There is no need to digitize the dollar because the dollar operates mostly in digital form today, and issuing central bank digital currency does not solve a specific financial problem or meet an economic need. pressing, the ABA said in a statement submitted before the House. Financial Services Committee hearing on the benefits and risks of a CBDC in the United States. The association echoed that message in a joint letter to lawmakers signed by several other financial trade groups.
The ABA pointed out that legislation would be needed to authorize the Federal Reserve and the Treasury Department to take such action. But at a fundamental level, “the primary policy barrier to developing, deploying, and sustaining a CBDC in the real economy is the lack of compelling use cases where CBDC provides benefits beyond those available from ‘other existing options,’ ABA wrote.
According to the ABA, a CBDC would serve as a “preferred competitor” to deposits from retail banks, ultimately moving money from banks to accounts at the Fed where the funds cannot be loaned into the economy. It would “fundamentally rewire our banking and financial system by changing the relationship between citizens, financial institutions, and the Federal Reserve,” reducing the availability of credit and increasing its cost.
The Fed said any CBDC should be “privacy-protected, intermediated, widely transferable, and identity verified,” which means that any U.S. digital currency would be distributed through private-sector financial institutions, but that individual holdings would sit at the Federal Reserve. “These deposit accounts now account for 71% of bank funding,” writes ABA. “The loss of this essential source of funding would undermine the economics of the banking business model, severely restrict the availability of credit, increasing the cost of credit and causing the economy to slow down.”
Fed’s Brainard and House Committee Debate CBDC Needs
During today’s hearing, members of the House Financial Services Committee questioned Federal Reserve Vice Chairman Lael Brainard on the benefits and risks of implementing a CBDC. in the United States, with issues ranging from when to implement a CBDC to the extent of legislation needed to enact such a system to economic equality and ensuring a level playing field for competition and innovation in the financial system.
“We still have many unanswered questions,” McHenry (RN.C.) said, Rep. Patrick McHenry (RN.C.), a ranking member of the committee, echoing the concerns of other lawmakers. There is potential for significant harm to our financial system if we move forward without sorting out the potential consequences. We must be thorough in our examination. Congress shouldn’t be rushing to issue a digital currency, nor should the Fed. We both need to understand if the benefits of a digital currency really outweigh the risks before any further congressional action is considered.
Representatives Brad Sherman (D-Calif.), Bill Posey (R-Fla.), and Andy Barr (R-Ky.) expressed concern that a CBDC would threaten the viability of deposits and lending activities of commercial banks, ultimately affecting consumers. options when applying for credit. The Fed has previously indicated a preference for any US digital currency to be distributed through private sector financial institutions, but individual holdings would reside within the Federal Reserve, which critics say would limit bank lending .
“Everything we do in this space should be consistent with banks remaining important intermediaries. Banks are very important in terms of providing credit, in terms of monetary policy,” Brainard said, responding to Posey. “We are already seeing massive changes, where payments are increasingly being made through mobile payment apps. We have seen those which have implications for the use of money. Any future changes in the financial system with digitalization will lead to less cash usage and less bank deposits,” adding that it will be “very important” to consider ways to limit CBDC competition with deposits.