US Senate Bans CBDC: What Happens to Its Wholesale Version?

• The US Senate’s newly passed Housing Act does not clearly distinguish between retail and wholesale versions of a CBDC.
• The definition of the act, though, implies that the CBDC prohibition applies only to the retail version, which is designed to be widely available to the public.

The US Senate effectively banned Central Bank Digital Currency (CBDC) when it passed the 21st Century ROAD to Housing Act on Thursday. The bipartisan bill sponsored by House Representative French Hill breezed through the upper chamber of Congress by a wide margin at 89 to 10.

The 21st Century ROAD to Housing Act

Senator Tim Scott, the Republican Chairman of the Senate Banking, Housing, and Urban Affairs Committee, and Senator Elizabeth Warren, a Ranking Member of the Committee from the Democratic Party, led the legislation’s passage. The fact that the bill’s support came from two polarizing figures in the Senate, who mostly don’t agree with each other on almost anything, speaks for itself.

The law aims to make home ownership more affordable and accessible for Americans. However, a section of the bill that has caught the public’s interest, particularly the digital assets sector, was the prohibition on the creation of CBDCs until the end of 2030.

ADVERTISEMENTThe provision mirrored US President Donald Trump’s CBDC ban when he took office for his second non-consecutive term in the White House. The prohibition came in response to public concerns about the potential for surveillance and strict monetary controls such an instrument could impose on ordinary people.

The New Housing Act’s CBDC Ban

The new Housing Act, however, didn’t make a clearly-worded distinction between retail and wholesale CBDCs. Several senators pointed out that the CBDC provision was an overreach in the housing regulation. Meanwhile, analysts at Forbes clarified that the CBDC ban only applies to the retail version of the virtual asset, which involves direct-to-consumer issuance.

The definition of the act implies that the restriction only affects a digital asset denominated in US dollars that is under the direct liability of the Federal Reserve System and widely available to the general public. Hence, it does not cover the wholesale version that enables more efficient, transparent, and secure settlement systems exclusively used by financial institutions.

ADVERTISEMENTIt’s important to establish clear boundaries between the two because of their different nature and purposes. Simply put, a retail CBDC is one that a central bank could substitute for money for regular purchases or transactions. Unlike stablecoins, the asset is directly overseen by a country’s central bank. An example of this is China’s digital yuan, or e-CNY.

A wholesale CBDC, on the other hand, is a digital representation of central bank reserves, used solely by commercial banks and other regulated financial institutions. Multiple countries are currently experimenting with this type of CBDC, like Switzerland, Hong Kong, the UAE, and China.

A wholesale CBDC is highly advantageous for these entities, as it enables the instantaneous settlement of large-scale interbank transactions. It significantly mitigates counterparty risk through programmable smart contracts, while addressing reconciliation bottlenecks, especially due to the involvement of a network of intermediaries.

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