The United States Anti-CBDC Surveillance Act: A Crypto Déjà Vu?

Introduction

Upon perusing the proposed Anti-CBDC Surveillance Act of the United States (US), I was struck by an uncanny sense of déjà vu. As an advocate in the virtual asset space over the last seven years, the familiarity of this moment is both captivating and unnerving. Rather than dismissing it as a fleeting sensation—a temptation I’m inclined to resist, given some of my reservations about CBDCs—I’ve chosen to gaze deeper into the mirror. What I see reflected back is the Anti-CBDC Surveillance Act as a parallel universe for crypto, eerily reminiscent of what I believe is a bygone era. Déjà vu.

The Anti-CBDC Surveillance Act has, unsurprisingly, sparked intense debate about the adoption and regulation of central bank digital currencies (CBDCs) in the US. A CBDC is a digital form of a country’s legal tender centrally owned and controlled by its central or reserve bank. It means a form of digital money or monetary value. This is denominated in the national unit of account, that is a direct liability of the central bank. Like Nigeria’s eNaira, the “digital dollar” or sometimes called “Fedcoin” is the US’s CBDC. The digital dollar or Fedcoin is digital cash. To ensure that the CBDC does not become a state weapon against citizens, the Anti-CBDC Surveillance Act was introduced in the US Congress. Concerned about the potential misuse of the digital dollar or Fedcoin, President Donald Trump, during his campaign, had promised to ban CBDCs in the US.

Proponents of the proposed Anti-CBDC Surveillance Act argue that it will protect financial freedom and privacy, believing a CBDC could enable government surveillance. This, they believe, will enable the Federal Reserve to track every transaction, potentially eroding financial privacy. They argue that this bill protects individual liberty and control over finances.

But critics see the proposed bill as a blanket ban on CBDCs that could stifle innovation in central or reserve banking. This, critics believe, is a dangerous precedent, since any anti-crypto administration could similarly ban crypto—as most governments did and others have continued to do over the years across the world. Banning CBDCs in any fashion, they say, denies everyone the potential benefits of improved payment systems (including cross-border transactions) and financial inclusion using fiat currencies in the digital age and smart economy.

What does the proposed Anti-CBDC Surveillance Act really say? Are there any exceptions? What benefits do CBDCs really offer, and what are the implications and risks, if any, of the proposed Act? I also highlight parallels in crypto restrictions and discuss key considerations in CBDC regulation.

Key Provisions of the Proposed Act

Prohibits direct issuance to individuals: In the proposed Act, the US Federal Reserve is barred from issuing a central bank digital currency (CBDC) directly to individuals. Specifically, the Federal Reserve is prohibited from offering products or services directly to an individual; maintaining an account on behalf of an individual; or issuing a CBDC or any similar digital asset directly to an individual. This is a death knell to retail CBDC innovations in the US.
Prohibits Indirect Issuance to Individuals through Intermediaries: The Federal Reserve is also barred from offering a CBDC or other similar digital currency indirectly to an individual through a financial institution or other intermediary. The implication of this prohibition on wholesale CBDC, which involves transactions between banks and other financial institutions who directly serve individuals, is unclear.
Prohibits CBDC Testing: Unless authorized by an Act of Congress, the Board of Governors of the Federal Reserve System and the Federal reserve banks are prohibited from establishing, carrying out, or approving a program intended to test the practicability of issuing a CBDC. Partnering or coordinating with a private sector entity to carry out such a program is also prohibited. This means no further CBDC development, except the US Congress permits it.

Parallels with Crypto Restrictions

The proposed ban on CBDCs in the US, specifically targeting direct issuance to individuals and use in monetary policy, raises concerns about setting a dangerous precedent. If a pro-crypto and anti-CBDC administration can restrict CBDCs, it could embolden future administrations with different priorities to impose similar restrictions on cryptocurrencies. My major concerns here border on the following:

Hypocrisy Concerns: If a pro-crypto administration can ban CBDCs, it may be seen as hypocritical when a pro-CBDC administration might attempt to restrict cryptocurrencies.
Precedent for Restricting Innovation: Banning CBDCs could establish a precedent for restricting emerging technologies, potentially stifling innovation in the financial sector.

