Joint Trades Hill Letter on Central Bank Digital Currency

Dear Chairwoman Waters and Ranking Member McHenry,

The American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Credit Union National Association, National Association of Federally-Insured Credit Unions, National Bankers Association, and The Clearing House appreciate the opportunity to share this letter detailing our views on the topic of Central Bank Digital Currency (CBDC). The debate on CBDC has significant implications for our financial system, economy, and, most importantly, for the American consumer.

Contrary to the assertions of some CBDC proponents, a U.S. CBDC is not necessary to “digitize the dollar,” as the dollar functions primarily in digital form today. Commercial bank money is a digital dollar, and is currently accepted without question by businesses and consumers as a means of payment. By the same token, some have argued that consumers have a natural right to hold an instrument backed by the central bank, and that the move away from cash will deprive them of that right. However, deposit insurance will continue to provide them exactly that – digital money in the form of commercial money, backed by the full faith and credit of the United States.

Furthermore, the issuance of a CBDC would fundamentally rewire our banking and financial system by changing the relationship between citizens, financial institutions, and the Federal Reserve, leading to a reduction in the availability and increase in the cost of credit. The Federal Reserve has recognized this potential, noting both in its recent Financial Stability Report and its CBDC consultative paper, that “A CBDC could fundamentally change the structure of the U.S.
financial system, altering the roles and responsibilities of the private sector and the central bank.”

There is a growing recognition that the deployment and use of CBDCs would be accompanied by significant real-world trade-offs. The lack of compelling use cases where CBDC delivers benefits above those available from other existing options, coupled with the significant risks of a U.S. CBDC, have, for good reason, cooled the enthusiasm for developing, deploying, and maintaining a CBDC.

Today, we use both public and private money. Public money, which includes cash and accounts held directly at the Federal Reserve, makes up about 5% of money in developed economies.2 The other 95% is private money – funds held as a liability of a private institution like a bank or credit union that themselves have accounts at the central bank that settles transactions among those institutions. Private money is created through financial intermediation by banks and credit unions– the process in which financial institutions take deposits and lend out and invest those deposits. Private money is used by financial institutions to provide funding for businesses and consumers and thus supports economic growth Introducing a CBDC would be a deliberate decision to shift some volume of private money to public money, with potentially devastating consequences for the cost and availability of credit for consumers and businesses. In sum, the savings of businesses and consumers would no longer fund the assets of banks – primarily, loans –but instead would fund the assets of the Federal Reserve – primarily securities issued by theTreasury Department, Fannie Mae, and Freddie Mac. Businesses and consumers would seek thecost of borrowing rise, and government would see the cost of borrowing fall.

If the intended objective behind issuing a CBDC is to realize the benefit of technological innovation, we should look to leverage novel developments in private money (like real-time payments systems and well-regulated stablecoins). Private sector innovation in banking and payments has made a significant contribution to establishing the U.S. dollar as the reserve currency of the world and is best positioned to support the dollar’s preeminent position in the years to come.

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