The House prohibits the Fed from building a CBDC like the digital yuan

The House of Representatives took a significant step by prohibiting the Federal Reserve from creating the “digital dollar,” a central bank digital currency. This resolution, proposed by the House Majority Whip, Rep. Tom Emmer, as the “CBDC Anti-Surveillance State Act,” is an important amendment to the Federal Reserve Act, which governs the US central banking system. The amendment reads: “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee may not use any central bank digital currency to implement monetary policy.”

The vote on the ban was almost a party-line vote, with three Democrats joining all Republicans in voting yes. However, the bill still has a long way to go before it becomes law – it must pass a vote in the Senate and possibly withstand a presidential veto. The fact that former President Trump has repeatedly mentioned that he would not allow a “digital dollar” to be built and Federal Reserve Chairman Jerome Powell has also said that the Federal Reserve will not start a digital dollar implement without congress. approval, adds to the potential implications of this ban passing the House. The Senate likely has allies on a CBDC ban, but whether there is a majority and/or a veto-proof majority will be an open question.

Yet, like one of the main opponents of the bill, Rep. Maxine Waters, stated: “In fact, if this bill becomes law, we will be the only country in the world to ban a CBDC.” Banning “innovation” on the central bank’s digital currency front seems like a policy mistake at first glance. However, as I outline in my book on Bitcoin + China, the Chinese party-state has not gotten that far with its CBDC, the e-CNY, or “digital Yuan.” Adoption has lagged, and people prefer private options like WeChat Pay and Alipay – although the state has put a lot of muscle into it with pilot programs that offer essentially free money and generous state media support. Even though it’s banned, people still use and sell Tether and Bitcoin, and people go to jail for selling Tether. China wants to expand the central bank’s digital currency model and has already launched it in the M-bridge with other central banks and in Hong Kong, but adoption has lagged behind for now.

Part of this is that central bank digital currencies do two things that put central banks on edge: they put central banks, which used to be bank regulators, in the hot seat when it comes to technology choices and by definition only supply closed source vendors chosen by the central bank – and not open source builds or game theory-proven approaches to mitigating attacks. The Chinese party-state has been the victim of cyber attacks before and is taking an approach that may be vulnerable to more.

Central banks are used to governing by edict, not by product benchmarks. In China, this has seen Alipay and WeChat Pay maintain their advantages through sheer user engagement/retention – their app ecosystems and services offer more than enough staying power. And if there was transaction throughput (the e-CNY has a fraction of what Bitcoin does, though numbers are hard to verify/audit as there are few public numbers), the central bank would have to handle ledgers with millions of transactions instead. than the engineering and data teams usually do.

Second, in the face of these new technological choices, central banks struggle to understand the privacy creations their users demand. Although it offers “privacy” at face value, the privacy that involves giving every financial detail to trust alone has not been very popular, even in largely cashless countries like China.

Still, that doesn’t mean there shouldn’t be concern. After all, a central bank digital currency implemented as an international standard would offer unparalleled oversight and individualized control. That governments have yet to succeed with top-down forced innovation standards doesn’t mean they won’t try to forcefully push harder—and perhaps win by sheer force of gravity. And even if this bill becomes law, there are many ways to do it, from working with banks in the system to issue stablecoins, to the ECASH Act proposing that the Treasury issue digital money instead.

It’s easy to see how dystopian that situation is when you think about a Chinese party state imprisoning people for tweets seen by a few dozen people at best and facing bank protests due to a loss of funds due to COVID- deploying codes as a weapon to keep protesters at home. But what about closer to home?

By taking this step, House lawmakers have decided not to follow China’s path when it comes to central bank digital currencies, digital freedom and financial oversight. Even if it’s symbolic – it’s an important symbol to know where the United States stands.