United States: House Financial Services Subcommittee Considers National Security Implications Of CBDCs

The U.S. House Financial Services Subcommittee on National Security, International Development and Monetary Policy considered testimony on the creation of a U.S. central bank digital currency ("CBDC").

In a Memorandum to the members of the Committee, majority staff explained that many central banks are pursuing CBDCs because of their potential to (i) increase financial inclusion, (ii) facilitate faster and cheaper payment options, (iii) counter private cryptocurrencies and (iv) build "newer, more direct levers" to implement monetary policy. With regard to national security considerations, staff asserted that a U.S.-sponsored CBDC should be evaluated in the context of:

• the current global dominance of the U.S. dollar's status and the "imminent roll-out" of a digital yuan by the People's Bank of China;
• sanctions evasion, as anonymized and tokenized CBDCs could undermine the impact of sanctions as a foreign policy tool;
• privacy concerns, given that a CBDC model with a centralized ledger would grant a single authority access to every CBDC user and transaction and the ability to approve or block transactions;
• adapting current anti-money laundering requirements to a purely digital ecosystem, including the onboarding of customers - specifically through Customer Due Diligence - and the reporting of suspicious findings to regulatory authorities; and
• cybersecurity and the vulnerabilities of CBDC systems to cyberattacks.

The Subcommittee heard testimony from:

• Dr. Julia Coronado, President and Founder, MacroPolicy Perspectives, who proposed a two-tiered system for a Federal Reserve-backed digital dollar by creating new digital payment providers that would process retail payments for consumers. She stated that a two-tier system "of private providers would promote competition and continued innovation, while Fed oversight would promote safety and soundness";
• Mr. Yaya J. Fanusie, Adjunct Senior Fellow, Energy, Economics and Security Programs, Center for a New American Security,  who testified that despite the risks associated with CBDCs, a "sound policy posture" by the U.S. is not to stop their development;
• Ms. Julia Friedlander, C. Boyden Gray Senior Fellow and Deputy Director, Atlantic Council,  who recommended that Congress pass legislation either authorizing a pilot program for CBDCs or amending the Federal Reserve Act to authorize the creation of a digital dollar, because legislation would signal the seriousness of the United States in developing a CBDC and prompt other countries developing CBDCs to ensure compatibility with a digital dollar;
• Dr. Andrew Levin, Professor of Economics, Dartmouth College,  who argued that legislative action is not a prerequisite for the creation of digital dollars because the Federal Reserve Act does not specify that Federal Reserve notes must be issued as paper bills; and
• Mr. Robert M. Baldwin, Head of Policy, Association for Digital Asset Markets,  who raised questions for legislators to consider, including whether the CBDC (i) will be token-based or account-based and (ii) will allow consumer-to-consumer transactions. He noted that it is "currently unclear if the Federal Reserve has the authority to develop a CBDC without [c]ongressional approval."

Primary Sources