Any Exceptions to the General Ban of CBDC?

There is only one exception. The proposed Anti-CBDC Surveillance Act preserves “any dollar-denominated currency that is open, permissionless, and private, and fully preserves the privacy protections of United States coins and physical currency.” What does this really mean? As I understand it, the exception above suggests that the proposed Act aims to preserve two things:

Protect private digital currencies: Preserve the existence and use of private, permissionless, and open digital currencies (like cryptocurrencies, including stablecoins) that are dollar-denominated.
Maintain physical currency privacy: Ensure that the privacy protections currently afforded to physical US currency (coins and bills) are preserved.

Essentially, the proposed Act appears to prioritize private, decentralized currencies while imposing restrictions on the development and use of CBDCs. This move suggests that the US Congress is wary of CBDCs’ potential to facilitate government surveillance and infringe on citizens’ privacy. Notably, the Act explicitly preserves the privacy protections afforded to physical US currency, such as coins and bills. However, this safeguard does not extend to the electronic version of the US dollar—the nondigital and nonphysical form—which, like other electronic transactions, is susceptible to tracing and potential privacy breaches. Although not as transparent as CBDCs, electronic transactions still pose a risk to individual privacy, particularly in scenarios where legal protections are insufficient.

By the way, do CBDCs offer any benefits?

Central banks worldwide have been increasingly captivated by the potential of CBDCs, a trend significantly influenced by the rise of decentralized currencies like Bitcoin. While proponents of cryptocurrencies speculate that CBDCs are primarily designed to counter the growing adoption of digital assets, central banks and supportive governments insist that the narrative extends beyond crypto.

According to CBDC whitepapers published by various central banks, these digital currencies promise a range of benefits, including the following:

Cheaper, faster, and easier cross border payments and trade;
Broader inclusion of excluded people in the financial system;
Improved effectiveness of monetary policies;
Easier and more transparent tax collection and remittance;
Easier and more transparent distribution of social interventions; and
Easier access to money during emergencies following natural disasters, outbreaks, wars, and similar events.

As the financial landscape evolves, central banks are determined to future-proof traditional fiat currency. In a digital economy, it’s imperative that legal tender adapts to remain relevant. After all, if the economy is embracing innovation, so too must the currency that facilitates it. The principle of parity suggests that what works for the digital goose should also work for the fiat gander. Afterall, the good old fiat cannot afford to be left behind in the future of finance. If the digital economy has gotten smarter, money also has to get smarter.

What are the Implications and Risks of the Proposed Act?

- Overly broad: The bill’s language could be interpreted broadly, potentially impacting other digital currency initiatives beyond CBDCs.
- Impact on financial freedom: The bill’s focus on financial privacy and limiting government control resonates with many, but its implications for financial freedom and innovation are complex.
- Stifling innovation: A ban on CBDCs might push innovation to other countries, potentially hindering the US’s competitiveness in the digital currency space.

Drawing the line: The bill could provide regulatory clarity regarding CBDCs, but it’s crucial to draw the line between legislative oversight and legislative overreach, in order to avoid unduly limiting the statutory powers of the Federal Reserve.
Global context: With over 130 countries exploring CBDCs, the US’s stance could influence global financial systems and digital currency development, including countries like Nigeria which already has a CBDC, the eNaira.

