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On Wednesday, June 27, 2021, at 10:00 a.m. (ET) National Security, International Development, and Monetary Policy Subcommittee Chairman Himes and Ranking Member Barr will host a virtual hearing entitled, “The Promises and Perils of Central Bank Digital Currencies."

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Witnesses for this one-panel hearing will be:

• Dr. Julia Coronado, President and Founder, MacroPolicy Perspectives

• Mr. Yaya Fanusie, Adjunct Senior Fellow, Energy, Economics and Security Program, Center for a New American Security

• Ms. Julia Friedlander, C. Boyden Gray Senior Fellow and Deputy Director, Atlantic Council

• Dr. Andrew Levin, Professor of Economics, Dartmouth College

• Mr. Robert M. Baldwin, Head of Policy, Association for Digital Asset Markets


Introduction

Central Bank Digital Currencies (CBDCs) are a digital representation of paper and coin fiat currency, and are monetary instruments that are direct liabilities of a central bank, making them distinct from both cryptocurrencies (e.g., Bitcoin, Ethereum) and other forms of digital money (e.g., money held by commercial banks). Eighty-one nations, representing 90% of global Gross Domestic Product, are currently researching, developing, or managing CBDCs, including the Central Bank of The Bahamas, which launched its own CBDC, the Sand Dollar, in October 2020; the European Union, which recently announced a two-year CBDC design and distribution project; and the ongoing pilot of the digital yuan by the People’s Bank of China (PBOC).

Many central banks cite similar motivations for pursuing CBDCs, which include: increasing financial inclusion; facilitating faster and cheaper payment options; countering privately managed virtual assets; and building newer, more direct levers to implement monetary policy. As government objectives and regulatory landscapes differ by country, the design choices of each CBDC can vary as well. For example, the digital yuan appears to have a structure that minimizes anonymity and maximizes authorities’ visibility into users and their transactions, facilitating Chinese government surveillance of financial activities and participants. The Sand Dollar, which aims to provide inclusive access to financial services in underserved and rural communities, especially in the aftermath of natural disasters, was designed for use across the array of mobile payment platforms commonly used by citizens of the Bahamas.

The United States is among those nations considering the use and design of a CBDC. While no decision has been made by the U.S.’ central bank, in late 2019, the Federal Reserve (the Fed) announced that it would analyze potential costs, benefits, and legal issues pertaining to a digital dollar. In August 2020, the Fed further announced two initiatives to explore the technical challenges of supporting a CBDC, including the aspects like available technology, distribution methods, interoperability, privacy, security, and compliance. Answers about the risks and benefits of a U.S. CBDC are being weighed by technologists, regulators, civil libertarians, economists, and national security experts. Policy makers are also considering what multilateral actions might be appropriate to shape global developments in a manner which benefits U.S. and allied interests, including monetary policy and national security objectives.

Monetary Policy and Financial Stability Considerations

Challenges with Monetary Transmission

Monetary transmission refers to the mechanisms used by central banks to conduct monetary policy and the effectiveness of those mechanisms in achieving central banks’ policy objectives. The Fed has traditionally undertaken monetary policy through the federal funds rate, the “interest rate that financial institutions (FIs) charge each other for loans in the overnight market for reserves.” In theory, the Fed lowers the federal funds rate to stimulate the economy through expansionary monetary policy and raise the federal funds rate to contract economic growth. In recent years, episodes where the federal funds rate has briefly been misaligned with the Fed’s target rate, as well stagnant economic growth despite sustained low interest rates,13 have raised questions about the current state of monetary transmission. Fed Chair Jerome Powell alluded to this dynamic (which is sometimes referred to as a “declining neutral interest rate”) in February 2020 testimony, saying, “there has been a decline over the past quarter-century in the level of interest rates consistent with stable prices and the economy operating at its full potential. 0This low interest rate environment may limit the ability of...

Hearing page: https://financialservices.house.gov/c...