The U.S. government mood on crypto is shifting

Senator Elizabeth Warren, who sits on the Senate’s banking and finance committee, is not known for her love of crypto, and indeed is better known for her push for tighter regulations on cryptocurrencies. So, it was something of a surprise when she made a statement on Wednesday of this week, saying that digital currencies, and in particular those issued by central banks, could assist unbanked, low-income Americans. She pointed out that this group has long been denied access to bank accounts in the mainstream banking system.

So, is this a signal that support for cryptocurrencies is picking up in Washington D.C.?

When Warren spoke to CNBC’s Squawk Box, she said, cryptocurrencies and central bank digital currencies “may be an answer” to the “enormous failure by the big banks to reach consumers.”

She also pointed out that digital currencies have “extremely low transaction costs,” and that this could make them an ideal way to include the 15 million Americans without bank accounts in the financial system. Warren also highlighted a fact that is well known to those working with the financially underserved: they have to pay intermediaries to cash their pay cheques or to pay bills. Access to a digital currency could change all that for these people and give them back full control of their money.

When asked about her objections to crypto, Warren replied that her concerns focused on “bad actors” rather than cryptocurrencies per se, saying that in her view a “wholly unregulated market” has allowed “big guys to take advantage . . . of small investors and taxpayers.”

The sentiments Warren expressed this week are significantly different to her thoughts expressed in a letter to Janet Yellen, the Treasury Secretary, in which she urged Yellen to lead “a coordinated and cohesive regulatory strategy” to help mitigate the “growing risks” cryptocurrencies pose to the financial market.

Before we get too excited about what appears to be a change of direction on Warren’s part, it is probably best to reserve judgement until we see the Fed’s highly anticipated report on central bank digital currencies, which is due to be released in early September. Fed Chair Jerome Powell has already insisted the Fed isn’t rushing into the space, but he has suggested that a digital US currency could make all other cryptocurrencies obsolete. He said, “You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency. I think that’s one of the stronger arguments in its favour.” That’s quite a big claim that smacks just a bit of American exceptionalism.

Meanwhile the Bank of America is reconciled to digital currencies, and sent out a note to its clients this week saying:

“Digital currencies—either issued by central banks or privately issued with safe, liquid backing—seem inevitable.” It added that central banks in particular “have the power and the will to prevent a very bad outcome in terms of collateral damage in the financial system.”

In the end, that is their real concern. Make of it what you will.

Fears about CBDCs are misplaced

Interesting read from Marcelo M. Prates in Coindesk this week with his thoughts on CBDCs who puts forward the idea that there is nothing to fear from central bank digital currencies (CBDCs), although some seem to think it will ‘disintermediate banks’ and ‘facilitate monetary surveillance and censorship’.

He says, “From papers to blog posts, a lot has been said on how a CBDC would deprive banks of deposits, as funds could be easily moved to CBDC accounts or wallets, especially in times of crisis.” CBDCs are also seen as instruments of control “ since CBDC transactions would be traceable in real time.” But the important question he asks is this; would these risks emerge because of CBDCs, or would they happen even if CBDCs never come into existence?

What about disintermediation?

There is a fear that people will remove their deposits to the safety of the digital currency provided by the central bank thus reducing the funds of the commercial banks. If there is no CBDC, the risk to the banks disappears. Not so, says Prates, because “We already have alternatives to bank deposits that could greatly reduce banks’ funding if used extensively.” What he is referring to is “the possibility of converting money from your bank account to a safer option of digital money that is currently available: e-money or its unregulated twin, the stablecoin.” Look at the success of Wise, PayPal and other e-money issuers and you will probably come to the same conclusion.


For some the possibility of state surveillance and censorship is the worst aspect of CBDCs. Prates points out that it is true that unscrupulous governments could use some of a CBDC’s unique features, such as traceability, to discriminate or to censor specific activities or individuals. He adds, “If, moreover, CBDCs were kept deposited directly at the central bank, governments could even threaten their citizens with balance freezing and confiscation.”

This is not something to be taken lightly, but as Prates says, abuse of people via their finances is not something new and cites the story of Fernando Collor, the first democratically elected president in Brazil in 1990 after 20 years of military dictatorship, and his “infamous plan to “kill inflation”: the Collor Plan.” Amongst its various measures, the Collor Plan determined that all bank balances above the equivalent of $1,500 would be frozen for 18 months and paid back in installments after that period. Not only did the banks comply with this order, the judiciary didn’t say a word, and the law was only repealed after two years. Prates says, “This kind of abuse, like many others against individual rights, is typical of countries with a weak rule of law, incapable institutions, and no political accountability.” These have existed long before CBDCs.

Fundamentally, the fears surrounding CBDCs are ones that have long existed in the current monetary system and the advent of a CBDC will not be “the root of all evil” that many fear.