The Risks of Central Bank Digital Currencies

This week at a hearing of a subcommittee of the House Banking Committee the risks related to central bank digital currencies. John and Elliot discuss some key risks identified in the testimony, including dollar primacy, economic and trade sanctions, and cybersecurity.

The Risks of Central Bank Digital Currencies TRANSCRIPT

Elliot Berman: Hi, John, how are you this week?

John Byrne: Good, Elliot. How have you been?

Elliot Berman:  I've been good too. So that everybody knows we're actually sitting next to each other for the first time. We happen to have the same meeting in one of our offices in Cleveland. So, we decided to do this in person.

So, this week, the House Financial Services, a subcommittee on national security, international development, and monetary policy, held a hearing. They held a hearing about central banking and digital currencies. I'm assuming you saw that notice of the hearing.

John Byrne: Yeah, by reading the subcommittee name, we've used up our five minutes. In addition to the fact that the House Financial Services Committee and various subcommittees have done a lot of work in the national security money launder prevention space throughout the year, this is just another example.

I thought what was particularly poignant about the hearing was basically academic types, and advocacy groups talked about what's the potential downside and upsides of central bank currencies and digital currencies. And they looked at some things that we care about, the potential to enhance money laundering activities, more unique operations there, and sanctions of Asia was another space.

There're some real positives going to central bank digital currency, but obviously a lot of things we don't know.

Elliot Berman: Yes. And what we've heard a lot about virtual currencies, just a reminder to our listeners that central bank digital currencies are really just what they sound like.

They are the central bank of a country, having a digital currency representing their paper, coin Fiat currency. So, this is different than Bitcoin or Ethereum, or any other virtual currencies, but it does play into that same space. There were a lot of national security considerations that were identified.

One that was interesting was the fact that dollar primacy is considered a national security issue. The fact that so much of world commerce is actually transacted in dollars and that as these central bank digital currencies come online, and there's only a couple that are online currently, that could impact the sway that the US dollar has worldwide.

John Byrne: Right. And one of the witnesses for representing the Center for a New American Security talked about something that I hadn't even begun to think about - that is, the impact it could have on banking services, basically saying that correspondent banking could go away.

If you create these central bank digital currencies and digital currencies, you get rid of the middleman, if you will. Correspondent banking, which is a big business, as we know, but also a high-risk business, could potentially go away. Private banking will still be a space, but they argue that private banks will have to figure out other services.

So, I thought that was an interesting add-on because, as we know, from dealing with risk-related topics, a high-risk category has always been correspondent banking. And so maybe some would say potentially not a bad thing if they were to go away, but obviously, that's pretty dramatic.

Elliot Berman: Yeah. Another element that they talked about was that these digital currencies could be constructed in a way that took away a degree of transparency that is now indirectly built into the financial systems and financial transactions.

It's the piece that allows financial services companies and financial institutions to try to detect suspicious or illegal activity. And depending on how these Central bank digital currencies were constructed, some of that transparency could go away, making detection more difficult and therefore use for legal purposes, more inviting.

John Byrne: Right. So, a lot here to digest. 

I thought the hearing was interesting in that it looked at folks from the outside. As I think we've talked about, the Federal Reserve is doing its own internal study, as I'm sure maybe some of the Federal Reserve Banks are doing, so much more to come here.

If people are interested in getting more information. It's the July 23rd hearing on the subcommittee that Elliot mentioned, and they titled it "The Promises and Perils of Central Bank Digital Currencies."

Elliot Berman: Yeah. So, one more shameless plug, you can listen to this and all of our other podcasts on Spotify and other places that you get your podcasts, and you can find more of our content on our website - amlrightsource.com.

Have a good weekend. I'll talk to you next week.

John Byrne: Yeah. And I'll probably talk to you in another five minutes. Take care.

Elliot Berman: Bye-bye.