U.S. Representative Stephen Lynch (D-MA) raised doubts Wednesday about the potential repercussions of a central bank digital currency (CBDC), requesting that Federal Reserve Chairman Jerome Powell contemplate the chance of a tokenized form of the U.S. dollar eliminating other digital tokens.
Lynch’s comments came while Powell was testifying before the House Financial Services Committee, responding to a series of queries concerning digital assets.
“I’m concerned about these stablecoins and other cryptocurrencies,” Lynch said. “Will they become worthless when we create a CBDC with the full faith and credit of the United States behind it?”
The Fed has studied the possibility of issuing a digital dollar for years, publishing research going back as far as 2016. CBDCs are akin to digital tokens in current usage such as stablecoins—which track the value of a fiat currency—but are managed by their respective governments instead of being released by private companies on decentralized networks.
Powell indicated he still doesn’t understand why any cryptocurrency that isn’t “based on the credibility of the dollar” like Bitcoin or Ethereum has any worth at all, regardless of a CBDC’s release. He refrained from commenting on how they might be impacted by a CBDC as a result.
“I’ve never comprehended the valuation of those,” Powell said regarding tokens that “don’t have any intrinsic value, yet still, trade for a positive number.”
He also suggested it’s difficult to judge how stablecoins would be influenced, citing a lack of regulatory oversight in the U.S. that renders the reserves of some stablecoins hidden.
Stablecoins like Tether have endured penalties in the past for making false claims about their token’s backing. And last month, Paxos reported it was preparing for a potential lawsuit from the Securities and Exchange Commission over its Binance-branded stablecoin BUSD.
Legislation that would provide a legal structure for stablecoins has been introduced on Capitol Hill multiple times, yet each bill so far has been unable to gain any real traction. Last summer’s collapse of Terra’s UST, a so-called algorithmic stablecoin that maintained its value via code instead of being supported by assets, generated renewed pressure among legislators to establish rules of the road.
Eleven countries have already released a CBDC and almost 90 countries are either piloting, developing, or investigating a CBDC, according to the Atlantic Council’s CBDC tracker. Lynch asked Powell for an update on the Fed’s timeline for potentially launching one too.
“I can’t give you a date,” Powell responded. “We interact with the public on an ongoing basis. We’re also doing research on policy and on technology.”
Powell said that the Fed has not yet established whether a CBDC is an innovation that’s even needed in the U.S., adding the central bank is not at the “stage of making any genuine decisions.”
He described the development of a CBDC as being in an early, experimental phase, adding the technology will take years to evaluate. However, Powell indicated that a CBDC could be quickly implemented to the public if it’s decided upon by Congress, saying “I think we can get this into the hands of the public very quickly.”
New York’s Federal Reserve bank has previously engaged in an experiment that simulated how a tokenized dollar could function among financial institutions, launching a pilot program last November that included firms like BNY Mellon and Citi.
Other legislators, including French Hill (R-AR), asked Powell questions related to CBDCs, such as whether the Fed chairman still believes that a CBDC would require endorsement from Congress.
Powell responded that the U.S. central bank might not need written permission from Congress to establish a CBDC, at least for financial institutions, explaining a “wholesale” CBDC could be valid for settling transfers between banks and other financial institutions.
Powell had earlier said that creating a tokenized version of the U.S. dollar would need written permission from Congress, but he clarified in testimony before the House Financial Services Committee that the necessity applies to a CBDC for “retail” customers.
“We’ve always been discussing [a] retail CBDC, and that’s something we would absolutely need congressional authorization for,” Powell said. “There are potential forms of a wholesale CBDC that we’d need to look at. It’s less clear.”
Powell added that it’s also a legitimate question to ask why a wholesale CBDC would be needed, alluding to the upcoming launch of FedNow, an instant payment service for Federal Reserve Banks that is due to launch later this year.
Some Republican legislators like Tom Emmer have advocated for legislation that would ban the Fed from launching a CBDC, saying it would erode Americans’ right to financial privacy. He reintroduced the legislation shortly after the
