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Nicholas Anthony


Several members of Congress have introduced legislation in response to the concerns that have been voiced over central bank digital currency, or CBDC. To help keep everyone up to speed, the table and paragraphs below offer an overview of the bills that have been introduced during the 118th Congress.
Editor's Note: The Cato Institute's Center for Monetary and Financial Alternatives has produced research demonstrating the net risks of CBDCs, and proposed ways for Congress to protect Americans from CBDCs. The Cato Institute does not support any particular piece of legislation. The information below is an educational resource only.












No CBDC Act
Introduced by Senator Mike Lee (R‑UT), the No CBDC Act would prohibit both the Federal Reserve and the Department of the Treasury from minting or issuing a retail CBDC (i.e., a CBDC that would be used directly by individuals). The bill would also prohibit intermediated CBDCs where financial institutions are enlisted to maintain customer accounts on behalf of the government. Furthermore, the bill prohibits the Federal Reserve from using a CBDC on its balance sheet which sets the groundwork for taking wholesale CBDCs off the table. Finally, the bill would also prohibit the Federal Reserve from using a CBDC to conduct monetary policy.
Co‐​sponsors: Senators Ted Cruz (R‑TX), Mike Braun (R‑IN), and Rick Scott (R‑FL)
CBDC Anti‐​Surveillance State Act
Introduced by Representative Tom Emmer (R‑MN), the CBDC Anti‐​Surveillance State Act would prohibit the Federal Reserve from issuing a retail CBDC. The bill would also prohibit the Federal Reserve from using a CBDC to implement monetary policy. Finally, in response to the Federal Reserve's research and development on CBDCs, the bill would require the Federal Reserve to report the status of CBDC pilot programs to Congress on a quarterly basis.
Co‐​sponsors: Representatives French Hill (R‑AR), Warren Davidson (R‑OH), Mike Flood (R‑NE), Ralph Norman (R‑SC), Byron Donalds (R‑FL), Andy Biggs (R‑AZ), Barry Loudermilk (R‑GA), Pete Sessions (R‑TX), Young Kim (R‑CA), Nancy Mace (R‑SC), Scott Fitzgerald (R‑WI), Bryan Steil (R‑WI), Don Bacon (R‑NE), Mike Bost (R‑IL), Jefferson Van Drew (R‑NJ), August Pfluger (R‑TX), Anna Paulina Luna (R‑FL), Kevin Kiley (R‑CA), Rudy Yakym (R‑IN), Jeff Duncan (R‑SC), Debbie Lesko (R‑AZ), Josh Brecheen (R‑OK), Glenn Grothman (R‑WI), William Timmons (R‑SC), Bill Posey (R‑FL), Marjorie Taylor Greene (R‑GA), David Rouzer (R‑NC), Michael Cloud (R‑TX), Austin Scott (R‑GA), Mike D. Rogers (R‑AL), Mary E. Miller (R‑IL), Christopher H. Smith (R‑NJ), David Valadao (R‑CA), Keith Self (R‑TX), Guy Reschenthaler (R‑PA), Ronny Jackson (R‑TX), Paul A. Gosar, (R‑AZ), Pat Fallon (R‑TX), Randy Weber (R‑TX), and Jake LaTurner (R‑KS)
S. 887
Introduced by Senator Ted Cruz (R‑TX), S. 887 would prohibit the Federal Reserve from offering a CBDC directly to individuals (i.e., a retail CBDC), maintaining accounts for individuals (i.e., FedAccounts), and offering any products or services directly to individuals. In short, it seems that the bill seeks to block attempts to have the Federal Reserve get into the business of commercial banking.
Co‐​sponsors: Senators Mike Braun (R‑IN), Chuck Grassley (R‑IA), and Rick Scott (R‑FL)
Power of the Mint Act
Introduced by Representative Jake Auchincloss (D‑MA), the Power of the Mint Act would prohibit both the Federal Reserve and the Department of the Treasury from issuing a central bank digital currency. The bill makes it explicit that any decision to move forward with a CBDC must first be authorized by Congress. Notably, the Power of the Mint Act is the first bipartisan piece of legislation to address CBDCs during this Congress—Representative French Hill (R‑AR) joined Representative Auchincloss on the House floor as an original cosponsor during the bill's introduction.
Co‐​sponsors: Representatives French Hill (R‑AR) and Barry Moore (R‑AL)
Digital Dollar Pilot Prevention Act
Introduced by Representative Alex X. Mooney (R‑WV), the Digital Dollar Pilot Prevention Act would prohibit the Federal Reserve (both the board and regional banks) from establishing pilot programs to test CBDCs without approval from Congress. Given recent concerns about CBDC cronyism, the bill also makes a point to explicitly state that the Federal Reserve can not circumvent this prohibition by partnering with the private sector to contract out CBDC development.
Co‐​sponsors: Representatives Pete Sessions (R‑TX), Bill Posey (R‑FL), Ralph Norman (R‑SC), Byron Donalds (R‑FL), John W. Rose (R‑TN), Andrew Ogles (R‑TN), Jeff Duncan (R‑SC), W. Gregory Steube (R‑FL), Randy Weber (R‑TX), Glenn Grothman (R‑WI), Ronny Jackson (R‑TX), Victoria Spartz (R‑IN), Harriet M. Hageman (R‑WY), Bob Good (R‑VA), Josh Brecheen (R‑OK), Nicholas A. Langworthy (R‑NY), Keith Self (R‑TX), and Thomas Massie (R‑KY)
Conclusion
With so many proposals on the table, the next steps for policymakers will likely involve debates over where to draw the lines on the distinctions between the different bills. Ideally, Congress will prevent both the Federal Reserve and the Treasury from creating a CBDC in retail, intermediated, and wholesale forms.

