WASHINGTON – Lawmakers are pressing the Federal Reserve to move quickly toward issuing a digital dollar, to counter moves by China and others that they say could one day threaten the U.S.’s status as a global reserve currency .
The bipartisan group of lawmakers, including Reps. Maxine Waters and French Hill, has sought for the United States to counter global competitors launching digital versions of their currencies. The House Financial Services Committee, which they sit on, could vote on related legislation as early as next month.
Waters has framed the competition over new forms of central bank money as “a new digital asset space race.” The Biden administration and the Fed do not share a sense of urgency.
Unlike private cryptocurrencies like bitcoin, a central bank digital currency issued by the Fed would be backed by the U.S. central bank, just as the Fed backs physical currency.
Fed Chairman Jerome Powell has indicated that the central bank is in no rush as it faces inflation and a slowing economy. Powell has said that it is more important to get the digital dollar right than to be first to market, in part because of the dollar’s critical global role. He has also said that the Fed will not issue a digital dollar without the support of elected officials. The White House has remained largely neutral on a digital dollar, with President Biden ordering a study to determine its implications for issues such as economic growth and stability.
Waters, who chairs the financial services panel, has drafted legislation that would require the Fed to study a digital dollar, building on the central bank’s existing work on the issue and creating a process for the U.S. to issue one in the future.
The idea faces stiff resistance. The banking industry generally says the costs of a central bank digital currency outweigh the benefits and that it would compete directly with private bank deposits, making loans more expensive.
For about a century, the dollar has reigned as the world’s most important currency, priced for its ubiquitous acceptance in almost any transaction, from a cup of coffee at the neighborhood restaurant to a bond sale in Hong Kong and other places abroad. There is now a serious debate about whether that status could be threatened by the march of technology and whether, in response, the dollar should go digital.
A digital dollar could offer a new option to the way consumers pay for goods and services. In addition to using a credit or debit card, or Venmo or Apple Pay, people would have a digital version of cash on their phones that could be used anywhere, likely through existing financial companies. This could lead to faster, cheaper and safer payments and make paper money obsolete.
The change could make it easier to move money across borders by lowering cross-border remittance fees. Advocates also say it could lead to faster and more secure delivery of government payments, such as stimulus checks and unemployment benefits.
Some in Congress say the US is already behind the curve. Among the major economies of the Group of 20, 16 are in the development or pilot phase of a digital currency, according to the Atlantic Council, a Washington think tank. The European Central Bank, on behalf of countries such as Germany and France, is exploring designs for a digital euro and is preparing to launch a pilot test.
Hill, the Arkansas Republican, said his concerns were fueled in part by China, which has begun real-world testing of its own central bank.–issued digital currency in 2020. In an interview, he said that China’s lending practices to the developing world could make it easier for the country to promote international uses of its digital currency, a potential threat to the global economy based on in the dollar
“We should be concerned about China’s predatory practices,” he said.
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Chinese authorities have not ruled out international use of e-CNY, the official name of the country’s digital currency, but say it is designed for small-scale domestic use by consumers.
Analysts are looking for signs that the People’s Bank of China will take concrete steps to join with central banks elsewhere to enable the use of digital currencies between countries. The bottom line is that Beijing is uncomfortable with the outsized role the U.S. dollar plays in global trade and, in particular, fears that it will freeze out of the dollar-based financial system, such as in response to a dispute over Taiwan. .
International transactions in a digital currency created by China, the thinking goes, could be a defensive weapon in such circumstances because they would go beyond the reach of the US.
The Chinese Embassy in Washington did not respond to a request for comment.
Some lawmakers say Congress should authorize a digital dollar, not just study it. “I feel some urgency because other countries are moving forward,” Rep. Jim Himes said in an interview. “The time is now for CBDC.”
Banks and some Republican lawmakers respond by saying that any digital dollar gains are best achieved through private sector innovation.
“What specific problems, if any, will a central bank digital currency solve?” asked North Carolina Representative Patrick McHenry, the top Republican on the House Financial Services Committee, in a hearing earlier this year.
Some analysts are skeptical that global markets will replace the dollar with the use of Chinese or other foreign digital currencies.
At the Fed, Vice Chair Lael Brainard has more enthusiastically pushed the idea of a digital dollar within the central bank, though she has stopped short of directly endorsing it.
Brainard has said that a digital dollar could one day provide consumers with a level of security amid a proliferation of privately issued digital assets such as stablecoins. A high-profile collapse of a stablecoin earlier this year has raised concerns about these assets.
“A digital native form of safe central bank money could improve stability by providing the trust-neutral settlement layer in the future crypto financial system,” he said in a speech in July.
This article was first published by The Wall Street Journal