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New Atlanticist May 21, 2024

Don’t let the US become the only country to ban CBDCs

By Josh Lipsky and Ananya Kumar

This week, as part of a trifecta of digital assets legislation, the US House of Representatives is set to take up HR 5403, also known as the “CBDC Anti-Surveillance State Act.” While the bill has received far less attention than the cryptocurrency regulation efforts being moved alongside it, its passage could do significant damage to the future of the dollar and curb innovation across both the public and private sector.

Central bank digital currencies, or CBDCs, are a digital form of a country’s fiat currency—like an electronic version of cash. The difference between a CBDC and the money one uses on, for example, the payment service Venmo or the Bank of America app is that a CBDC is a liability of a country’s central bank, not a commercial bank.

Over the past five years, most central banks in the world have started exploring the possibility of issuing a CBDC. The reasons vary from country to country. For example, in some small island nations, such as the Bahamas, improving financial inclusion because of limited access to banks and vulnerability to natural disasters is a major motivation. In other countries, such as the United Kingdom, there is a push to “future-proof” money as citizens use less paper cash. While the reasons might vary based on the unique requirements of each country, the trend line is clear. According to Atlantic Council research, as of March 2024, there is a new record high of 134 countries exploring a CBDC, with thirty-eight ongoing CBDC pilot projects, including ones in Europe and Japan.

The United States trails all of its Group of Seven (G7) peers when it comes to researching and developing a CBDC. Outside the G7, the gap is even wider. Eleven Group of Twenty (G20) countries are in the pilot stage, including Brazil, India, Australia, South Korea, and Turkey. China, too, is on the list and already has 250 million users.

It would be a self-defeating move in the race for the future of money.

In the absence of US-led models and regulatory roadmaps, there is a growing risk of a fragmented payment system emerging in which different models proliferate and make the international financial architecture more expensive and less efficient. This is the exact opposite of what banks are trying to achieve with these new technologies.

Critics of CBDCs rightly raise concerns about citizens’ privacy. If the Federal Reserve issues a digital form of cash, couldn’t the government then “surveil” the population and see how citizens spend their money? The solution, however, is not to remove the United States from the playing field, which would allow countries such as China, which will not prioritize privacy, to set standards for the rest of the world. Instead, the United States should work with partners and allies to develop digital assets with democratic values—ones that protect privacy, ensure cybersecurity, and foster a healthier global financial system.

In fact, if this bill ever became law, the United States would be the only country in the world to have banned CBDCs. It would be a self-defeating move in the race for the future of money. It would undercut the national security role of the dollar as the decision would only accelerate other countries’ development of alternative payment systems that look to bypass the dollar in cross-border transactions. This would make US sanctions less effective.

It is one thing to decide not to issue a CBDC—and several countries are debating that precise issue right now. But it is an unnecessary and harmful step to preemptively ban the Federal Reserve from even exploring the idea.

In many ways, the bill before the House is a solution in search of a problem. Over the past year, the Federal Reserve has been crystal clear that it would not proceed with a CBDC without congressional approval. Federal Reserve Chair Jerome Powell repeated this stance in March in testimony to Congress. This gives both the House and the Senate ample opportunity to voice their legitimate concerns if and when the time comes to debate a US CBDC. But even that point is a long way off. The Federal Reserve is only researching a retail CBDC—meaning one used by the general public for commercial and peer-to-peer transactions—at this point, and as the experience of other countries shows, these projects can take years to turn into actual prototypes.

The bill does create real risks for the future of the dollar, however. Because the bill is so broadly worded, it could potentially ban a range of the Federal Reserve’s existing functions and its work with commercial banks on faster settlement of deposits, as research by the Congressional Budget Office shows. Such sweeping language could impact a range of ongoing projects between the Federal Reserve, major US banks, and even US allies overseas. In fact, the New York Federal Reserve is currently working with the private sector and a number of countries, including Singapore, Germany, and France, on developing faster ways to exchange money between commercial banks across borders.

It is very likely that several countries will look at the House bill and conclude that it’s not worth their time, energy, and money to engage with a partner that may, in the near future, not be able to see a project to its conclusion. Even if the Senate never takes up the legislation, a signal will have been sent. With this single vote, the House could create a chilling effect that will undercut US influence in being able to set critical standards around this emerging technology.

Financial innovation in the United States is and always should be a collaboration between the public and private sector. The Federal Reserve should be allowed to continue its exploration and work with US commercial banks and countries around the world to build safe global standards and faster payments. To stop this research in its tracks and make the United States the one country in the world to ban a CBDC would be a disservice to innovation and jeopardize US leadership in the global economy.

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center. He previously worked at the International Monetary Fund and US State Department.

Ananya Kumar is the associate director for digital currencies at the Atlantic Council’s GeoEconomics Center.

Further reading

Image: The US Capitol Building is seen in Washington, U.S., August 15, 2023. REUTERS/Kevin Wurm/File Photo