"GOP lawmakers absolutely should head CBDC efforts off at the pass, and the party's presidential candidates should support that rejection." ~ Alexander W. Salter

Nicholas Anthony


In a series of Twitter threads posted on April 12, April 21, April 27, May 2, May 9, May 16, May 24, May 30, and June 6, the Federal Reserve tried to dispel some of the concerns that FedNow is a central bank digital currency, or CBDC. To its credit, the Federal Reserve is largely correct that FedNow and CBDCs are distinct issues. However, the Federal Reserve left out an important part of the story in the campaign: its authority to issue a CBDC.
Maybe the Federal Reserve's framing of the issue was simply an oversight rather than an intentional effort to mislead anyone. Yet considering it has been quoted in the Washington Post, AP News, Forbes, Central Banking, and other outlets, this framing should not be allowed to persist.
The issue at hand is where the Federal Reserve said:
Testifying before the House Financial Services Committee in March, Powell said a central bank digital currency is "something we would certainly need congressional approval for."

This statement was an attempt to dispel concerns that one of the Federal Reserve's CBDC pilots could suddenly go into operation without any say from Congress. The problem, however, is that the quote supplied is only half of what Chair Powell told Congress.
In his full response, Chair Powell said that a retail CBDC would require authorizing legislation, but that might not be the case for other forms of CBDCs:
That is absolutely the case as it relates to a retail CBDC. There are potential forms of a wholesale CBDC that we would need to look at—it's less clear. But we've always been talking about a retail CBDC and that's something we would certainly need congressional approval for.

For those that might not remember, the Federal Reserve built its entire proposal for CBDCs on the idea of a CBDC being "intermediated," not retail. So it's concerning to hear Chair Powell frame the conversation this way. However, if nothing else, Chair Powell's full statement shows that the issue is more nuanced than what the Federal Reserve is presenting on social media.
Now, to be fair, the character limits on Twitter could be reasonably cited as a reason to not include the full quote. Setting aside that they could have included the quote as an image as I've done here or as a video as I've done here, it is always difficult to present the full story on social media. Yet, that argument does not explain why the Federal Reserve's official website also fails to provide the full quote.
Luckily, there's a simple solution for the Federal Reserve. It just needs to issue a statement or press release explaining Chair Powell's full statement at the hearing or simply commit to not issuing any type of CBDC without authorizing legislation from Congress.

