There is an increase in the political fear mongering about central bank digital currencies. On 23 March 2023, U.S. Senator Mike Lee, Republican of Utah, introduced SB 967, a bill that amends the Federal Reserve Act to limit the ability of Federal Reserve banks to issue central bank digital currencies.
Mr Lee’s concerns regarding CBDCs appear two-fold. First, banks would be less involved in their traditional functions of opening deposits or issuing loans. Banks would, according to Mr Lee, be reduced to wallets.
Second, the banks would take on the intrusive role of monitoring consumer transactions, having knowledge of every sale or purchase involving a CBDC.
Over in the U.S. House, US Representative Tom Emmer, Republican of Minnesota, has introduced HR 1122 which prohibits Federal Reserve banks from offering certain products or services directly to an individual while prohibiting the use of CBDCs for the execution of monetary policy,
According to the Board of Governors of the Federal Reserve System, a central bank digital currency is a digital liability at a central bank that is made widely available to the general public. It is a digital form of paper (fiat) money. The CBDC would be intermediated. This means that the private sector, i.e., banks and other financial institutions, would offer accounts or digital wallets that help manage CBDC holdings (deposits) and payments.
As of this writing, the text for SB 967 is not yet available. My review of HR 1122 leads me to conclude that Mr Emmer is leaving a crack in the door for deployment of CBDCs. For example, while Mr Emmer seeks a prohibition on Federal Reserve banks providing direct services to individuals, the Board of Governors has expressed no desire that the twelve district reserve banks open up accounts for individuals. In addition, the Federal Reserve Act already prohibits providing services directly to individuals.
HR 1122’s prohibition on the use of CBDCs in the execution of monetary policy appears on the surface as moot. Analog currency is not used in carrying out monetary policy either. Rather, the Federal Reserve’s monetary policy tools are for the most part interest rate-based and are used to influence the rates banks assess each other for exchanging excess reserves. In addition, these reserves are already digital.
Mr Emmer could have added teeth to his bill by specifically wording the text to prohibit the addition to or removal from the money supply currency in the form of CBDCs. This specific wording would head off attempts at quasi asset forfeiture in the name of manipulating the money supply.
I believe that given the potential invasion of privacy CBDCs represent, it is easy for House and Senate members to consume the low hanging fruit the privacy issue presents. The question is, in my opinion, whether the invasion of depositor privacy is a part of the Federal Reserve’s mandate such that they would develop a digital currency that does that. I don’t believe invasion of privacy is their primary intent.
The Federal Reserve’s intent around central bank digital currency is to create a direct and efficient way to manipulate money supply. A programmable digital currency that regulates spending via some algorithm or all out reduces dollar amounts in accounts again by some algorithm would save the Federal Open Market Committee two days of hair pulling decisions. CBDCs would amount to their unique version of ChatGPT, an artificial monetary policy environment that reduces the FOMC’s role to monitoring and advising versus direct policy action.
The Federal Reserve would have to get Congress onboard with their policy recommendation of course. The Board is a creature of Congress and Congress still has the Constitutional duty to regulate the value of money.
3 April 2023
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