What a GOP bill banning central digital currency means for consumer banking

A proposed GOP ban on a central bank digital currency (CBDC) could pump the brakes on grand visions to reshape electronic payment access around the Federal Reserve. 

Republican lawmakers pushed the ban through the House on Thursday over concerns the government could use a CBDC to surveil Americans’ financial transactions. The banking industry has also lobbied against the currency, arguing the public already has sufficient access to easily usable and safe digital money.

“Nobody yet knows whether a CBDC is a good idea or not,” Rep. Jim Himes (D-Conn.), who has pushed for the government to explore a CBDC, said following the House’s vote.

"There is potential for abuse and corruption, but also for extraordinary modernization that could serve unbanked communities, support the primacy of the U.S. dollar, and much more," he added.

Fed floated idea in 2022 white paper

In 2022, the Federal Reserve issued a study of CBDCs that outlined their risks and benefits. 

“All options for private digital money, including stablecoins and other cryptocurrencies, require mechanisms to reduce liquidity risk and credit risk. But all these mechanisms are imperfect,” the report notes.

A traditional bank account is backed by the Federal Deposit Insurance Corporation, which guarantees individual deposits up to $250,000 in the event a bank fails. But there are also riskier forms of digital financial services.

In 2024, a financial technology company called Synapse collapsed and left customers unable to access some $265 million in deposits.

A CBDC, backed with the full faith and credit of the U.S. government, would be the safest possible digital asset. The Fed paper said that a CBDC could make cross-border payments easier and potentially improve access to banking for low-income households.

A 2022 study by Himes, the Connecticut Democrat, proposed that CBDCs could be used for depositing paychecks or even be integrated into federal programs like Social Security.

A more ambitious version of a CBDC could allow Americans to hold digital dollars at a bank account with the Fed, enabling them to make digital payments without an account at a traditional bank.

That could, as the Fed paper noted, “fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the central bank.” A government-backed digital dollar — especially one that could bear interest — could also drive consumers away from traditional commercial bank accounts.

A CBDC still would require significant study, from the impacts on the banking system to the technology that it would run on. A hypothetical CBDC could use existing technology, or it could be distributed on a blockchain, similar to how Bitcoin and other cryptocurrencies are issued. 

In 2022, former Federal Reserve Vice Chair Lael Brainard estimated that it would take “a long time” — at least five years, she said — to launch a digital currency if Congress decided to do so. Fed Chair Jerome Powell said in February that the bank would not develop a CBDC under his tenure. His term expires in May 2026.

The bill, which now heads to the Senate, would bar the Fed from directly or indirectly issuing a CBDC or studying the issue. Other federal agencies are already barred from studying a CBDC due to a January executive order from President Trump.

Republicans cite privacy concerns

Privacy is the biggest concern about CBDCs aired by Republican lawmakers.

House Majority Whip Tom Emmer (R-Minn.), who led the CBDC ban through the House, said on the floor that a digital dollar would be tantamount to government surveillance.

“It is government-controlled programmable money that, if designed without the privacy protections of cash, this could give the federal government the ability to surveil and restrict Americans’ transactions and monitor every aspect of our daily lives,” he said.

In contrast to cash, which is essentially untraceable, a CBDC would likely leave a digital record of some form. If the government pursued a CBDC, it would have to balance concerns about privacy with safeguards to curb its use in money laundering or other illegal activities.

Many lawmakers have cited China’s digital yuan as a worrying example. Tech and China experts, as reported by WIRED, have raised concerns that the Chinese government could use its digital currency to track individual transactions or otherwise scoop up tranches of consumer data.

Other Republicans have issued starker warnings about CBDCs.

“CBDC is an existential threat to Western civilization,” Rep. Warren Davidson (R-Ohio) wrote on the social platform X.

Banking, crypto lobbies strongly oppose

Banking and cryptocurrency lobbying groups are staunchly against a centrally issued digital currency.

In a letter to Emmer in April, the American Banking Association argued that Americans already had sufficient access to digital payments. 

Alongside other digital transfer systems pioneered in the private sector, the Fed launched FedNow, an instant payment system that can operate 24/7, in 2023. Banks have to opt in to using the service, whose major clients include JPMorganChase and Wells Fargo.

More broadly, the bank lobby argued that a CBDC would undercut the role banks play in the country’s economic system.

“For example, a CBDC would be an advantaged competitor to retail bank deposits that would move money away from banks and into accounts at the Federal Reserve, severely limiting the ability of commercial banks to make loans that power economic growth in communities across the country,” the group wrote.

A CBDC could also dampen hopes that cryptocurrencies like Bitcoin or privately developed stablecoins — cryptocurrencies whose value is pegged to a reference asset like the U.S. dollar — could become the primary form of digital money.

“You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies, if you had a digital U.S. currency,” Powell said at a congressional hearing in 2021. “I think that’s one of the stronger arguments in its favor.”