AbstractThis paper aims to provide an outline of the dynamic landscape of cryptocurrencies and central bank digital currencies (CBDC) so as to comment about the role and prospect of both in the future. We highlight the main drivers of the ongoing digital currency wave from a socio‐economic as well as historical perspective. From an investment standpoint, we evaluate the merits of placing a cryptocurrency within a diversified portfolio and analyse other factors to be taken into account when it comes to asset allocation considerations. We also explore environmental, social, and governance (ESG) implications of the introduction of such digital currencies. Finally, we comment on the current status of national CBDC projects and what it would mean for the digital currency universe when the official CBDC roll‐outs begin in a few years.

Nicholas Anthony


Late last year, the Federal Reserve caught attention for its central bank digital currency (CBDC) pilot projects. Going beyond traditional research, the Federal Reserve contracted with the private sector to build potential CBDCs for the United States. As American Banker's John Adams reported at the time, "Even as debate in the U.S. rages over the utility of a digital dollar, work continues on the nuts and bolts of a potential American CBDC."
Therefore, with concerns about the risks of CBDCs high and the potential for such CBDC development to go awry, Representative Alex X. Mooney (R‑WV) introduced a bill to rein in the Federal Reserve's discretion.
The Digital Dollar Pilot Prevention Act, or DDP Prevention Act, would establish that the Federal Reserve would need explicit congressional authority to set up a CBDC pilot on its own or through a private sector contractor. The bill covers both the Federal Reserve board which would ultimately lead the charge on issuing a CBDC as well as the regional Federal Reserve banks that have thus far been conducting CBDC pilots. With that in mind, Representative Mooney's bill would help to stop a CBDC pilot from being quietly transitioned to the masses.
The Federal Reserve recently tempered some of its public statements on CBDCs, but one doesn't need to look far to see where other statements have given reason to be concerned. For example, former vice‐​chair Lael Brainard testified before Congress in 2022 that developing a CBDC may take five years. While serving this warning, Brainard attempted to make the case that the United States should create a CBDC now because it might be needed in the future:
It's really the future states of the financial system that we should be thinking about as we think about the costs and benefits [of a CBDC.] … What is really important is that it takes a long time if, for instance, Congress decides that it is very important for the Federal Reserve to issue a [CBDC]. It could take five years to put in place the requisite security features [and] design features.

While this type of argument is less than compelling, it could help explain why the Federal Reserve has been developing potential CBDCs through pilot programs. If the Federal Reserve sees its authority to issue a CBDC as questionable, then developing one unofficially might be the next best thing in its eyes. Unofficial development through pilots, for instance, could mean that a CBDC would be ready to go if Congress gives the green light. However, it would also mean that a CBDC would be ready and could be launched alongside a flurry of other programs once a crisis occurs.
While research is important, there's a fine line between lab experiments and operating a venture capitalist incubator for tech startups and financial institutions to get their CBDC models off the ground. More so, there's a fine line between conducting internal research and conducting pilots where the broader public is used for experiments.
With all these factors in mind, it is easy to see why Representative Mooney is concerned about the Federal Reserve's actions on CBDCs.

Nicholas Anthony


An interesting issue with central bank digital currencies (CBDCs) is their status as a direct liability of the central bank. This distinction rarely gets the attention of the broader public, but it's an important distinction because it could lead to a complete destabilization of the financial system as we know it. For example, a CBDC would likely worsen bank runs, lead people to leave the banking system, and increase the cost of loans. Broadly speaking, this direct liability feature is one of the main reasons that a CBDC represents a radical departure from the existing financial system.
What Is a Liability?
For those that might not be familiar, the term "liability" is used in finance to describe something that person A owes to person B. In contrast, an "asset" is something that person A owns outright. From here, we can see that something—such as a loan or a deposit—can simultaneously be a liability for one person and an asset for another person. The difference between what is owned (assets) and what is owed (liabilities) is referred to as "equity." Generally, equity is the residual value that belongs to the owners of the bank.
If we step back to accounting 101, we can model the relationship between assets, liabilities, and equities in a simplified balance sheet for a bank (see Figure 1). There might be different items in each category, but, ultimately, assets should equal liabilities plus equities. This relationship is often referred to as "the accounting equation."












