Bloomberg
The Federal Reserve Board of Governors will not be issuing a central bank digital currency anytime soon, but that doesn’t necessarily mean it couldn’t whenever it wants to.
Fed leaders have been adamant that the agency needs congressional approval to move forward on the implementation of a digital dollar, not because it is their preference, but as a “matter of law,” as Fed Chair Jerome Powell put it to the House Committee on Financial Services last June.
“I think we will need to have an authorizing law, and I think we haven’t decided whether we think this is in the public’s interest,” Powell told the committee. “If we do, we will come to you.”
Yet, some experts say this assertion is just one interpretation of the various laws governing the Fed’s issuance of currency. Should changes to attitudes or leadership on the board tilt it in favor of a central bank digital currency, or CBDC, an argument could be made that the institution already has the authority to recognize a digital dollar as legal tender.
One person making that argument is Jonathan Dharmapalan, founder and CEO of the financial software firm eCurrency, which provides technical assistance to governments establishing CBDCs. Because Congress gave the Department of the Treasury the power to mint and print currency, and the Fed the ability to distribute that currency into the economy, he said, that is all the approval needed. Additional legislation specifically extending those powers to modern interfaces are unnecessary, he said.
“This is not a mimicking of some crypto asset,” Dharmapalan said. “This is actually an execution of the intent of the Constitution and the subsequent laws that were put into place that caused the United States dollar to exist, then applying those to a digital instrument, no different than the notes and coins we carry in our pockets — or those, I should say, that we are not carrying in our pockets anymore.”
Dating back to the foundation of the country, Congress has passed numerous laws on coinage and currency to create and manage various forms of government as well as private money. Issues arising from this trial and error approach led to the Federal Reserve Act of 1913, which created the Fed and empowered it to “furnish an elastic currency.”
One pivotal statute in the debate over the legitimacy of a digital dollar is 31 U.S. Code 5103, which recognizes U.S. currency, “including Federal reserve notes and circulating notes of Federal reserve banks and national banks,” as legal tender. Some see the description as an exhaustive list of the forms government money can legally take, but others say the term “including” leaves open the possibility of additional types.
In a 2021 research paper on the legal authority for CBDCs, Paige Pidano Paridon, senior vice president and senior associate general counsel at the Bank Policy Institute, noted that introducing a new medium of currency based on the 5103 statute would require a legal interpretation known as “ejusdem generis.” Under that standard, the Fed would have to demonstrate that the new instrument is “similar in nature” to coins and notes. For a digital dollar, Pidano Paridon argued, that would be a hard sell.
Beyond that, she added, the various forms of government obligations in circulation at the time that statute was authored would have given “good reason for Congress to specify an exhaustive list of what was in fact included.”
In her paper, Pidano Paridon makes several arguments as to why the Fed does not have authority to enact a CBDC unilaterally. These include provisions of law that specify the exact materials, sizes and denominations of the coins that the Treasury can mint and the fact that the Fed is only given the express authority to issue reserve notes. She added that the Federal Reserve Act limits account access at the Fed to depositories, the Treasury and certain other entities, a restriction that would preclude individuals from maintaining holdings of digital dollars directly at the central bank.
“It’s pretty clear that there’s no authority for a retail CBDC, based on my research,” Pidano Paridon told American Banker this week, “and the Fed agrees with that view.”
Whether or not the Fed could unilaterally create a wholesale CBDC — one used to settle transactions between financial institutions or other central banks — is less clear, Pidano Paridon noted, though she said such an arrangement would be less problematic than a system in which individuals transacted directly with the Fed.
Powell has also acknowledged that the Fed’s authority around issuing a wholesale digital dollar is more open to interpretation.
“There are potential forms of a wholesale CBDC that would be — we’d need to look at,” he told Congress last month. “It’s less clear. But we’ve always been talking about retail CBDC and that’s — that’s something we would certainly need congressional approval for.”
Still, even some who are opposed to the idea of a Fed-issued digital currency are not convinced the current legal framework is enough to prevent a future Board of Governors from pursuing a digital dollar without the backing of Congress.
