ABA: Case not yet made for a U.S. CBDC

It is not necessary to digitize the dollar because the dollar functions primarily in digital form today, and issuing a central bank digital currency doesn’t solve a specific financial problem or respond to a pressing economic need, ABA said in a statement submitted ahead of 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.

ABA emphasized that legislation would be required to authorize the Federal Reserve and Treasury Department to take such a step. But at a fundamental level, “the main policy obstacle to developing, deploying and maintaining a CBDC in the real economy is the lack of compelling use cases where CBDC delivers benefits above those available from other existing options,” ABA wrote.

According to ABA, a CBDC would serve as an “advantaged competitor” to retail bank deposits, ultimately moving money away from banks and into accounts at the Fed where the funds cannot be lent back 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 has said that any CBDC should be “privacy-protected, intermediated, widely transferable and identity-verified,” which means any U.S. digital currency would be distributed through private-sector financial institutions, but individual holdings would sit at the Federal Reserve. “These deposit accounts represent 71% of bank funding today,” ABA wrote. “Losing this critical funding source would undermine the economics of the banking business model, severely restricting credit availability increasing the cost of credit, and causing a slowdown of the economy.”

Fed’s Brainard and house committee debate CBDC’s need

At today’s hearing, House Financial Services Committee members grilled Federal Reserve Vice Chair Lael Brainard on the benefits and risks of implementing a CBDC in the United States, with questions ranging from the timing of implementing a CBDC and the breadth 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,” said McHenry (R-N.C.), said Rep. Patrick McHenry (R-N.C.), the committee’s ranking member, echoing concerns from other lawmakers. There is potential for significant harm to our financial system if we move forward without sorting through potential consequences. We should be thorough in our review. Congress should not rush to issue a digital currency, nor should the Fed. We both should understand whether the benefits of a digital currency actually outweigh the risks before any further congressional action is considered.”

Reps. Brad Sherman (D-Calif.), Bill Posey (R-Fla.) and Andy Barr (R-Ky.) expressed concern that a CBDC would threaten the viability of commercial banks’ deposits and lending activities, ultimately affecting consumers’ options when seeking credit. The Fed has previously indicated a preference for any U.S. digital currency to be distributed through private-sector financial institutions, but individual holdings would reside within the Federal Reserve, which critics claim would limit bank lending.

“Anything we do in this space would have to be consistent with banks remaining important intermediaries. Banks are very important in terms of credit provision, in terms of monetary policy,” Brainard said, responding to Posey. “We’re already seeing massive changes, where payments are made increasingly through mobile payments apps. We’ve seen those having implications for cash usage. Any future evolution of the financial system with digitalization is going to lead to some diminished use of cash and some diminution of bank deposits,” adding that it will be “very important” to consider ways to limit CBDC competition with deposits.