Key Considerations in CBDC Legislation

My years of advocacy in the emerging technology space teaches me that principle-based approach to managing the risks and threats that emerging technologies inherently bring along with their strengths and opportunities remains the safest. Like crypto, CBDCs are no exceptions, whether we like them or not. So, rather than stifling innovation by restricting the development of technologies like CBDCs, lawmakers should focus on regulating their use. This nuanced approach would enable the benefits of technological advancement while mitigating potential risks. By prioritizing use cases and risk management, policymakers can craft a framework that balances financial freedom, innovation, and national security. Below, I volunteer what I hope could serve as a guiding light in this regard:

Technology-Neutral Regulations: Laws should focus on the specific use cases and risks associated with digital currencies, rather than targeting the technology as a whole. Essentially, CBDC is not bad in itself, but how badly it could be used. So, regulate usage!
Risk-Based Approach: Policymakers should adopt a nuanced approach to regulating CBDCs by assessing specific risks and developing targeted regulations to mitigate them. Rather than imposing blanket bans, which could stifle innovation and hinder the potential benefits of CBDCs, regulators should focus on crafting clear guidelines and frameworks that foster innovation while ensuring compliance. For example, lawmakers should not attempt to ban the use of CBDCs for monetary policy, a statutory duty and power reserved for central banks like the Federal Reserve. Instead, they could restrict the use of CBDCs for monetary policy manipulation, striking a balance between innovation and regulatory oversight. By providing clarity and certainty, policymakers can create an environment that promotes financial innovation, protects consumers, and maintains financial stability.
Citizen Surveillance: The attempt to completely ban the Federal Reserve’s use of CBDCs over privacy concerns is impractical and contradictory to existing surveillance practices in the US. Given that the government already engages in surveillance activities under the Foreign Intelligence Surveillance Act of 1978 (FISA) and the Fourth Amendment allows for exceptions, a blanket ban on CBDCs due to privacy concerns seems inconsistent. In light of this reality, it seems more productive to focus on crafting regulations that balance the benefits of CBDCs with privacy protections, rather than an outright ban.
Global Competitiveness: The United States’ approach to CBDCs has far-reaching implications for global financial systems and digital currency development. It is crucial for the US to strike a balance between fostering innovation and managing risks. If other countries, such as China, continue to advance their own CBDCs—like the e-CNY being developed by the People’s Bank of China—while the US lags behind, it could potentially compromise the country’s position as a global economic leader in the digital economy.
International Cooperation: With over 130 countries, beyond the US, actively exploring CBDCs, international cooperation and coordination are paramount for crafting effective regulatory frameworks. Moreover, the potential of CBDCs to facilitate smarter cross-border transactions presents a compelling case for global collaboration, one that I believe outweighs the doubts and concerns voiced by critics of CBDCs.

Conclusion

The proposed ban on CBDCs in the US eerily echoes the past treatment of cryptocurrencies. Global policymakers, whether intentionally or not, tarnished the reputation of crypto, relegating it to the fringes. After years of stigma, discrimination, and even criminalization, governments are now attempting to embrace digital assets. However, the scars of the past still linger, and the journey to mainstream acceptance remains arduous. Let us not repeat the mistakes of the past with CBDCs.

A balanced approach, characterized by technology neutrality and risk-based regulation, is essential for addressing the risks associated with CBDCs while fostering financial inclusion. Targeted regulations can effectively mitigate concerns around privacy, financial stability, and other risks. As the Anti-CBDC Surveillance Act advances in the US, it is crucial to consider the potential consequences and strive for a balanced approach that promotes innovation while managing risks. By doing so, we can avoid repeating the tumultuous history of cryptocurrencies and create a more favorable environment for digital currencies to thrive. We have been here before. Let’s not repeat crypto’s history here. Déjà vu.

Design by Jesús Gonzáles

Senator Ihenyen is the Lead Partner at Infusion Lawyers where he heads the Innovation & Emerging Technologies Practice. He is the immediate former President of SiBAN and former General Secretary of Blockchain Industry Coordinating Committee of Nigeria (BICCoN). Senator is the Founding Editor of CAB and Advisory Board member, Lagos Blockchain Week. He is a Trustee and Executive Chair of the Steering Committee of the Virtual Asset Service Providers Association (VASPA), an Africa-focused advocacy group for VASPs.

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