Fitting the bill: US Congress eyes e-cash as an alternative to CBDC

On March 11, United States President Joe Biden issued an executive order in which he encouraged the Federal Reserve to continue research on a prospective U.S. central bank digital currency, or CBDC.

The order emphasized that the market capitalization of digital assets had surpassed $3 trillion in November — with Bitcoin (BTC) representing more than half of the total value of all cryptocurrency and peaking at over $60,000 — up from just $14 billion five years prior. For comparison’s sake, the U.S. money supply (M1) in the same month was $20.345 trillion.

Stephen Lynch, a member of Congress who chairs the Task Force on Financial Technology, introduced the Electronic Currency and Secure Hardware Act on March 28, which would develop “an electronic version of the U.S. Dollar for use by the American public.” How does this project fit into the existing U.S. CBDC frameworks?

Is Lynch’s e-cash a CBDC or not?

Curiously, the specialists tasked with authoring the concept claim it isn’t a true CBDC because it would be issued by the U.S. Treasury rather than the U.S. Federal Reserve, the central bank system.

Rohan Grey, an assistant law professor at Willamette University’s College of Law who helped draft Lynch’s bill, said in an interview that the Fed doesn’t have the statutory authority to create a CBDC or the capacity to maintain the retail accounts that would be required for it. Instead, he described the digital dollar as something replicating the privacy, anonymity and transactional freedom reflecting the properties of physical cash.

He noted that it would neither use a centralized ledger (like most proposed CBDCs) nor a distributed ledger (like crypto) and maintain its security and integrity through its hardware. According to Grey, beyond that, giving the Fed the power to conduct the electronic surveillance of digital currency isn’t a good idea because of the potential for infringing on users’ privacy. He positioned e-cash as a third alternative beyond account-based CBDCs and crypto, which addresses concerns related to privacy and surveillance.

Isn’t online banking enough?

Last summer, crypto critic Senator Elizabeth Warren argued that there was no need for digital money because U.S. money is already accessed digitally. Lynch’s proposal reflects a different perspective in the Democratic party. What attracts him?

In Europe, China and other parts of the world, it’s common to transfer money via online apps or with debit card payments. While these exist in the U.S., they complement an older “legacy” system of paper checks. While the use of personal paper checks by individuals has declined significantly over the past 20 years, the U.S. government and U.S. businesses still use them to send money.

This makes things difficult for the millions of adults who are “unbanked” or “underbanked”: those who lack a bank account and commonly rely on check-cashing services, which charge high rates. Many consider these extra expenses too high or disproportionately high, given that these services are considered the most essential by the least economically resilient segment of the population. Many U.S. politicians are worried about economic inequality issues, especially since the 2008 financial crisis and more recently in the wake of the 2020 riots.

Additionally, when Americans use credit cards or digital platforms to make payments, retailers must pay third-party fees, which adversely affects the cash-based economies of poorer and immigrant-dominated communities. Small businesses, landlords and individuals providing services often must rely on paper checks.

Sending paper checks also involves unacceptable lag times involved in their transfer, receipt and processing. The number of banks in the U.S. is in the thousands, while in Canada, just five account for most residents. This means that bank-to-bank transfer costs associated with sending money are essentially unavoidable.

Normally, the U.S. Bureau of Engraving and Printing…