Banks See Doom in CBDCs; CFTC Chairman on Proof-of-Work + Sustainability; DOC's Request for Comment
DEF Weekly Roundup – May 26, 2022
Banks Submit Comment Scrutinizing Fed Report on CBDCs
Traditional U.S. financial institutions view the development of a CBDC as the end of banking as we know it. In a comment responding to the Federal Reserve’s discussion paper, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” the American Bankers Association claims that “the issuance of a CBDC would fundamentally rewire our banking and financial system by changing the relationship between citizens and the Federal Reserve.” But the ABA is not alone in viewing CBDCs with suspicion. Both the Bank Policy Institute and the Financial Services Forum wrote similar comments, highlighting the uncertainty around CBDCs among TradFi institutions.
That uncertainty hasn’t stopped CBDCs from becoming a topic of intense interest to policymakers around the world. Several jurisdictions, including Europe and the U.S. are already exploring what building one might look like. Most of this exploration is still in the earliest stages. The Federal Reserve issued its Money and Payments report simply to serve as “the first step in a public discussion between the Federal Reserve and stakeholders about central bank digital currencies.”
But the Fed is closely following CBDC developments. In February, Fed Vice Chairwoman Lael Brainard gave a speech on the future of the United States dollar. In it, Brainard discussed the rapid growth of digital assets, distributed ledger technology, and stablecoins alike, and highlighted the benefits that these technologies can serve both at home and abroad. Some of the benefits mentioned were reduced transaction costs, disintermediated and cheaper cross border payments, instant settlement, and banking the unbanked.
Yet according to the ABA, these same private-sector digital assets and their benefits obviate the need for a CBDC entirely. The ABA’s comment letter argues that a digital dollar maintained by the public sector is unnecessary and would complicate or even potentially threaten the stability of the relationship between private and public sector money. Instead of pursuing a CBDC, the ABA argues that the Federal Reserve should focus on helping facilitate the adoption of “well-regulated stablecoins” held and issued by insured depository institutions, a.k.a. banks.
What does this mean?
Traditional financial institutions’ views on CBDCs really boil down to one simple issue: whether and to what degree ordinary people can control their financial assets.
The first and most important thing to keep in mind here is that the Fed’s discussion paper considers a completely intermediated, account-based CBDC. That means citizens would be entirely unable to self-custody this asset; they would have to rely on a bank to custody the asset for them.
In our view, that’s already an unfortunate framework that doesn’t really create a digital currency at all. The ability for citizens to self-custody is the essential foundation of the financial empowerment that decentralized digital assets promise their users.
But for TradFi, the critical issue is that Fed’s CBDC model is that the CBDC, while held by a financial institution, could not be used to finance loans and other investments. The Fed’s outlined CBDC would be like cash that the bank would be required to hold in a vault and obligated not to touch (but that, unlike cash, users couldn’t withdraw).
That’s a major threat, not to their user’s financial freedom, but to the banks’ ability to control when and how users make withdrawals.
Let’s take a step back: when banks are at risk of failing, depositors naturally seek to withdraw their assets from the bank, knowing that deposits could be instantly wiped out in the event of catastrophic failure. This risk is why the Federal Deposit Insurance Corporation insures U.S. bank deposits.
The CBDC considered by the Fed would empower people to make these withdrawals without much friction. And that freedom could aggravate the consequences of bank runs—and threaten the stability of the bank.
In essence, the argument is that giving people slightly more control over their bank deposits represents an existential risk to the banking system as we know it. It’s not about making the financial system safer or more empowering for ordinary users; it’s about preventing depositors from fleeing to safety in times of stress.
CFTC Chairman Behnam Expresses Sustainability Concerns over Proof-of-Work
At POLITICO’s Sustainability Summit on May 18, 2022, Commodity and Futures Trading Commission (CFTC) Chairman Rostin Behnam spoke and answered questions on how the CFTC is addressing issues around climate change and environmental sustainability. When asked about the impact digital assets are having on these issues, Chairman Behnam singled out proof-of-work blockchains’ energy consumption. He argued that mining disclosures would create market pressure for the digital asset industry to shift to more “sustainable” mining methods.
What does this mean?
The environmental concerns over PoW aren’t going away. But the rest of the Chairman’s comments are a bit more encouraging. First, Chairman Behnam seems to believe that some crypto-assets are commodities, and he wants to regulate them as such. Second, environmental agencies seem to still be in a fact-finding stage—which suggests there is still time to correct the record on the environmental impact of proof-of-work. We should maximize our opportunity to do so.
Department of Commerce Releases Request for Comment on Economic Competitiveness and Digital Assets
Last week, the Department of Commerce and the International Trade Administration requested comment on “a framework for enhancing U.S. economic competitiveness in, and leveraging of, digital asset technologies.” This framework is one of the many studies and reviews that have come out of President Joe Biden’s executive order on cryptocurrencies from earlier this year.
Commerce is seeking input from the public on three broad topics: Competitiveness, “Comparisons to ‘Traditional’ Financial Services and Financial Inclusion Considerations,” and “Technological Development.”
Some of the questions asked by the Department of Commerce have caught our eye. In particular, the Department of Commerce shows intense interest in identifying the factors and conditions that could support U.S. leadership and competitiveness in digital asset development.
What does this mean?
The DEF will be responding to this request for comment. This RFQ is an awesome opportunity for many of us in the U.S. ecosystem to make the 30,000ft case for why and how the U.S. can be a leader in crypto and DeFi. There’s no reason we can’t be a global competitor and leader in digital asset development; we just need the right policy approach to make it happen.