Whose Liability Is It?
When people spend money digitally today with a debit card, the money in the corresponding checking account is a liability of the bank (e.g., Bank of America or Capital One). Similarly, when people spend money digitally today with a prepaid card, the balance is a liability of the private company that issued the card (e.g., Visa or Mastercard). In either case, the financial institution owes the customer the funds that are deposited in the account. When a customer transfers that money to make a payment, the financial institution that has the liability is responsible for transferring the money.
In the case of a CBDC, however, the digital money would be a liability of the central bank itself. That is, it would be the government that has the direct responsibility to hold, transfer, or otherwise remit those funds to the ostensible owner. This feature creates a direct link between citizens and the central bank.
Why Does a CBDC's Liability Status Matter?
As mentioned in the initial accounting primer, something can be a liability to one person and an asset to another. However, something cannot be a liability owned by two separate parties (Note: the word "separate" is used here to exclude agreements like joint partnerships). In the context of a CBDC, this distinction means that a CBDC cannot be a liability on both the Federal Reserve's balance sheet and a bank's balance sheet. That condition matters because the basic business model for banks has long involved a strategy of using deposits (i.e., their liabilities) to fund loans (i.e., their assets).
If the number of deposits is cut down as people put their money in CBDC wallets instead of bank accounts, then the number of loans will be cut down, too (see Figure 2). As the supply of private loans decreases (Q1 to Q2), the price of those loans will start to increase (P1 to P2). In other words, this issue is about more than just bank profits. Yes, some banks would likely go out of business or merge with larger banks as the price of loans increases and cuts into profit lines, but this disruption would also make loans more expensive for everyone.











Why Would People Choose a CBDC Over a Bank Account?
There are many civil liberty concerns that might make people hesitant to adopt a CBDC. However, setting those concerns aside, there are reasons people may still be swayed to use a CBDC. Consider two situations that people may face in financial markets: a time of panic during a bank run and a time of peaceful planning during a period of financial stability.
Bank runs are instances when customers lose faith in their bank for one reason or another (often due to bad news about the bank's finances) and, as the name suggests, run to the bank to withdraw all their money. In the past, that primarily meant people ran to get their money out in cash. Yet, as far as a run for cash is considered, the time waiting in line, the amount of cash available in the vault, the difficulty in carrying cash, and the security risk of storing cash all act as frictions that slow down runs. In contrast, as explained by the Federal Reserve itself, "The ability to quickly convert other forms of money—including deposits at commercial banks—into CBDC could make runs on financial firms more likely or more severe." In other words, rather than run to the bank to get physical cash, a person could instead choose to transfer their balances into a CBDC without leaving their home. Not only that, but the money might be kept as a CBDC for prolonged periods because it would essentially be digital money that is "100 percent insured" and, unlike cash, people would not need to worry about storing, securing, or carrying a large sack of money.
While running for cash was more common in the past, technological advances have since led to digital runs where people instead wired or otherwise transferred their money directly to another bank instead of withdrawing cash (see Panel A in Figure 3). To be clear, the speed of these digital runs does pose a challenge. Yet, there is a silver lining with this development: this type of run is largely limited to the initial institution in question and does not affect the larger supply of deposits. Rather than leave the system, the money transferred flows into other institutions and stays within the financial system. The problem posed by a CBDC in this scenario is that people would instead transfer their money out of the financial system and into their digital wallets and purses—the digital equivalent of placing one's money under a mattress (see Panel B in Figure 3).