Norbert Michel, vice president and director of the Cato Institute’s Center for Monetary and Financial Alternatives, said the Federal Reserve Act leaves enough room for interpretation on key issues such as reserve notes and payments systems that the Fed could move forward with an intermediated CBDC and be met with little resistance.
“It’s an open question,” Michel said. “There’s enough gray area that, if I were the Fed chair and I wanted to do this, I could easily get away with it, or at least do it and let the chips fall where they may.”
Part of the issue, according to Michel — who believes Congress should ban the creation of a CBDC based on concerns about privacy and government overreach into the private sector — is that it would be hard for groups opposed to a digital dollar to effectively challenge it in court. Doing so would require the group to prove they have standing and then mount a successful legal challenge against the central bank, something no party has done before.
“If they did an intermediated version, they’d have at least a 50/50 shot that it holds up,” he said. “And I’m not sure who sues them and successfully gets them to court.”
One unknown variable in the debate about the Fed’s current authorities regarding a digital dollar is a legal opinion from the Department of Justice rendered to the White House last September. The agency gave its assessment of “whether legislative changes would be necessary to issue a CBDC, should it be deemed appropriate and in the national interest,” as part of a broad reaching report on digital assets.
The department’s findings on detecting and preventing crime committed through digital assets were made public on September 16, 2022, but the opinion on CBDCs was kept private. The Department of Justice and the White House did not respond to requests for information about the findings this week.
At the moment there appears to be scant support for a central bank digital currency at the Fed or in Congress.
Former Vice Chair Lael Brainard was the closest to a proponent of a digital dollar before she left the Fed earlier this year to lead the White House’s National Economic Council. She called it a “natural evolution” of payments technology and argued that a digital dollar could bolster financial stability. She also refused to concede that a congressional mandate was necessary for the creation of a CBDC. No other Board member has taken up that mantle.
Instead, Fed Governors Christopher Waller and Michelle Bowman have said that a CBDC amounts to a solution in search of a problem. They have argued that a digital dollar would not improve financial inclusion, speed up transactions or bolster the dollar’s standing globally better than the current array of instruments and systems available from the Fed and the private sector.
Similarly, Rep. Jim Himes, D-Conn., has been the only advocate for a CBDC on Capitol Hill. A member of the Financial Services Committee and the Permanent Select Committee on Intelligence, Himes has argued that digitizing the dollar is essential to protecting the dollar’s role as the world’s reserve currency. Himes published a proposal for authorizing a CBDC last summer, but garnered little public support.
Meanwhile, Reps. Tom Emmer, R-Minn., and French Hill, R-Ark., have led the charge against a digital dollar, introducing legislation to stop the Fed from researching the topic, noting concerns over privacy.
Fed officials say it is important to study how government-issued digital currencies work, even if the U.S. does not implement one, because so many other central banks are pursuing the technology. According to a survey from the Bank for International Settlements, nine out 10 central banks are exploring CBDCs and two-thirds of them are on track to adopt some form of digital currency in the next six years.
One place where CBDCs have seen mounting support is from the Treasury Department’s Office of Financial Research. Last year, it issued a working paper noting that a digital dollar could have a net positive impact on financial stability. It followed that up last month with a report noting the potential benefits that consumers would likely enjoy from a digital dollar — as well as the “financial frictions” the banking sector would likely experience.
In a speech last month, Treasury Under Secretary for Domestic Finance Nellie Liang said her department and the Fed will hold regular meetings with the White House to discuss options for a CBDC.
These considerations by government agencies domestically coupled with the mounting international movement toward currency digitization have caused some to believe it is only a matter of time before the U.S. rolls out a digital dollar, be it with the support of Congress or not.
“I strongly believe that this is an inevitable situation, that a digital dollar will happen one way or the other,” Dharmapalan said. “It may take some time, but we need to prepare ourselves for it, because people are not carrying around notes and coins in their pockets anymore.”
