Lawmakers miss the mark with anti-CBDC bill

The House of Representatives has passed a bill aimed at preventing the issuance of central bank digital currency.

What is CBDC?

A central bank digital currency (CBDC) is a digital currency issued and governed by a central bank. A digital dollar, for example, would be issued by the Federal Reserve — though critics point out that, unlike cash, it could be monitored and controlled by the Federal Reserve. A digital dollar could be used at any point of sale and in any transaction, which would be settled instantly, but can also be tracked and even cancelled.

Republicans pass anti-CBDC bill

Last month, 213 House Republicans and three Democrats voted to pass the CBDC Anti-Surveillance State Act. The bill, which will now proceed to the Senate, would ban the Federal Reserve from issuing a CBDC to Americans.

“[A] CBDC is government-controlled, programmable money, that if not designed to emulate the privacy protections of cash, could give the federal government the ability to surveil Americans’ transactions and suppress politically unpopular activity,” said Majority Whip Tom Emmer (R-Minn.) in a statement. Rep. Emmer sponsored the legislation.

Too late: FedNow already launched last year

But Emmer and his Republican colleagues' concerns about the Federal Reserve surveilling and controlling Americans’ transactions may be too late.

The Federal Reserve already has that capability with FedNow, which was launched in July last year. FedNow is a “safe and efficient” instant payments service which allows the Federal Reserve to facilitate payments between bank customers and receive their transaction data.

How does FedNow work?

With FedNow, the Federal Reserve will act as a middleman in transactions between banks and credit unions. Until last summer, transactions passed through a financial institution called a clearing house, which facilitated the payments. But as of July 2023, the clearing house has been replaced by the Federal Reserve for many banks.

For example, if John Doe wishes to pay a bill, he initiates the transaction as he previously did through an end-user platform like his banking app. John’s bank then sends the request to the Federal Reserve, which notifies the recipient’s bank that funds are about to be transferred. The central bank then gives the go-ahead to John’s bank to release the funds. The Federal Reserve then takes the funds from John’s bank and deposits them in the recipient’s bank. This all happens in the span of six seconds.

John is none the wiser that the Federal Reserve has not only just seen his transaction but has conducted it from beginning to end. 

The Federal Reserve can view and reject transactions

The Federal Reserve does not deny that it is able to view details on all transactions, but says it is legally unable to reject transactions or access customers’ bank accounts.

However, the FedNow website states that the service does have “the ability to specify certain conditions under which transactions would be rejected, such as by account number (a ‘negative list’).” In other words, FedNow could order financial institutions to reject transactions involving certain accounts.

At least 57 banks and service providers including JPMorgan Chase, Wells Fargo and US Bancorp have signed up for the service, meaning they will be using FedNow to conduct their customers’ transactions.

"When the Fed says something happens, it happens," Modern Treasury CEO Dimitri Dadiomov told Axios. “Banks don’t say no to the Fed.”