CBDC in a US election year: Balancing domestic politics with dollar dominance
The political furor around digital currencies misses the point of wholesale CBDC’s potential
It has been widely reported that 52 million Americans own cryptocurrency. Regardless of this claim’s truth, an influx of spending by cryptocurrency lobbying groups has made crypto policy a highly visible topic in this year’s election cycle. However, America’s public debate is too narrow and missing the point. Beyond retail crypto assets, central banks and wholesale financial markets around the world are using blockchain technology today to innovate and regulate. Meanwhile, the US’s nascent behind-the-scenes work using blockchain for wholesale markets is being overshadowed by the relatively toxic discussion surrounding retail.
US regulators’ conservative approach to managing the topic of distributed ledger technology (DLT) in public comments may reflect a concern that the politicization of the retail crypto industry could derail innovation more generally in financial markets. After all, the management of this topic will determine whether there is political space for the US to continue these efforts.
Donald Trump has made crypto a central part of his campaign, appearing at the Bitcoin 2024 conference and even launching his crypto venture. His attention to the issue and the industry’s lobbying efforts likely put pressure on the Democratic candidate, Kamala Harris, who mentioned digital assets for the first time at a fundraiser in late September, promising to “encourage innovative technologies like AI and digital assets while protecting our consumers and investors.”
Public conversation in the US has been driven by the US crypto industry’s lobbying. As such, it has been focused on regulations surrounding retail crypto investments. While regulations to protect retail investors are important, it has distracted from other applications of blockchain technology, despite the enormous potential benefits they offer wholesale financial markets. A BCG and Global Financial Markets Association report estimates that the adoption of DLT could lead to US$15-20 billion in annual global infrastructure operational cost savings. Improved settlement processes, less expensive payment systems, and improved cross-border payments could be a boon to the US economy.
The US market is behind both the UK and EU in the development of digital asset and currency regulation. Both jurisdictions already provide a clearer public vision of what the landscape will look like in the medium term and are actively talking to the market about CBDC issuance and core infrastructure development. The UK’s Digital Securities Sandbox is exploring how securities trading and settlement regimes might fit new technologies. The EU’s DLT Pilot Regime, led by ESMA, is developing a legal framework for trading and settlement of transactions in crypto-assets, and creating new types of market infrastructures. These initiatives are driving innovation within their borders.
Herein lies the problem with the blockchain conversation in the US. The Fed is actively exploring applications for distributed ledger technology in financial markets and is working with the industry to create and regulate networks that will bring greater efficiency to current systems. It is involved with the Bank for International Settlements’ Project Agorá, a collaboration between seven central banks and forty leading private sector financial firms that explores how wholesale central bank digital currencies (CBDCs) could improve cross-border payment systems. The US Regulated Settlement Network project has brought together industry participants like Citi, J.P. Morgan, Mastercard, and SWIFT to explore the feasibility of leveraging shared ledger technology to improve settlement processes. Both projects have been done with deliberately little fanfare.
The Fed’s hushed approach reflects a choice; namely, that it is better to stay quiet about the wholesale DLT use cases it is exploring, lest their efforts become muddied by the highly politicized debate surrounding retail crypto. Politics in an election year pulls few punches and Republicans have successfully pushed the anti-Fed and unsubstantiated narrative that a CBDC would be used by the federal government to spy on Americans. These efforts resulted in the Republican-controlled House of Representatives passing of H.R. 5403, or the CBDC Anti-Surveillance State Act in May, despite a March statement from Federal Reserve Chair Jerome Powell that the public should not be concerned about CBDC, as the agency is “nowhere near recommending, let alone adopting” one.
Importantly, the sort of CBDC that the Republicans are afraid of is retail CBDCs. These are CBDCs that are intended for use by the public as a complement to cash domestically and as a means of streamlining digital and other forms of payments.
In contrast, projects like Project Agorá are exploring applications for wholesale CBDC (wCBDC), which would be used only by central banks and regulated financial institutions to more efficiently transfer value and settle transactions. This could lead to greater financial stability and functionality—reducing costs to the public. The Federal Reserve has clarified that any CBDC developed in the US would not include surveillance features and would likely use an intermediated model, leveraging the private sector’s existing privacy and identity-management frameworks, but this news was nowhere near as widely reported as Republican legislators’ anti-CBDC efforts.
As a nation whose financial system powers the world’s reserve currency, the US should publicly lead the development of the world’s next generation of global payment infrastructure. If domestic politics prevents US leaders from speaking confidently on the benefits of digital innovations, there is a limitation on the authority and credibility the country can display internationally. The election’s outcome is unlikely to mark the end of the conflict but does provide an opportunity for a reset.