It is also likely that incentives could be used—even without a crisis or failure to spark a bank run—to encourage people to leave the existing financial system. For example, some CBDC proponents have called for CBDCs to offer things like "high interest compared with ordinary bank accounts and full government backing with no need for deposit insurance." For many people, the allure of above-market interest rates would likely make transferring to a CBDC a quick decision. In fact, proponents have specifically recognized that these offerings would crowd out alternatives in the private sector. When weighing the costs and benefits, one proponent went so far as to say that disrupting the banking system is the number one advantage of creating a CBDC even though doing so would lead to "profound systemic changes that threaten entire lines of business within banks and credit card companies."
Theory is not the only source for concern when considering how government incentives might lead people to leave the banking system. For those that might not recall, the U.S. Postal Savings System operated from 1911 to 1966 on the premise of offering "safe and convenient places for the deposit of savings at a comparatively low rate of interest." That low rate of interest, however, was set in stone by bureaucrats and later became comparatively high when market rates fell during the Great Depression—a period that coincided with a significant number of bank failures. So in addition to people leaving banks in pursuit of a higher return, studies have shown that other people moved their money to the Postal Savings System directly in response to the announcement of local bank suspensions. From 1929 to 1933, the amount of money deposited in the Postal Savings System had increased nearly eightfold from $154 million to $1.2 billion.
So both in times of panic and times of peace, a CBDC could destabilize the financial system.
Can't You Just Store CBDC at the Bank?
With a general understanding of both liabilities and bank runs in hand, let's dive deeper and explore how a CBDC might be used by the public. A common question that comes up when discussing CBDC risks is: Why can't people just keep their CBDC at the bank? There are really three options for a consumer looking to store their CBDC—partially depending on what CBDC model is ultimately used.
With a retail CBDC provided directly by the central bank, people would store their CBDC in accounts directly managed by the Federal Reserve. That means every dollar held as a CBDC is a dollar that has either been taken out of the banking system or converted from cash. Any dollar stored as a CBDC here would be off-limits to banks. This arrangement sort of turns the Federal Reserve into a payments processor like PayPal or Cash App. However, rather than solely handling money like those services do today, the Federal Reserve would also be providing money directly to the public—another deviation from the current system.
With an intermediated CBDC supported by private intermediaries, people would store their CBDC in a digital wallet that banks (or other private institutions) maintain on behalf of the Federal Reserve. Although the bank would incur costs for things like processing payments, cybersecurity, and regulatory compliance, putting a CBDC into this wallet does not mean that the CBDC becomes the bank's liability. Rather, storing a CBDC in this wallet is more akin to storing valuables in a safety deposit box. Banks will maintain the account, but they can't touch what is inside or have ownership of it—as ultimately, those accounts are being maintained on behalf of the Federal Reserve.
With either of those two CBDC designs, people could instead exchange their CBDC for bank deposits—though, it's a bit of a roundabout process. Behind the scenes, the bank would send the customer's CBDC to the Federal Reserve in exchange for a credit that would then be used to balance a newly created deposit of equal value. This method would allow banks to use deposit accounts to fund loans and consumers to continue using the financial system like they already do, but the owner of the account would no longer be using a CBDC. A payment from that account would be a regular debit transaction like what already happens—without a CBDC—over 240 million times a day in the United States.
This last option is akin to what happens with cash, or paper money, that is deposited at a bank. When someone deposits cash, they no longer get to use an anonymous, physical money. Instead, they spend money by initiating transfers to and from a deposit account. Exchanging a CBDC for a deposit account would resemble this process as people would no longer have access to the features of the CBDC.
Hold On, Isn't Cash a Direct Liability of the Central Bank?
At this point, some people might still be wondering how a CBDC poses a unique threat when cash is also a direct liability of the central bank and involves a similar exchange process when deposited at banks. It's a good question to consider.
First, the existence of cash does facilitate disruptions to the financial system considering it gives consumers a final means of payments that they can run to. In fact, similar arguments could be made about physical gold during the gold standard era. Yet, a CBDC poses a unique threat because consumers would likely be able to pull out their money faster than ever before and store the funds easily without significant storage or security costs. It's for this reason that the Federal Reserve said a CBDC would make bank runs "more likely" and "more severe." The digital nature of a CBDC would increase the impact of a run and delay the return to normal relative to cash (see Figure 4).











