars. And many of those pillars are quite durable and are not going to be undermined any time soon,” said Giancarlo. “Nevertheless, the Chinese efforts and some other efforts are directly targeting some of those pillars. The U.S. dollars’ dominance is based on an account based global banking system. The moved toward a digital yuan by China is meant to bypass the accounts based system and allow for direct payments.”
Giancarlo continued: “Coupled with their Belt and Road initiative and a free trade zone in the east they are talking about, that is going to have an impact on a number of dollar strengths in the global market.”
“And then finally there’s the issue that most of the world’s major commodities are priced in dollars – major commodities, contracts and benchmarks. As they all move to a digital programmable format, I believe it’s also vitally important that the dollar itself also becomes digital in order to interact with those commodities. Otherwise, other country’s digital money will be able to interact with them.”
Giancarlo mentioned soybeans, but in fact, all commodities are now starting to be digitized. For oil, there is the VAKT blockchain post trade platform, which includes several global oil firms and already processes more than 90% of North Sea crude transactions. For agribusiness, there is Covantis founded by the world’s largest companies in the sector. And there are multiple initiatives in metals and mining, including ForceField and Minehub.
Senator Tom Cotton opened his comments by saying the need for a digital dollar was “more about keeping the dollar’s reserve currency status and ensuring its role in global payments,” he said. “The dollar has unmatched advantages, but without digitization, I worry that the dollar may end up being like the very best flip phone in 2006.”
Financial inclusion
The other key topic was financial inclusion, and here the arguments didn’t especially favor CBDC.
Senator Brown opened with scathing comments about technology firms. “Big tech companies have made a lot of big promises about the better society they were going to allow us to build. They have not lived up to any of them. They sold us the idea that the technology they’d unleash would help us level the playing field for people whose voices have been silenced,” said Senator Brown.
“They disrupted industries and institutions for taxi cabs to local journalism to our democracy itself. Instead of building something better, they tear down things for their own profit.”
For financial inclusion, Senator Brown emphasized his Banking for all Act, which could enable anybody to have access to a free bank account backed by the Federal Reserve. Critically there would be no 1.5% check cashing fees and there wouldn’t be a delay in accessing earned funds while the money clears.
Duke University Assistant Professor Nakita Cuttino highlighted similar issues as well as the cost of prepaid debit cards and the fact that low income Americans are often considered ‘unprofitable’ by banks.
She echoed concerns about new technology offering to solve a problem but sometimes making it worse. Early wage access programs are one example that is growing rapidly. She calculated that the actual costs sometimes mirror the payday loan costs, which the solution is intended to address. Moreover, because they are early payment and not classed as loans, they lack consumer protections.
Moving on to central bank digital currencies, her concerns are that if the primary mechanism is digital wallets that there are nearly 45 million Americans that don’t have smartphones. She pointed to a lack of broadband access, a topic also raised by Senator Tester from Montana where broadband quality is somewhat variable. The conclusion was that broadband quality needs to be extended.
However, not mentioned during the testimony are solutions being explored elsewhere, including China. For example, in the absence of wifi and broadband there can be p2p communication based on proximity between smartphones. These sorts of solutions are explored for inclusive identity by the likes of ID2020. For those without smartphones, advanced debit cards could hold the digital dollars.
Action needed
Senator John Kennedy asked about what steps Congress needs to take to make a CBDC a reality. Charles Cascarilla, the founder and CEO of stablecoin firm Paxos, responded with three steps. Firstly, is regulation where he highlighted the E.U. emoney license. When a fintech is registered in one country, it allows a firm to operate anywhere within the union.
Secondly, Cascarilla gave the example of the Bank of England, which recently opened access to the payment system to non bank payment service providers, including licensed fintechs. And the third recommendation is to fund pilots as the Digital Dollar project has suggested, to test numerous features of a potential digital dollar.
Three weeks ago there was a similar hearing in Congress which focused on privacy and the underbanked.
