Bank Battle Looms if Treasury Throws Weight Behind Digital Dollar

A report that the Treasury Department is going to recommend the creation of a digital dollar right up to the point of deciding whether one is actually in the national interest is effectively recommending the creation of a U.S. central bank digital currency (CBDC).

The news came from crypto industry news outlet CoinDesk, citing someone who said that agency’s forthcoming Future of Money report will recommend building a CBDC — a process expected to take a minimum of five years — and then deciding whether or not to use it.

See also: ‘National Interest’ Said to Drive US Treasury Support of Digital Dollar

That decision, the person who declined to be identified told the outlet, should hinge on whether it is in the “national interest” to launch a U.S. CBDC.

The Treasury Department is, in effect, recommending the creation of a digital dollar. The “protect the dollar as world’s reserve currency” argument will have a lot to do with that.

Read this: The Three Most Important Questions for the Fed on Its CBDC Plans

It also means the banking lobby is about to shift its campaign against the digital dollar it sees as an existential threat into high gear.

Just Say Yes

Whether news reports about it are accurate or not, the Treasury’s whitepaper will be among the first in a series by many government departments and agencies focused on regulating cryptocurrencies and stablecoins order by President Biden in March — all of them due this month.

See more: White House Crypto Executive Order Ignites Digital Dollar Debate

As for the national interest, there are a number of factors that play into this, including the idea that a CBDC will be more inclusive. That’s something the Rep Maxine Waters (D-Calif.), chairwoman of the powerful House Financial Services Committee, has been advocating aggressively.

“A U.S. CBDC has the potential to create significant improvements in financial inclusion,” she said in January. “We can ensure that the unbanked, low- and moderate-income consumers, and people of color are fully included in our rapidly evolving financial system.

There have also been arguments that it would bring real-time payments — an argument Federal Reserve Governor Michelle Bowman said in August that the forthcoming FedNow system would make moot. The same has been said for The Clearing House’s existing RTP service.

Read also: CBDC Weekly: Fed’s Bowman Says FedNow Makes Digital Dollar Unnecessary

Still, the biggest part of the “national interest” argument will inevitably be that the U.S. can’t — and doesn’t dare — fall behind the rest of the world in creating CBDCs if it wants the dollar to remain the world’s reserve currency. It doesn’t have to be first — Fed Chairman Jerome Powell has made very clear that he believes the greenback’s clout gives the U.S. plenty of time to do it right.

But there’s too much competition not to build a digital dollar at all. China is on the verge of launching a digital yuan, powerful voices in the EU are actively lobbying for a digital euro, both Russia and India plan to have CBDCs within two years, and many of the more than 100 countries that are at least considering digital versions of their national fiat will build one.

Related: Digital Dollar Debate Shifts as Central Banks Embrace CBDCs

And many of those countries have suggested that one reason is to break the U.S. dollar’s trade hegemony.

Read more: Fed’s Brainard: US Needs CBDC For International Use Cases

“The dollar is very dominant in international payments, and if you have the other major jurisdictions in the world with a digital currency, a CBDC offering, and the U.S. doesn’t have one, I just, I can’t wrap my head around that,” Fed Vice Chair Lael Brainard said in a speech last month. “That just doesn’t sound like a sustainable future to me.” 

Bank Haven’t Even Begun to Fight

There are several counterarguments, notably privacy concerns and protecting private-sector innovation in digital payments, but the biggest is the destruction a CBDC could in theory rain down upon banks.

The banking industry sees a digital dollar as so destructive to its business model that the Bank Policy Institute (BPI) said it would “undermine the commercial banking system in the United States and severely constrict the availability of credit to the economy.”

See this: Heyday or Doomsday? Regulators, Banks at Odds Over CBDCs

That comment, in May, came in response to the Federal Reserve’s CBDC “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” in which the central bank took a carefully neutral stance.

Aside from their considerable economic clout, the U.S. commercial banking lobby spent $57.8 million lobbying in 2021, according to Open Secrets — a number that does not include donations from private individuals or various political action committees.

With their basic business model on the line, that number is likely to climb and climb dramatically in the next few years.

There are several factors here. First, a CBDC would put the Fed in direct competition with the banks for deposits, with consumers likely to flock to digital dollars in times of economic crisis. Those dollars, the BPI argued, would be “unavailable for lending to businesses or consumers” as banks would have to hold them like securities.

It’s a serious enough concern that the EU has suggested limiting the size of private digital accounts to a few thousand euros.

Both the BPI and American Banking Association (ABA) argue that the dollar’s position as world’s reserve currency is protected by the U.S.’s strong rule of law and democratic institutions, and its economic might.

A better solution, the ABA said, is to “leverage novel developments in private money (like real-time payments systems and well-regulated stablecoins).”

This is very similar to what the Republicans on the House Financial Services Committee have been saying for a year.

“First and foremost, the U.S. dollar and payment system must remain the best in the world. To accomplish this goal, we must not stifle private sector innovation and competition,” its members wrote last November.

Learn more: PYMNTS Cryptocurrency Glossary: Central Bank Digital Currency

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