Politico reports that the Fed is taking “what may be the first significant step toward launching its own virtual currency,” a move that the American Bankers Association opposes. Still, according to Politico, a “fully digital version of the U.S. dollar” now has bipartisan interest in Congress “because of its potential benefits for consumers who don’t have bank accounts.”

The idea of a central bank digital currency (CBDC) is hardly new. Neither is the idea that such a currency would help the unbanked. But it is impossible to evaluate how a CBDC might help the unbanked without precisely defining the CBDC and seeing the unbanked problem clearly.

Let us tackle the unbanked issue first.

According to the FDIC’s latest survey, as of 2019, 95 percent of U.S. households had either a bank or credit union account. This figure shows that the overwhelming majority of Americans do have a bank account, but it also demonstrates that 7 million households do not have a bank account.

>>> The Fed Should Not Create a Digital U.S. Dollar

Interestingly enough, it turns out that nearly half of unbanked households say that they do not have an account because they do not have enough money to meet minimum balance requirements. Other explanations include privacy concerns (36 percent of unbanked households), excessive bank fees (34.2 percent), unpredictable bank fees (31.3 percent), and a lack of trust (36.3).

Simply put, a large portion of the unbanked do not want bank accounts because they feel they cannot afford them. In other words, the root of the unbanked problem is that the unbanked do not have enough money to be banked.

Rather than address this economic problem, Congress is focused on improving the “efficiency of the financial system” by using “digital public money [that] is well-designed and efficiently executed.” (I’m not entirely sure what efficiently executed means, but feel free to ask Sen. Elizabeth Warren (D-Mass.)

It is always something of a spectacle to watch Congress discuss solutions to a problem that it created, and this instance is no different. Increased federal regulatory barriers, including the infamous Durbin amendment that led directly to higher banking fees and fewer zero-fee accounts, have been making low-balance accounts an increasingly losing proposition for banks for decades. At the same time, federal regulators have steadfastly made alternative private solutions, ranging from check cashing services and short-term lending to Wal-Mart’s attempt to provide banking services, increasingly difficult to deliver.

Rather than remove regulatory barriers and lower the costs that they impose, or discuss the difficult-to-solve problems that result in long-term poverty, Congress appears happy to do what they always do: Impose higher costs on people and throw more money at the poor.

And that gets us back to the importance of precisely defining a CBDC framework. Some of the popular CBDC proposals are so different that it is impossible to evaluate the costs and benefits without knowing the specifics. The following four categories cover most of the basics. (Broader overviews are here, here, here, here, and here.)

Reserves held in accounts at the Fed. This type of CBDC refers to the reserve balances that private banks hold at the Federal Reserve. These accounts are available only to financial institutions, not retail consumers. Banks (and the U.S. Treasury) can make electronic payments from these accounts using Fedwire, a “real-time gross settlement system that enables participants to initiate funds transfer that are immediate, final, and irrevocable once processed.” As this description shows, the U.S. already has a type of CBDC.

Electronic balances held—either indirectly or directly—in accounts at the Fed. Rather than wholesale (bank-to-bank) transactions, some folks advocate for a CBDC that consists of retail customer accounts held at the Federal Reserve. Some proposals call for banks to intermediate these accounts, and others want individual customers to have direct access to their Fed accounts. Either way, the result is the same: Fed accounts give individual customers the ability to conduct electronic transactions.

Essentially, this type of CBDC “gives” the unbanked bank accounts. It allows such individuals to conduct digital transactions just like those of us with bank accounts. While it may appear that these accounts confer a huge benefit, unbanked Americans already enter the mainstream economy using prepaid cards and low-cost apps. These low-cost options enable electronic transactions that do not meaningfully differ from the electronic transactions of people with bank accounts.

The only benefit that might arise from having such an account would be that it could improve the ability to build a credit profile and to (eventually) borrow money. That benefit is no sure thing, however, as the “free” Fed account does nothing to change the underlying economic conditions that pushed many of these folks out of banking in the first place.

Balances held directly on a blockchain controlled by the Fed. This type of CBDC closely mimics private decentralized cryptocurrencies, only the ledger—the database known as the blockchain—is controlled by the Federal Reserve. Retail banking customers would conduct transactions as if using any other cryptocurrency, but their transactions would be with U.S. dollars. The Fed would centrally control the database, so anyone concerned with privacy would face the same problems—possibly more—that drove them away from banks. Moreover, it is difficult to see the marginal benefit (for anyone) between this option and a non-blockchain electronic account at the Fed.

Balances held indirectly on a blockchain controlled by the Fed. In this case, retail customers would still interact with banks, and only the banks would have access to the (Fed controlled) ledger. Compared to the previous option—direct access to a Fed-controlled ledger account—it is even more difficult to imagine the benefits that would confer to unbanked customers relative to those that might arise from having a non-blockchain account at the Fed. Indeed, private blockchain-based solutions are becoming popular because their decentralized nature makes customers less reliant on existing intermediaries, thus providing lower transaction costs.

Overall, the possibility of a CBDC helping the unbanked hinges on giving people “free” access to electronic accounts. This solution really has nothing to do with the private digital currencies that have arisen except that the possible benefits of private solutions like Bitcoin have forced many government officials to acknowledge that people will not always have to use bank accounts and U.S. dollars.

>>> Digital Dollar Project Promotes Federal Reserve Digital Dollar

The allure of (nearly all) retail-based CBDC proposals is that they shift people into publicly-backed-bank accounts with zero fees. If Congress wants to do that—to convert having a bank account into an entitlement—then they have the power to do so without involving the Fed in any way. Congress can just redistribute more money to people to pay for bank accounts with overdraft protection. (Exactly why it is kosher for federal taxpayers to subsidize these accounts and short-term loans, but out of bounds for private companies to charge for such services, is another great question for Sen. Warren.)

That policy would be awful but still superior to the other options currently being discussed, because it would be transparent and because it would properly separate the issue from a major potential downside to a CBDC: Governments can use CBDCs to secure full control of money and disintermediate the private financial sector.

One Member of Congress on the right track with these issues is Sen. Pat Toomey (R-Penn.). In a recent hearing, Toomey noted: “What problem is a central bank digital currency trying to solve? In other words, do we need one? It’s not clear to me yet that we do. In my view, turning the Fed into a retail bank is a terrible idea.”

Toomey also recognizes the power of the private sector. In a recent letter to the U.S. Treasury—which has generally been horrible on crypto and FinTech issues across multiple administrations—Toomey nails it:

While I recognize that [these] proposals are seeking to address the misuse of cryptocurrencies for illicit activity, if adopted, they would have a detrimental impact on financial technology (“fintech”), the fundamental privacy of Americans, and efforts to combat illicit activity. A cryptocurrency connects one person with another through open, public networks—separate from government control or other financial intermediaries. As a result, cryptocurrencies stand to dramatically improve consumers’ privacy, access to financial services, and power to make decisions for themselves.

More members of Congress should view a CBDC and fintech regulation through Toomey’s lens. For America’s unbanked to get the best outcome, after the Fed takes its “first significant step toward launching its own virtual currency,” it will take two steps back.