In another example of China driving Congress’ agenda, a House task force will on Tuesday hold its second hearing in two weeks on a U.S. digital dollar, a technology that some lawmakers see as essential if the U.S. is to maintain its global economic dominance. “The U.S. dollar is the reserve currency, but the longer we wait to adopt a cryptocurrency that maintains privacy, the more threatening the digital yuan could become,” said Minnesota Rep. Tom Emmer, a Republican member of the House Financial Technology Task Force. “Which is why the Fed needs to have a little bit more of a jump when it comes to this.”At issue is whether the Federal Reserve should issue a central bank digital currency. Advocates of such a CBDC say the U.S. has at least three characteristics that would give such a digital dollar an edge over the yuan globally: trust in the U.S. courts, superior privacy protections and a robust financial services sector.But with the Chinese government working on a digital yuan since 2014, and with pilot programs in four cities already running and more coming, the U.S. risks being left behind. Fed Chairman Jerome Powell said only last month that the central bank will release a discussion paper this summer exploring the possibility of issuing a U.S. digital currency.In one sense, a government-backed digital dollar is an electronic form of cash. Two parties exchange the digital dollar for a good or service. The exchange requires no third parties and can settle instantaneously. Anybody with a smartphone and access to the digital dollars can participate. But such a transaction, by virtue of being electronic, comes with other problematic characteristics. Some people don’t have access to the needed devices or to the digital dollars. Hacking and cybertheft are growing problems. And anonymity not only risks being compromised, it may not even be desirable.The Fintech Task Force hearing Tuesday will look at the U.S. technological infrastructure, privacy implications and financial inclusion. Unlike bitcoin and other privately operated cryptocurrencies, a central bank digital currency is issued by and has a value set by a national governmentChances are that many consumers already experience transactions as both instant and digital thanks to peer-to-peer payment apps, direct deposit and debit card transactions. Those transactions, however, involve a host of intermediaries behind the scenes sending messages back and forth. A digital currency could cut out those intermediaries, saving time and potentially costs.The idea has taken off internationally. Last year, 86 percent of central banks told the Bank of International Settlements that they were looking into the potential of developing a CBDC. The Bahamas became the first country to issue a digital currency for nationwide use in October 2020. Efforts to develop a federally backed digital currency in the U.S. have been slower, but consensus among lawmakers that the Federal Reserve should at least explore a digital dollar is growing. DIGITAL YUAN: ‘A LONG-TERM CHALLENGE’Rep. French Hill, R-Ark., said attitudes among the top banking regulators have come a long way since he and Rep. Bill Foster, D-Ill., approached the Fed and the Treasury Department on the subject in 2019. Hill was until recently a member of the Financial Technology Task Force.The threat China’s digital currency could pose to the global dominance of the U.S. dollar has galvanized interest. Beijing says it is focused on domestic adoption of the digital yuan, but Hill said the country could use its investments abroad to push adoption internationally.“China is in an early stage, as it’s become a very wealthy country over the last 30 years, of taking that wealth and using it strategically for both military and geopolitical purposes, and commercial purposes,” Hill said in an interview. “They are moving rapidly in that to both conventionally challenge the dollar and through digital means.” “This is a long-term challenge, but the time to talk about this and develop our strategies is now,” he said.“We have an edge to implement a sovereign digital currency, as we have an edge in financial services today around the world,” Hill said. “This is about planning the maintenance and expansion of that competitive position.”A digital dollar backed by a free democracy with rule of law and an established court system will be more attractive internationally than a CBDC backed by an authoritarian surveillance state, Hill said. PRIVACY AND TRUSTFoster said in an interview that balancing privacy with protections against fraud and money laundering will be key to a digital dollar’s appeal, though how much privacy would be enough is a matter of debate among policymakers. Money laundering, fraud, ransomware, human trafficking payments and other abuses make a fully anonymous digital dollar unacceptable, Foster said, adding that Powell and Treasury Secretary Janet L. Yellen agreed with that assessment at a March 23 House Financial Services hearing. A trusted third party, such as a court, must be able to unmask participants in a transaction when things go wrong, Foster said. The Illinois Democrat heads the House Financial Services Artificial Intelligence Task Force. “That’s an anathema to many of the bitcoin purists in the world, but it’s going to have to be an essential feature of any system that people will trust to put a large fraction of their net worth at risk in,” he said. Foster acknowledged that there must be privacy protections for users.“You don’t want a situation where any policeman could get on his console and look at any payments made by any person in the United States, including his ex-girlfriend,” he said. “You want to require a clear legal regime for this.”Those protections would give a digital dollar an edge over China, which already has extensive access to its citizens’ electronic payment data, Foster said. “That’s something where I think the United States and the free democracies of the world will have a real advantage — that we have a transparent and fair court system that is not present in, for example, China or Russia,” he said.Hill said a digital dollar should be subject to the same anti-money laundering and banking privacy laws as physical cash and wire transfers. Cash transactions are anonymous below $10,000, the threshold at which financial institutions must report them to the government under anti-money laundering laws — although peer-to-peer cash transactions can take place at any amount out of view of the government. Both Hill and Foster said digital identity and authentication is essential to standing up a digital dollar. Foster said he will push for digital identity to be part of efforts to expand broadband access. Oklahoma’s mobile ID program, which allows individuals with a federally recognized Real ID to prove their identities using a smartphone, could serve as a possible model, Foster said.‘PERMISSIONLESS’Still, lawmakers are far from a consensus on the degree of privacy a digital dollar should offer. Emmer said in an interview that a digital dollar must replicate all the attributes and anonymity of physical cash. That includes being “permissionless,” meaning anyone anywhere can join without being verified or approved by a third party, such as the government.“Our currency should really reflect our American values,” he said. “Not just freedom, but privacy, openness and permissionless entrepreneurship, meaning we don’t have to go ask our government if we’re going to be able to participate.”If that’s not possible, the government should leave digital currencies to the private sector, Emmer said, adding that privately run stablecoin cryptocurrencies pegged to the U.S. dollar could be an alternative. “I’m not opposed outright to a CBDC,” he said. “It has to have the same attributes as cash. That being said, I don’t know that you can get there.”
Original source can be found here.
