Lawmakers split on merits of U.S. central bank digital currency

The Federal Reserve establishing a “digital dollar” could transform the nation’s payment systems, though much work is needed before it’s achievable, according to experts, but Republicans and Democrats are divided as to whether it’s good idea at all.

Lawmakers on the Senate Banking Committee’s economic policy subcommittee and a panel of experts discussed the potential for a central bank digital currency at a hearing Wednesday. A central bank digital currency is a widely used digital representation of a country’s sovereign currency issued by and as a liability of a jurisdiction’s central bank or other monetary authority.

Sen. Elizabeth Warren, D-Mass., who chaired the hearing, said cryptocurrencies “are a lousy way to buy and sell things. Unlike the dollar, their value fluctuates wildly depending on the whims of speculative day traders.”

She added that a central bank digital currency, or CBDC, has great promise. “Legitimate digital public money could help drive out bogus digital private money, it can help improve financial inclusion, efficiency, and the safety of our financial system — if that digital public money is well-designed and efficiently executed, which are two very big ‘if’s,'” Ms. Warren said.

But Sen. Pat Toomey, R-Pa., ranking member on the committee, said it’s unclear that a CBDC is necessary and that Congress should encourage the continued development of private digital currencies.

“Private digital currencies have the potential to increase access to financial services for all Americans while increasing individual privacy,” Mr. Toomey said. “Now, people have raised legitimate, important issues about private digital currencies, including their use in illicit activity and the possibility they could affect monetary policy and on our existing financial infrastructure. I think we need to discuss these, we need to understand these issues, and we may well need to address them. But we shouldn’t lose sight of the tremendous benefits that the underlying technology of digital currencies offers, and that disintermediated payments can offer as well.”

The Federal Reserve Bank of Boston announced a partnership in 2020 with the Digital Currency Initiative at the Massachusetts Institute of Technology to perform technical research related to a central bank digital currency.

Neha Narula, director of MIT’s Digital Currency Initiative, told committee members that there are myriad open questions regarding how a U.S. CBDC should operate — including how users might access it and how to protect consumer privacy — but the upside is immense.

“Digital currency offers an opportunity for a ground-up redesign of our payment systems,” Ms. Narula said. “If built in the right way, a digital dollar might empower users and create a platform for innovation in payments, much as the internet created a platform for innovation by facilitating the transfer of information.”