Central Bank Digital Currencies: Potential Financial Catastrophe in Search of a Problem

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The White House released a framework recently on regulation of digital assets that included a call for the Federal Reserve and Treasury Department to continue behind-the-scenes efforts to impose a government-run cryptocurrency known as a Central Bank Digital Coin.

A Central Bank Digital Coin would be one of the most authoritarian—and one of the most reckless—government scheme of the past 50 years. It would gamble with our economy and our financial system, threaten our fundamental liberties, and could, ironically, reduce the dollar’s existing prestige.

What’s a Central Bank Digital Coin?

Such a “coin” is a government-run cryptocurrency whose value is fixed, in this case at $1, copying the “stablecoin” cryptocurrency model and replacing the dollars in your bank and your wallet. A Central Bank Digital Coin can either be intermediated, meaning it’s managed through banks, or disintermediated, meaning people effectively park their money at the Federal Reserve. The Fed effectively becomes your bank.

In either case, governments—and hackers—can see all personal information about what you spend, where you spent it, and potentially, why you spent it.

Beyond that built-in surveillance power, Central Bank Digital Coins can be easily programmed so bureaucrats can forbid you from buying a given product, or even force you to buy it . Indeed, China has already bragged about the power to dictate all spending in their own Central Bank Digital Coin.

Promoters of the concept argue they could reduce transaction costs and promote international use of the dollar. Both are wrong.

In fact, America’s financial and payment systems are already among the cheapest and fastest in the world, and remaining inefficiencies are largely due to overregulation—including by the very agencies pushing Central Bank Digital Coins.

That was displayed tragically in last year’s Robin Hood-Gamestop debacle, sparked by outdated financial regulation that caused payment delays, leaving the online brokerage short of cash as market prices fluctuated.

Moreover, private firms already exist to mitigate the frictions that Central Bank Digital Coins are supposed to fix: CashApp, Venmo, Apple Pay, and others have already learned to route around the clunky financial obstacles bureaucrats have already imposed.

As for dollar dominance, promoting Central Bank Digital Coins could actually undermine international use of the U.S. dollar as today’s dollars and private stablecoin cryptocurrencies are replaced by a centrally controlled surveillance token.

The U.S. dollar today holds a 99.85% dominance in private stablecoins, increasingly the main way people use crypto. Fully $140 billion of dollar stablecoins exist today, yet the largest euro token is worth just $14 million, and there’s no significant yen or Chinese yuan token at all.

In other words, the U.S. dollar is already owning the crypto space with no government mandates at all. And that dominance was earned simply because dollars are the most liquid asset on earth, and, unlike the Chinese yuan, backed by a heretofore privacy-respecting US government, thus relatively free of bureaucratic control.

Ironically, this suggests the best way to promote the U.S. dollar is for regulators to actually promise never to introduce a Central Bank Digital Coin, so private stablecoins continue to feel safe sticking with dollars, rather than fearing their industry could be destroyed by regulators.

Central Bank Digital Coin Risks

There are five key risks that make Central Bank Digital Coins both unacceptably risky and dangerous to Americans’ freedoms. They relate to financial stability, privacy rights and surveillance, mismanagement of inflation and recessions, the risk of financial crisis, and exposing Americans’ personal data to hacking threats.

Government control of private investment: A Central Bank Digital Coin could drain trillions of dollars of deposits from commercial banks, replacing loan officers with bureaucrats—akin to nationalizing investment. Bureaucrats are already trying to direct capital towards climate, equity, or environmental, social and governance goals, and a Central Bank Digital Coin would massively expand that power. It would move us toward a Soviet-style political allocation of capital, leading inevitably to misallocations like those that triggered the 2008 financial crisis.

Surveillance and censorship: A Central Bank Digital Coin could force every American to hand every financial detail to the government, amounting to state-run surveillance that makes a mockery of the 4th Amendment. Further, a Central Bank Digital Coin can be programmed so bureaucrats can mandate any transaction they want, and forbid any transaction they dislike, or financially cripple any individual or business they dislike. This dystopia was on display in Canada’s recent crackdown on peacefully protesting truckers.

Politicization of the economy: A Central Bank Digital Coin can impose negative interest rates on depositors, forcing them to “spend it or lose it” in time for the next election. That would dramatically increase the Federal Reserve’s ability to manipulate the economy into boom-bust cycles that end in inflation and recession.

Bank runs: The Federal Reserve has already admitted Central Bank Digital Coins could increase the likelihood of bank runs, since unlike a private bank, the Fed cannot go bankrupt. (It can print unlimited dollars.) Yet the Fed also notes a Central Bank Digital Coin can be programmed to freeze your money to mitigate such runs. This combination raises the risk of the next financial crisis forcing the American public to go down with the ship, unable to escape failing banks or financial institutions lest those failures embarrass the government.

Hacking Risk: A Central Bank Digital Coin that records millions of Americans’ personal data while acting as the backbone to our financial system will be the single most valuable hacking target on earth. Given the federal government’s laughable programming capabilities—recall the months-long disaster of the Obamacare website—it beggars belief that the Fed or the Treasury Department can protect our data and our financial system from state-funded attacks or even common criminals.

Conclusion

In sum, a Central Bank Digital Coin or government surveillance token would be an existential gamble in search of a problem. Like tearing off the roof and replacing it with kindling, it risks financial instability, economic chaos, and abuse of human rights and personal safety for no discernable gain beyond granting the federal government surveillance power.

Instead of copying China’s shriveled financial markets and totalitarian surveillance, Congress should respect and support market solutions to the domestic problems government has already created, solutions from private stablecoins to CashApp and other payment apps.

If there is any role for the federal government to play in how we use our dollars, it’s to proactively get out of the way.

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