Dear Chair Lynch, Ranking Member Davidson, and Members of the Task Force:

My name is George Selgin. I’m a professor (emeritus) of economics at the University of Georgia and the Director of the Cato Institute’s Center for Monetary and Financial Alternatives. I thank the task force for allowing me to submit some research I’ve done bearing on its forthcoming hearing on “Digitizing the Dollar: Investigating the Technological Infrastructure, Privacy, and Financial Inclusion Implications of Central Bank Digital Currencies.”

That research consists of the enclosed article, “Central Bank Digital Currency as a Potential Source of Financial Instability,” which appeared in the Cato Journal earlier this year. The article was originally written for last year’s annual Cato Monetary Conference entitled Digital Currency: Risk or Promise?

As its title suggests, my article warns of potentially destabilizing consequences of Central Bank Digital Currency (CBDC) that I hope your task force will carefully consider in assessing the desirability of such currency, and also in specifying what safeguards may be needed to prevent it from proving harmful should it be adopted.

While I was writing my paper last fall, the BIS issued its own report on CBDC. That report includes a succinct summary of the issue my paper addresses that may serve to introduce it:

Depending on the design and adoption of a CBDC…[t]here is a risk of disintermediating banks or enabling destabilising runs into central bank money, thereby undermining financial stability. Today, the public can (and have in the past) run into central bank money by holding more cash, but such runs are very rare, given the existence of deposit insurance and bank resolution frameworks that protect retail depositors. …[A] widely available CBDC could make such events more frequent and severe, by enabling “digital runs” towards the central bank with unprecedented speed and scale. More generally, if banks begin to lose deposits to CBDC over time they may come to rely more on wholesale funding, and possibly restrict credit supply in the economy with potential impacts on economic growth.

Steps that could limit the danger in question include having CBDC yield less interest than bank reserves, or (in the case where CBDC consists of an individual Federal Reserve account balance) capping individual CBDC holdings. However, it should be kept in mind that either solution will limit the effectiveness of CBDC in achieving at least some of its proclaimed benefits, and that its proponents may object to them for this reason. In fact, most proposals for CBDC would have it yield interest at the same rate as bank reserves, without placing any limit on individual holdings. Should the choice ultimately be between a CBDC arrangement of this sort, or none at all, it will confront legislators with the unenviable task of having to weigh the proclaimed benefits of CBDC against the disintermediation risks it will pose.