Congressional Hearing: The Implications of a Central Bank Digital Currency and Private Sector Alternative

This is a test: testing.

Here is a video of a hearing of the Congressional Subcommittee on Digital Assets, Financial Technology and Inclusion, help on 14 Sep 2023, on the idea that the US should, or should not, pursue the creation of a Central Bank Digital Currency.

The first 26:22 of the video is waiting for the hearing to start.

The witnesses

Four witnesses openly state their opposition to the Federal Reserve creating a CBDC. The fifth witness states his support for the idea.

The witnesses is opposition to the idea are:

  • Mr. Yuval Rooz, Co-Founder and Chief Executive Officer, Digital Asset
  • Ms. Paige Paridon, Senior Vice President and Senior Associate General Counsel, Bank Policy Institute
  • Ms. Christina Parajon Skinner, Assistant Professor, The Wharton School of the University of Pennsylvania
  • Dr. Norbert Michel, Vice President and Director, Center for Monetary and Financial Alternatives, Cato Institute

The witness in support of the idea is:

Reasons for stated opposition

The reasons stated for being in opposition fall into two broad categories:

If the Fed does retail banking, it could severely disrupt our credit expansion banking system, in which 95% to 97% of all USD are created and exist

I consider this issue to be legitimate.

For what it’s worth, I do believe the US will eventually create a digital USD, for various reasons, but I personally believe it needs to be a Decentralized Digital Currency that mirrors how our existing credit expansion banking system works today.

A CBDC can threaten the personal privacy of Americans

The “minority” witness points out the obvious flaws with this argument. The idea that a CBDC can threaten the personal privacy of Americans implies existing forms of digital money (credit cards and debit cards) somehow protect the personal privacy of Americans.

But they don’t.

For two reasons:

  • US law enforcement agencies can TODAY access all our banking records. They need a warrant or subpoena or some other form of court order, but this happens frequently. And again, I wish to emphasize that the electronic money we all use today (credit cards, debit cards, PayPal, Zelle, etc.) does not provide privacy.
  • While commercial banks themselves do a good job at protecting the financial records of US citizens, non bank payment processing companies, credit reporting agencies, and insurance providers have a history of being terrible at this. The most extreme example was when Equifax reported a system breach where the financial records of EVERY ADULT AMERICAN were accessed by unauthorized persons (hackers).

Anyone who says our current systems of electronic money provides personal privacy is either misinformed, or lying. They don’t.

A CBDC could actually provide anonymity

This argument was made by the witness advocating for the possible benefits of a CBDC. While the devil is in the details, we CAN design and implement a CBDC that provides the same level of anonymity as paper bank notes do today.

But of course, the CBDB would need to be specifically designed to do so, and we could just as easily design one whose privacy protections are as bad, or even worse, than the lack of privacy that exists in our current forms of digital money.

The Questions and Answers

The questions and answers portion of the hearing was uneventful with one (in my humble opinion) exception.

Everyone spoke about our fractional reserve banking system as if deposits create loans and the ability of licensed commercial banks to create loans is constrained by the deposits they hold.

Deposits neither create loans nor does insufficient deposits or reserves constrain the ability of licensed commercial banks to make loans.

This was especially true of Ms. Paige Paridon, who at about 1:41:11 is specifically asked about how if USD are moved from commercial bank accounts into CBCD accounts they’re no longer available for banks to lend against.

Her answer was very interesting, as she said “…if it was an intermediated CBDC…”.

Her answer obscured the reality, possibly intentionally, that licensed commercial banks are NOT financial intermediaries.

As the Senior Vice President and Senior Associate General Counsel of the Bank Policy Institute, she has to know that.

Which implies she choose to give a misleading answer.

How licensed commercial banks are NOT financial intermediaries

The ability for licensed commercial banks to make loans is specifically NOT constrained by the deposits or reserves they do or do not hold.

This is by design and enshrined in law.


The Feds primary mandate today is to hit their interest rate target.

Aggregate loan volume is based on demand for loans. Like haircuts, they can not be produced in advance and be kept in inventory until someone wants one.

Loans are made when someone applies for a loan, and is approved. Without a loan application, no loan is made.

This means the demand for loans is what is called “elastic” meaning it changes over time.

And, if during periods of high demand for loans, the availability of loans was constrained for any reason, demand would outstrip supply and the cost (the retail interest rate) would rise.

But as the Fed mandate today is to hit a target interest rate, this can not be allowed to happen. Yes the Fed sets the Federal Funds Rate, but they seem to consider it to be important that retail interest rates not be meaningful higher, except of course for credit cards where they no longer care.

So, when banks need more reserves in order to make more loans, the Fed provides them, via various mechanisms (the repo market for example).

While we call this a “free market”, in reality it looks VERY managed by the back end supplier of USD.

In reality, loans create deposits

When a licensed commercial bank makes a loan, the money being loaned out does not come from anywhere. It is legally conjured from nothing, because by law, that’s how it works.

If someone borrowing money asks “Where did the money come from?” the loan officer answers with something like “You will find your money in account XYZ and here a set of initial checks that allow you to draw on the account”.

The money being loaned out does not “come from” anywhere. It is created by the licensed commercial bank from nothing.

In the entire series of events from loan application to money creation and loan disbursement, the only thing in that entire chain of events that has value, is the loan contract where the borrower promises to adhere to a repayment schedule.

Other than that, there is no underlying anything supporting the creation of the money needed to fund the loan.

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