Last week, Congressperson Tom Emmer made an unusual first move in the narrative battle over a potential U.S. central bank digital money. He proposed to legal limit the Federal Reserve’s ability to issue a retail CBDC. Emmer also suggested that a bank could take over the role of the Federal Reserve. This could have huge implications as we have yet to see an equally clear expression of opposition. It isn’t even clear whether any other U.S. lawmakers have strong opinions about the matter, other than condemning privately issued stablecoins to be a digital substitute for the dollar. Emmer might be able to shift the conversation towards a more friendly view of less centralized digital money by framing the Fed CBDC potential as a privacy risk first.
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U.S. representative vs. U.S. CBDC
The global shift towards digital payment rails is centered on the tension between state-issued CBDCs and decentralized digital money. Last week saw the first ever instance in which a sitting member of Congress took a formal position against the Federal Reserve’s possible retail CBDC move.
While sovereign digital fiat is undoubtedly more convenient than analog, the privacy risks of such convenience could be huge. All money will be CBDC. This will make it virtually impossible for the government to monitor financial transactions and deny people the anonymity that cash transactions once allowed. These privacy concerns were the reason Representative Emmer introduced the bill to ban the Fed’s direct CBDC distribution to consumers. It would also be prohibited from acting as a retail bank.
Although Emmer’s proposal may not reach the House floor immediately, a simple statement by a member can make a big difference in the direction of the policy discussion around a possible CBDC. This is particularly true given the willingness of top Fed officials to give Congress guidance on the matter.
Another ban scare in El Salvador
Elsewhere in the world, the signals that various regulators have been sending over the past week ran the gamut from potentially banning crypto transactions in Pakistan to considering the replication of El Salvador’s Bitcoin-as-legal-tender move in Tonga. The Pakistani drive for a blanket ban is consistent with a well-known scenario, where the central bank of Pakistan is committed to banning crypto transactions and penalizing them. Although the High Court in Sindh was charged with determining cryptocurrency’s legal status, the judges declined to make the final decision and instead referred the matter to the specialized ministries of government.
Tonga, an island nation, could soon be on the Bitcoin adoption trail. This is despite being on the other side of the regulatory spectrum. Lord Fusitua, who was a former member and chairman of many regional interparliamentary groups, announced that Tonga could soon make Bitcoin legal tender. It seems natural that El Salvador could make a similar move considering the Tongans’ dependence on remittances.
IMF believes crypto’s hedge function is over.
The financial stability risk that crypto’s increasing correlation with equity markets poses to the future of the digital asset is one of many factors that analysts have attributed to digital assets. This is what researchers from the International Monetary Fund concluded after examining the dynamics between Bitcoin and the S&P 500 index correlation. According to the authors, crypto’s hedge function is being undermined by the increasing interconnectedness of the two asset classes. It no longer serves as a diversifier for investors’ risk. According to the IMF analysts, there should be a coordinated global approach to crypto regulation.