Rep. Himes argues that Congress should start new legislation to authorize CBDCs

Rep. Himes argues that Congress should start new legislation to authorize CBDCs

“Now is the time for Congress to begin the process of considering and ultimately passing legislation authorizing the issuance of a US CBDC,” says a new report issued Wednesday by Congressman Jim Himes ( D-CT), the first white paper (Himes Report on CBDC) by a congressman on the subject of a central bank digital currency for the United States. Himes, who serves as Chairman of the Subcommittee on Homeland Security, International Development, and Monetary Policy, chaired a audience in 2021 called ‘The promises and dangers of a central bank digital currency’. It could be argued that his position as chair of this particular subcommittee puts the notion of issuing a CBDC squarely within his Congressional jurisdiction.

the proposal is titled ‘Earning the Future of Money: A Proposal for a US Central Bank Digital Currency.’ and begins by defining a CBDC as ‘a digital form of central bank fiat currency’. Under the proposal, a CBDC would have advantages over privately issued stablecoins that are based on the strength of the issuer and crypto assets that are volatile in nature. The proposal argues that the Fed has a responsibility to explore and possibly issue a CBDC during this period in which the crypto asset ecosystem continues to grow. “While stablecoins and CBDCs may coexist, central banks should not delegate the development of a digital dollar entirely to the private sector,” the proposal says.

The proposal highlights the work of the Federal Reserve in issuing a document on CBDCs titled Money and payments: the US dollar in an era of digital transformation. The proposal reiterates the Fed’s description of several benefits of a CBDC, such as risk-free payments, better cross-border transfers, support for the global role of the dollar, and opportunities for better financial inclusion. The proposal also mentioned what the Fed found to be potential risks of issuing a CBDC, such as financial system disruption, security concerns, effects on monetary policy, and privacy and data protection concerns.

The white paper is highly thoughtful and could be inferred as an argument for the rest of Congress to begin examining Congressional legislation authorizing the Federal Reserve to issue a US CBDC. The proposal notes how, “…the The Fed would not proceed with issuing a CBDC ‘without clear support from the executive branch and from Congress, ideally in the form of a specific authorization act.'”

Early days for digital assets and blockchain

The proposal compares the origin of the Internet with the technology of digital assets. “The current stage of development of digital assets and blockchain generally resembles the development of the Internet in the early 1990s. At the time, there was skepticism about the ‘use case’ of the Internet, breathless speculation about the future, and disbelief in the seeds of a truly transformative technology,” says the Report.

The document also sought to address the concerns of their Republican counterparts and many incumbents within the current financial system who are skeptical of the idea of ​​a CBDC. The proposal provided three arguments to colleagues across the aisle, as well as skeptics. First, a US CBDC, leveraging the full faith and credit of the US government, could be an exceptionally safe and reliable platform for innovation. Second, a digital equivalent of a physical US dollar is likely a vehicle to preserve the dollar’s position as the global reserve currency of choice in the future. Third, a CBDC could have trust and cost advantages so that unbanked and underbanked populations might find this an opportunity to participate in the US financial system.

The risks of a CBDC

The proposal also lists certain risks in issuing a CBDC. First, a CBDC would be federally backed as a liability of the Fed, creating unique new risks for monetary policy. Second, the question of whether CBDCs could be seen as commercial bank deposits which would then lead to a reduction in deposits in the banking system was considered. Finally, in times of stress, a CBDC could be seen as a safe haven that would also lead to a countercyclical drawdown of bank deposits.

The proposal tries to answer whether CBDCs should have intermediaries that allow consumers to accumulate and spend their digital money. or whether CBDCs should not be intermediated where the Fed would interact directly with the public. The proposal finally agrees with the Federal Reserve that a retail CBDC should be brokered with private sector participants as brokers of a US CBDC.

The proposal suggests that limits be placed on how much a consumer can hold in a digital wallet. Furthermore, the proposal suggests that it will not be possible for the Fed to pay interest on the CBDC. The reasons for these limits relate to preventing CBDCs from withdrawing deposits from the legacy banking system, as well as avoiding a negative interest rate imposed on digital wallets.

The CBDC Ledger: Distribute or Centralize?

By determining the architecture for the Fed’s CBDC ‘digital ledger’, the proposal accounts for the traditional centralized databases currently used by financial institutions in the legacy system versus bitcoin, which has a permissionless distributed ledger/ blockchain that can be used by the public. The proposal’s suggestion is to split the difference into what is characterized as a ‘permissioned semi-distributed architecture’. In this case, access to the CBDC network would require permits from the Federal Reserve or other regulators rather than the network being accessible to the public at large. The white paper provides an example where a depository institution offering a CBDC escrow service may have permission to modify the network, while a payment service provider may only have permission to read the network. The proposal argues that a sanctioned system would offer high levels of network security against unauthorized access or cyberattacks, as well as privacy.

In terms of the types of digital wallets people would hold to hold their CBDCs, the Himes Report on CBDCs recommends the notion of an ‘account-based wallet’. The rationale for this type of ‘custodial regulation’ structure, as the report describes, would be for “robust user identification processes that require intermediaries to certify the identity of wallet holders.” The proposal notes that this choice is opposed to a token-based structure, which involves verifying the authenticity of the digital asset rather than the wallet holder.

According to the report, this account-based structure mirrors current digital banking structures such as Fedwire and merchant payment systems that allow “participant validation” before finalizing transactions. Regarding the concerns that many have about the privacy impacts of a CBDC, the proposal suggests that, “the US retail CBDC would allow the Federal Reserve to work with intermediaries and experiment with cryptographic techniques that allow officials to identify money laundering operations and trace illicit funds while protecting personal information and data.”

The proposal also suggests that the US could become a leader in CBDC privacy standards that, “…could encourage other platforms, both domestic and international, to implement data privacy mechanisms that protect consumers in the digital asset ecosystem. However, one of the tougher challenges the proposal pinpoints is how “a US CBDC would present new and serious privacy challenges.”

How a US CBDC could operate between the Federal Reserve, a private sector intermediary and the public

An example of how a US CBDC might work between the Federal Reserve and an intermediary, along with an individual looking to make a purchase from a merchant, is illustrated in the document below to give an idea of ​​the flow that this proposal have in mind.

The proposal again notes that the interactions of all these different players in the CBDC ecosystem, “…will raise concerns that a CBDC payment system could become a shortcut to government surveillance, data collection, or worse. Furthermore, a CBDC that stores consumer data would be an attractive target for cybercriminals.” However, the proposal seems certain that this problem can be handled and suggests that the Fed “test methods with a wide range of encryption tests with the aim of protecting transactions and the identity of individuals from being revealed”. “.

The proposal also establishes that access to the distribution of CBDC, “…should be open to non-banks and other companies that wish to offer CBDC wallet services, provided that non-banks can meet critical security parameters. infrastructure, such as user identification protection, cybersecurity resilience, network maintenance, management, and data storage protocols. This encouragement to ‘non-bank’ entities that are technology providers today for digital currency systems provides insight into how some in the private digital asset sector today can serve as intermediaries for US CBDCs in the future.

The document concludes with the importance of national security and notes that “security standards and best practices for a US CBDC. cooperation and internal policies.” Therefore, any digital asset provider that wishes to serve as an intermediary as a ‘non-bank entity’ will likely need to have excellent skills with regards to BSA compliance.

In general, it’s not very often that you see a member of Congress take the time to publish their own white paper on a particular topic. However, the publication of this proposal shows that Himes does not misunderstand what exactly is at stake and how complex the idea of ​​CBDCs is, not to mention what the implementation of such an important project could one day look like.

Leave a Comment