Lawmakers Seek to Prevent the Federal Reserve from Creating a Central Bank Digital Currency

Senator Mike Lee (R-UT) is seeking to formally ban the Federal Reserve from creating a central bank digital currency (CBDC). Earlier this month, Lee reintroduced a bill, known as the No CBDC Act that he had initially sponsored during then-President Joe Biden’s administration. The bill is cosponsored by additional politicians, including Ted Cruz (R-TX), who has opposed the idea of the Federal Reserve establishing a CBDC for years.

Lee’s move to reintroduce the No CBDC Act comes on the heels of an executive order issued by President Donald Trump that focuses on digital assets. 

Among other directives, the executive order aims to “protect Americans from the risks of Central Bank Digital Currences (CBDCs), which threaten the stability of the financial system, individual privacy, and the sovereignty of the United States, including by the prohibiting the establishment, issuance, circulation, and use of a CBDC within the jurisdiction of the United States.”

As consumers and businesses pursue ways to move money faster, tools such as digital currencies and account-to-account payment services can bring greater efficiency to payments and funds transfers.

The Atlantic Council recently released a report revealing that 134 countries and currency unions, which are economic groups sharing a common currency, are exploring the creation of a central bank digital currency in their respective regions. In May 2020, only 35 countries and currency unions were looking into establishing a CBDC, according to the report.

To date, just three countries have launched a central bank digital currency: the Bahamas, Jamaica, and Nigeria.

None of these countries are members of the Group of 20, the international forum where leaders of major economies discuss policies regarding global economic concerns.

But 13 more countries are piloting CBDC efforts, including Group of 20 members Australia, India, Japan, and Russia. So why are political leaders in the U.S. taking steps to prevent the Federal Reserve from creating a central bank digital currency?

We spoke with Anil Kumar, CEO and Co-Founder of Rome Protocol, to gauge his thoughts on the possible impacts of a government-issued digital currency. Rome Protocol provides solutions  to companies that use blockchain technology.

“Blocking the Fed from issuing a CBDC is a strong stance against government overreach in finance,” Kumar told us. “This isn’t just about digitizing the dollar. It’s about whether we want the government to have direct control over how money moves. The U.S. financial system has always thrived on competition and private sector innovation. A centrally controlled digital currency could disrupt that balance in ways we might regret.”

Trump’s executive order and Lee’s bill stand in stark contrast to Biden administration directives regarding the creation of a central bank digital currency in the U.S. Though the Federal Reserve didn’t establish a CBDC during Biden’s tenure, he put forth an executive order stating that the development of central bank digital currency was an issue of the “highest urgency.” 

Concerns regarding consumer privacy have emerged as a primary argument against the creation of a CBDC. In a press release announcing the reintroduction of the No CBDC Act, Lee said the bill would “prevent the Federal Reserve from reshaping the U.S. financial sector and having the ability to monitor consumer transactions through a Central Bank Digital Currency.”

Today, cash transactions fly under the radar of government surveillance. The government can access consumer financial transactions, but it’s limited in part by the Right to Financial Privacy Act, which stipulates that government authorities must follow specific procedures to obtain information about a customer’s financial records from a financial institution. A central bank digital currency could provide the government with unfettered access to many consumer transactions.

Lee touched on that issue in his press release, stating that, with a Fed-controlled CBDC, “Big Brother will know Americans’ every purchase.”

A central bank digital currency can be a powerful tool for governments that seek oversight of citizens’ day-to-day financial activities. But those who prefer a limited role in government oversight of personal money matters may feel otherwise. 

“A CBDC could allow real-time tracking of transactions and potentially even restrictions on how money is spent,” Kumar told us. “That level of control should be a red flag for anyone who values financial freedom. Once you give that power to a central authority, it’s almost impossible to roll back.”

The banking industry could also suffer if the Federal Reserve were to establish a CBDC.

Lending is the lifeblood of many financial institutions. But if consumers begin keeping their money in digital currency managed by the Fed, then banks and credit unions won’t have as much capital as they do today to provide to businesses and consumers in the form of loans and other credit products.

“A CBDC would fundamentally change the way money flows through the economy,” Kumar told us. “That could lead to more reliance on government intervention and fewer opportunities for private sector innovation. The U.S. became a financial leader because we let the market drive innovation, not central planners.”