A June 9 congressional hearing on the prospects for a central bank digital currency, or CBDC, is likely to address banks' fears that a CBDC could alter their traditional role in the financial system, analysts said.
Though it is still in the early stages of development, the Senate Banking Committee hearing signals growing congressional interest in a government-issued digital currency.
"One thing that I would predict is that you’re going to hear lawmakers echo the concerns of the banks," said Ian Katz, managing director at political research firm Capital Alpha Partners.
Chief among those concerns would be a CBDC's impact on a bank's ability to take deposits and make loans.
"That system provides depositors a secure place to put their money with the right to withdraw it immediately, while allowing borrowers access to stable, low-cost, long-term funding." Bank Policy Institute CEO Greg Baer said in the executive summary of a 22-page working paper his organization published on the subject. "As some of those bank deposits moved to the central bank in the form of CBDC, the impact on economic growth could be significant — unless the central bank also assumed responsibility for lending or became a regular source of funding for banks."
But Senate Banking Committee Chairman Sherrod Brown, D-Ohio, is expected to promote a central bank digital currency as a way to help the underbanked and unbanked enter the financial system. Brown wrote a letter to the Fed in March calling for movement on the issue, and his goal may be to put more pressure on the Federal Reserve during the hearing, according to Bert Ely, a principal at Ely & Co. Inc.
Meg Tahyar, co-head of the Financial Institutions Group at Davis Polk and Wardwell, said the framework for currency distribution is the most important structural element of any CBDC.
"The key design choice is whether the digital dollar is distributed to consumers and businesses indirectly through the banking system or directly by the Federal Reserve Banks. The impact on the banking sector, and the allocation of credit, is different in the two options," Tahyar told S&P Global Market Intelligence.
Fed Chairman Jerome Powell said May 20 that the central bank will release a research paper this summer exploring the potential for a CBDC. Powell added that such a digital currency must complement, not supplant, cash and private-sector digital forms of the dollar, such as bank deposits.
Another critical issue is whether the Fed has the authority to issue the digital currency without congressional approval.
"Would Congress be ready to authorize the Fed to do it?" Ely said. "I think there would be a tremendous battle over that."
In a note published on its website in February, the Fed stated that it is exploring whether amendments to the Federal Reserve Act would be necessary to issue a CBDC.
The hearing may not offer immediate answers to this or many other CBDC questions, Katz said.
Despite the growing focus on Capitol Hill, fueled in part by moves in China and other countries to develop their own digital currencies, "you don't know where all the lawmakers stand on this," Katz said. "It's not a traditional issue; it's not obviously a Republican or Democratic issue."
Indeed, the hearing will likely serve to give lawmakers a general sense of the issues influencing the debate, according to Isaac Boltansky, director of policy research at Compass Point Research & Trading LLC.
"This hearing is more about understanding the broader issues and the political dynamics the Fed will be forced to consider if it proceeds," Boltansky said.
Christopher Giancarlo, former head of the Commodities Future Trading Commission who now promotes CBDC as a leader of the Digital Dollar Foundation, will testify at the hearing. Giancarlo also serves as senior counsel at law firm Willkie Farr & Gallagher.
Neha Narula, director of the Digital Currency Initiative at the Massachusetts Institute of Technology; Lev Menand, a law professor at the Columbia Law School; and Darrell Duffie, a professor of management and finance at Stanford University, will also testify at the hearing.