The CBDC Tradeoff
Many others have also recognized that the risk of destabilizing the financial system is a serious threat posed by CBDCs. George Selgin (Cato Institute), Andrea Maechler (Swiss National Bank), Greg Baer (Bank Policy Institute), Rob Morgan (American Bankers Association), and researchers at the European Central Bank, Massachusetts Institute of Technology, and University of Michigan have all described similar concerns about CBDCs destabilizing the financial system. In fact, the Federal Reserve has acknowledged that the introduction of a CBDC, "could reduce the aggregate amount of deposits in the banking system, which could in turn increase bank funding expenses, and reduce credit availability or raise credit costs for households and businesses."
Not ready to throw in the towel, some CBDC proponents have proposed making CBDCs intentionally bad to discourage and limit their use. For instance, the Federal Reserve and the European Central Bank have proposed not paying interest on CBDCs, limiting the amount of CBDC a person can hold, or limiting the amount of CBDC a person can accumulate over time. In other words, there won't be interest payments, total CBDC holdings will be limited, and the amount that can be transferred over time will be limited.
William Luther, director of AIER's Sound Money Project, has described this issue as the "CBDC Tradeoff." Consider two extremes. On the one hand, a CBDC could pay interest, offer subsidized payments, and even tax discounts. These offerings would lead people to leave the banking system, but it would mean that the CBDC gains enough users to maintain a stable network. On the other hand, a CBDC could pay no interest, have some low cap like $10,000, and restrict how many transactions people can make. In this case, people probably wouldn't leave their bank any time soon, but then the CBDC probably would not have enough users to be considered a worthwhile effort. In short, the tradeoff becomes a question between making something people will want at the expense of the larger financial system or making something no one will want at the expense of taxpayer resources.
Faced with this tradeoff, the best choice is to not introduce a CBDC at all.
Conclusion
Let's quickly recap the ground that has been covered here.
Introducing a CBDC risks destabilizing the banking system and worsening panics. The Federal Reserve tried to lessen that risk by "including" banks in the process by proposing an intermediated CBDC. Yet, with an intermediated CBDC, banks would have to cover regulatory and overhead costs to maintain CBDC accounts even though they would have no loan revenue from those funds since the CBDC is still a liability of the central bank. Moreover, shrinking the supply of deposits would likely lead to costlier credit. That means loans will be more expensive for everyone.
Today's financial system is not perfect, but it usually works so well that people rarely stop to ask: "Whose liability is it anyway?" Yet, being a direct liability of the central bank is a defining feature of a CBDC. In practice, that trait means destabilizing the financial system is a defining feature of a CBDC. Consequently, the risk posed to financial markets is just another reason why Congress should prohibit the Federal Reserve and Treasury from issuing a CBDC.

Increased dissemination of information and communication technologies in the economy has led many central bankers around the world to consider the introduction of money in the digital form. In academic literature, various central bank digital currency (CBDC) issues from technical design to political influence are discussed, although until now it has not been fully implemented in any country except the Bahamas. The central bank digital currency (CBDC) is an additional form of national currency that combines the properties of cash and bank accounts. This study mainly aims to provide a comprehensive analysis of monetary policy in the CBDC economy. to meet the aim of the study, the study applies an agent-based model that has six types of economic agents and complicated interaction algorithms. The various design parameters are employed to study the dynamics of endogenous variables. Model simulations suggest that CBDC introduction leads to reduced macroeconomic volatility and price stability. Furthermore, the study provides evidence of the increased efficiency of the interest rate channel of the monetary policy transmission mechanism and the negative consequences of possible banking disintermediation. Based on the results obtained, the study concludes that the CBDC impact the economy through changes in the monetary base, strengthening the structural liquidity deficit, banking disintermediation, and increasing the fiscal policy capabilities. The proposed agent-based model provides a theoretical foundation for the further study of monetary policy and banking intermediation in the CBDC economy.