Early in November, the Federal Reserve (Fed) launched the next phase of its central bank digital currency (CBDC) development: a 12-week pilot program with the nation’s largest banks. Although the Fed has yet to receive authorizing legislation from Congress or an executive order from the Biden administration, the pilot, alongside the Boston Fed’s Project Hamilton, marks another step closer to the issuance of a CBDC in the United States.

In fact, the pilot highlights not just the development of CBDCs themselves, but also the development of an entire “CBDC industry.” Groups like Mastercard, Bitt, and Celo have been consulting with central banks to advance the issuance of CBDCs. And they are not alone. A whole industry has emerged in pursuit of what appears to be the next big government contracting opportunity (Table 1).

What might be most interesting is that some of the companies actively promoting CBDCs are also the very same ones that encouraged the Fed to push forward. For instance, in a comment letter to the Fed, HSBC wrote:

As the world’s largest trade bank and one of the largest foreign exchange dealers, HSBC is actively involved and engaged with a number of Central Bank Digital Currency (CBDC) projects, including with individual central banks and the Bank for International Settlements (BIS).

We are committed to supporting the development of CBDCs where central banks and governments wish to examine or introduce them, for either wholesale or retail purposes. We are well-placed to support and advise central banks and public authorities as they tackle the policy, operating model and technology decisions that arise from CBDC development, and the rise of new forms of digital money more generally.

Likewise, Mastercard, in their own comment letter, wrote:

Mastercard is committed to supporting central banks in their chosen path to payment system modernization; including the development of a central bank digital currency (CBDC) where this is relevant. … We are committed to bringing that expertise to bear in support of the design, testing, and deployment of CBDC networks where central banks choose to pursue their development.

It should therefore be no surprise that HSBC and Mastercard were two of the banks chosen to participate in the Fed’s pilot program. And it is this kind of conflict of interest that led Representatives Tom Emmer (R‑MN), Patrick McHenry (R‑NC), Bill Huizenga (R‑MI), Ted Budd (R‑NC), Ann Wagner (R‑MO), Andy Barr (R‑KY), French Hill (R‑AR), Anthony Gonzalez (R‑OH), and Warren Davidson (R‑OH) to question the relationship between these companies and the Fed.

In a press release, Representative Emmer said, “The more we learn about the Boston Fed’s work on [CBDCs], the more we have become concerned with the lack of transparency, especially as it relates to their partnership with the private sector.”

The private sector shouldn’t be faulted for identifying a profit opportunity. However, there is a clear conflict of interest and the government should not be in the business of distorting the market. The Fed is not a venture capital firm for projects in need of funding. And there’s a fine—yet, critical—line between researching CBDCs and developing them. It’s with this line in mind that the answers to Representative Emmer’s questions are so important.

Yet considering that the Fed appears ever eager to toe, and even blur, that line, Congress should set the record straight and explicitly prohibit both the Fed and the Treasury from launching a CBDC.