Could a CBDC give the U.S. government greater control over its currency?

Article author: Robert M. Dewey Article compilation: Block unicorn

In the coming weeks, the European Parliament will vote on a regulation that would set out guidelines and allow the European Central Bank to continue research and test the issuance of an ECB-backed digital currency (CBDC).

If this vote passes, momentum will continue to build toward issuance within the next 2-3 years. The likelihood of the U.S. issuing a central bank digital currency (CBDC) could also increase if the European Parliament authorizes the ECB to proceed.

Here's a discussion of these issues and why Europe's likely vote will go ahead, with CBDC proponents pointing to the following potential benefits:

1. Improve the payment system

a. Instant transactions

b. Help the unbanked access banking services

c. Reduce retail transaction costs

d. Protect transaction privacy

e. Easy to use

2. Prevent the rise of private digital currencies and foreign central bank digital currencies.

3. Prevent, detect and combat financial crime.

4. Protect privacy.

a. Private businesses cannot trust consumer spending data.

b. Today’s financial system is already under close scrutiny by the private sector and government surveillance; CBDC will only slightly change this to some extent and make it more efficient and effective

5. Promote payment innovation

It is worth noting that one feature of CBDC, not what is promoted by CBDC proponents, is that CBDC is software-based and therefore programmable. This would allow the government to control welfare payments and the central bank to implement monetary policy more directly.

Opponents raised the following issues:

1. Security:

a. Government control provides a single point of failure for external cyberattacks and is an attractive target.

b. Government controls are also susceptible to abuse by bad actors from within.

2. CBDC replaces deposits in fractional banks and cannot be used for leverage or loans.

3. CBDC replaces payment systems because digital currencies can be transferred instantly at low or no cost.

4. Power is concentrated in the federal government:

a. CBDC is centralized, not decentralized, and therefore cannot be monitored reliably.

b. This means they can be programmed to monitor, control, cancel and locate.

c. This means there is no reliable way to prevent these problems from occurring.

**US 2023 CBDC national survey, yellow indicates opposition, purple indicates support. The figure shows that Democrats are more likely to support CBDC, while Republicans are more likely to oppose CBDC. **

US CBDC: Currently, the chances of the US issuing and approving a CBDC are slim. Not only is there little public support for the issuance of a CBDC, but there is a very active group of elected officials in Congress who will actively oppose the issuance of a CBDC, as well as a cross-party group of people who are opposed to the issuance of a CBDC, possibly because of the US focus on individual rights. , freedom and privacy. While there are some supporters, Congress also lacks vocal advocates for CBDCs.

It’s worth discussing some of the “advantages” mentioned above:

1. Improving payment systems: Many believe that in developed countries, the private sector has implemented technologies that have led to improvements in payments. When attending a House Financial Services Committee hearing on September 14, 2023, one of the main points was that a U.S. CBDC would not improve the United States’ efficiently functioning banking and payment systems.

2. Prevent the rise of private digital currencies: The Organization for Economic Co-operation and Development (OECD) has highlighted this, but few in the United States are concerned that cryptocurrencies pose a sufficient threat to U.S. payments and banking infrastructure to need to be addressed at this point , even so, CBDC is not an effective substitute for the private sector. There can be an element of suspicion in the United States about foreign companies in other regions like Europe that doesn't exist in the United States.

3. Preventing financial crime is a commonly shared benefit of CBDC, which can monitor transactions.

4. Protecting privacy: For Europeans, this is seen as a positive perception - many trust government over private companies, especially foreign companies. In the United States, there is greater trust that the private sector has checks and balances, including accountability to customers, employees, shareholders, and government regulators, while government is not necessarily reliably bound by these mechanisms.

5. Improving financial innovation: Similar to privacy, there are supporters of public sector competition, while opponents argue that governments undermine free market competition because of their different incentives.

Issue 1: CBDC erodes banks’ capital base and reduces their lending capacity. As a direct liability of the central bank, banks cannot hold CBDC balances other than as custodians. Representative Sean Casten of Illinois (D-IL) focused on an inherently self-destructive aspect of the government’s introduction of CBDC, which is that the greater the proportion of CBDC that accounts for the monetary base, the lower the banking system’s lending capacity. , which will hinder the economic growth of CBDC issuers. In the European Union, the legislation would set limits on how much CBDC can be held by each person to prevent this from having an undue disincentive on banks’ lending capabilities.

Issue 2: CBDC is inherently programmable, introducing a single point of failure for control and security. It is this programmability that is one of the fundamental reasons for most opposition to CBDC and one of the main features of China’s CBDC. Proponents of CBDC argue that the protections built into the original programming are secure and that EU legislation provides safeguards, such as preventing specific data from certain transactions from being communicated to the European Central Bank. If a CBDC were based on a decentralized and public blockchain, public monitoring would be possible, possibly preventing changes but at least providing detectability. However, CBDC is necessarily centralized and therefore susceptible to change.

Issue 3: CBDC’s ability to instantaneously and low-cost/zero-cost transmission poses a threat to payment service providers (PSPs). Proponents of CBDC believe that payment service providers are charging exorbitant payment fees, and that CBDC, which enables instant transfers and low/zero-cost transactions, will be a welcome competitive force to reduce costs. In the EU, both CBDC proponents and EU legislation acknowledge that CBDC should not be a drag on the free market but rather provide a “fair and appropriate” compensation solution, which will be subject to changing political attitudes and is currently unlikely in the United States. Got great support.

If the European Parliament passes the legislation in October, CBDC may become even bigger news.