GOP Senators Propose Ban on Central Bank Digital Currencies

Republican senators on Monday introduced legislation that would ban official cryptocurrencies backed by central banks, a type of proposed digital asset that the Biden administration and the Federal Reserve have expressed interest in studying.

GOP senators said Fed-backed cryptocurrencies would raise privacy concerns and give regulatory authorities access to the private spending habits of individual Americans.

Sen. Ted Cruz (R-Texas) described Fed-backed digital currencies, also known as Central Bank Digital Currencies (CBDC) or stablecoins, as “programmable money that, if not designed to mimic cash, the federal government … significant transaction-level data down to the individual user.”

The Biden administration has been interested in studying the use of cryptocurrencies since 2022, when it issued a broad executive order on the technology and received reports from various agencies on how to incorporate it into the economy.

“Recognizing the potential benefits and risks of a US central bank digital currency (CBDC), the reports encourage the Federal Reserve to continue its ongoing CBDC research, experimentation and evaluation,” the White House said said in a 2022 statement.

Both the Fed and the Treasury Department have studied the potential uses of and structures for CBDCs and started a working group to examine their applications. Even so, the White House has not explicitly endorsed the creation of a CBDC, and Fed Chairman Jerome Powell has said that the central bank will not create one without an act of Congress.

“Like existing forms of money, a CBDC will enable the general public to make digital payments. However, as a liability of the Federal Reserve, a CBDC will be the safest digital asset available to the general public, with no associated credit or liquidity risk,” the Federal Reserve says on its website.

“Both real-time payment systems and CBDCs present opportunities to build a more efficient, competitive, and inclusive U.S. payment system,” Treasury Department Undersecretary for Domestic Finance Nellie Liang said last year.

Monday’s initiative from GOP senators suggests that any such research and development on Fed stablecoin technology could be a site of increasingly hostile partisanship.

The GOP proposal would prevent the Fed from authorizing Fed stablecoins for individuals to use and credit unions, retail banks, financial cooperatives and other types of third parties to issue to their members or customers.

These provisions will ease the banks, which have long sought to block proposals to use digital currencies to bypass the commercial banking sector, essentially turning banks into a public utility.

Providing stablecoins through the buffer of third-party financial institutions was seen as a compromise between the privacy risks associated with issuing them directly and the efficiency gains of cutting out the commercial middlemen. But the Republican bill could eliminate that possibility altogether.

Cryptocurrency firms have long resisted moves to standardize their industry despite failures of major companies in the sector, wild volatility in asset values, runs on stablecoins and the use of inherently hard-to-trace crypto for criminal activity.

“The pooling of client and firm assets, conflicts of interest, and lack of risk management and other standards have contributed to” troubling episodes for the crypto business, Liang said last year. Crypto firm FTX was the sector’s biggest failure, and its former CEO Sam Bankman-Fried is now behind bars.

Central bank digital currencies have also been a hot topic internationally. Advocates have championed the idea, while authorities are wary.

“Providing the general public with access to central bank money could take a jurisdiction into uncharted waters,” the Bank for International Settlements (BIS), the Fed’s international coordinating body, wrote in a 2019 study.

“A CBDC has major operational implications for central banks in the implementation of monetary policy,” the BIS noted.