A new form of money being explored in Washington could fundamentally alter how Americans buy, sell, and save, prompting strong warnings from lawmakers. Known as a Central Bank Digital Currency (CBDC), or 'digital dollar,' this currency would be issued and regulated by the Federal Reserve. Formal discussions around CBDCs intensified around 2020.
Renewed Debate on Social Media
The debate over adopting a digital dollar has been reignited online after Congressman Eric Burlison called it 'the most tyrannical tool you could put in Washington's hands.' In a post on X on Tuesday, the Missouri representative stated, 'Flip a switch, you can't buy a firearm. Flip another, you can't donate to your church. China built that system. We are NOT building it here.'
Potential Risks and Criticisms
Critics warn that if the US government adopts a CBDC, it could directly manage money flow, monitor transactions in real-time, instantly distribute payments, and enforce targeted monetary policy. Potential capabilities include programming money for specific uses, reducing financial privacy, and potentially enforcing negative interest rates.
Legislative Efforts to Block CBDC
Many lawmakers have been pushing to block the Federal Reserve from creating a digital currency, attempting to attach a ban to several major bills. Most recently, they sought to include it in legislation extending a key surveillance program. However, that effort failed when Congress passed the measure without the digital currency restriction before an April 30 deadline.
The House voted 235-191 to extend the spy program, known as Section 702 of the Foreign Intelligence Surveillance Act (FISA). A group of Republican lawmakers had hoped to include a CBDC ban in the bill, but the Senate resisted. Senate Majority Leader John Thune warned that any legislation including a ban on a digital currency would be 'dead on arrival' in the Senate, effectively killing the proposal. Instead, lawmakers approved a short-term extension to keep the surveillance program in place while the debate continues.
Burlison responded to Thune's comments on X, saying, 'I don't care what Thune thinks. A Central Bank Digital Currency is a threat to all of our rights and liberties. It must be banned.'
Rep Scott Perry of Pennsylvania, a member of the House Freedom Caucus and a supporter of the ban, said in a press conference that most of his constituents 'don't want the government monitoring their bank accounts, telling them what they can buy, when they can buy it, and when they're not allowed to buy.'
Global Context
More than 130 countries are researching or launching CBDCs, with full usage in the Bahamas, Jamaica, and Nigeria. China's 'e-CNY' leads in pilot scale with $986 billion in transactions, while India's digital rupee is also in active testing. The e-CNY operates as a state-backed, pilot-stage digital currency, functioning similarly to WeChat Pay or Alipay for payments. While not restricting total spending, the Chinese government strictly bans private crypto and utilizes the traceable, programmable e-CNY to control capital flow, enhance monitoring, and potentially steer consumer behavior.
State-Level Actions
Several US states have passed legislation banning or restricting the use of CBDC within their jurisdictions, primarily focusing on prohibiting its use as legal tender or in state financial transactions. Florida led this initiative, followed by states including Alabama, Georgia, Indiana, Louisiana, Montana, Nebraska, North Dakota, and Utah.
Federal Reserve's Position
In 2022, the Federal Reserve released a paper weighing the pros and cons of creating a central bank digital currency. The paper stressed that no final decisions about a US digital currency have been reached. However, it suggested that a digital currency that 'would best serve the needs' of the nation would follow an 'intermediated model' under which banks or payment firms would create accounts or digital wallets. The Federal Reserve said it would not proceed with creating a CBDC 'without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.'
'While a CBDC could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries, there may also be downsides,' Fed officials wrote. Challenges include maintaining financial stability and ensuring the digital dollar would 'complement existing means of payment.' The central bank also needs to tackle major policy questions, such as ensuring a CBDC does not violate Americans' privacy and that the government maintains its ability to combat illicit finance.
Unlike cryptocurrencies, which are typically run by private actors, a CBDC would be issued and backed by the central bank. It would differ from electronic transactions that happen through large commercial banks in that it could give consumers a direct claim to the central bank, similar to physical cash.
