By now, there’s a good chance you’ve heard of central bank digital currencies (CBDCs). In the U.S., they’ve come to be known popularly as “digital dollars.” Basically, CBDCs are the digital versions of the same official currencies issued by central banks around the world.
Proponents of CBDCs cite numerous reasons for their enthusiasm. Among them is an improvement in the overall efficiency of payment systems. CBDC advocates also say the technology would bring about greater financial inclusion on behalf of those populations that have found themselves shut out from the traditional banking structure. A smoother, faster and more effective implementation of fiscal- and monetary-policy measures is another claimed advantage of CBDCs (although not everyone agrees; more about that in just a bit).
There is a momentum that seems to be energizing CBDC research and development around the world right now – including in the United States. Last year, President Biden signed an executive order that “places urgency on research and development of a potential United States CBDC.”
But CBDCs have more than their fair share of opponents, as well. And the objections revolve mostly around the technology’s potential implications for financial privacy and personal autonomy. By construction, CBDCs issued to the public would require that each citizen keep an account directly at the Federal Reserve. Theoretically, the central bank could see how every CBDC user is spending their money.
That’s not all. CBDC detractors also suggest the digital dollars could make it easier for the Federal Reserve to implement especially drastic forms of monetary policy – including negative interest rates.
It might be tempting for some to dismiss these concerns as the rantings of the tinfoil-hat-wearing crowd. However, many of those who are raising these objections hardly live on society’s ideological fringes. They include respected economists, mainstream financial journalists…even members of the Federal Reserve.
They also include elected officials, including the well-known governor of Florida, Ron DeSantis. DeSantis is running for president, and recently made headlines for his public declaration that, if elected, he would ban CBDCs outright as soon as he assumed office.
DeSantis is by no means the only American political figure publicly opposing CBDCs. Several new bills have been introduced into Congress this year designed to put the kibosh on a U.S. digital dollar.
We’re going to take a closer look at all of this, including the two principal concerns that many seem to have about CBDCs – the privacy and monetary-policy implications – and the nature of the objections that Governor DeSantis and other national political figures have about CBDCs as they seek to derail any and all efforts at making digital dollars a reality in this country.
The core of the privacy concerns related to CBDCs is the fact that unlike the cash you keep in your pocket right now, your CBDC “cash” would be necessarily tethered to the central bank, where it would exist on account. This simple but compelling reality means that a central bank – the Federal Reserve, in the case of the U.S. – could theoretically see how you’re spending your money.
You don’t have to take my word for it. Central bankers themselves are saying it. And the way some of them discuss the possibility, it sounds more than “theoretical.”
Agustin Carstens is the general manager of the Bank for International Settlements, considered the “bank for central banks.” Here’s how he explains what he calls the “key difference” between physical cash and CBDCs:
We don’t know who’s using a $100 bill today and we don’t know who’s using a 1,000 peso bill today.
The key difference with the CBDC is the central bank will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that.
It’s worth noting that Carstens’ statement underscores not only the “mere” privacy implications of CBDCs, but the even-more-ominous potential implication that central banks could control precisely how the currency is used by citizens.
Others in the international public-banking space have referred openly to this CBDC “programmability.” What’s more, they have done so in a manner that suggests they see it not as a problem, but as benefit for those in control of the programming.
Bo Li is deputy managing director at the International Monetary Fund (IMF) and former deputy governor at the People’s Bank of China. Speaking at last year’s meetings of the World Bank and IMF, Li at one point said, “A CBDC can allow government agencies and private sector players to program, to create smart contracts, to allow targeted policy functions.”
He gave examples of these targeted functions, which included the distribution of welfare payments and food stamps. And then he added:
By programming CBDCs, the money can be precisely targeted for what kind of people can own [it] and [for] what kind of use this money can be utilized.”
Concerns about the privacy implications of CBDCs even have been raised by Minneapolis Federal Reserve Bank President Neel Kashkari, who, in doing so, invoked the Chinese surveillance state when he discussed why he is against development of the CBDC by the Fed.
“I can see why China would do it,” Kashkari said. “If they want to monitor every one of your transactions, you could do that with a central bank digital currency.
Later he repeated himself and added a very interesting context: “I get why China would be interested. Why would the American people be for that?”
It is these privacy implications that sit at the foundation of the growing domestic political opposition to CBDCs. We’re going to take a closer look at that opposition shortly. But before we do, I want to touch on another meaningful concern that’s been raised about CBDCs: The possibility that they could make it easier for central banks – including our own Federal Reserve – to apply even more unconventional forms of monetary policy than we’ve seen in recent years.
In terms of the economic consequences generated, the 2008 financial crisis and the global pandemic are among the most prominent global shocks of the millennium thus far.
In this country, the economic fallout from each was so substantial that the Federal Reserve felt it necessary to turn to quantitative easing (QE), the central bank’s program of purchasing seemingly limitless sums of government debt – and even private securities – in order to make sure the financial system remained flush with cash, stabilize markets and lower interest rates.
But there are even more drastic forms of monetary policy out there, including something called negative interest rates. The upshot of negative interest rates for bank depositors is that they conceivably could be charged for the money they keep on deposit.
The purpose of that, in the context of monetary policy, is to incentivize citizens to spend money and help stimulate the economy, rather than leave it at a bank (even the central bank). And there are those who say CBDCs are particularly conducive to the application of negative interest rates.
One of “those” is James Mackintosh of the Wall Street Journal. “The main monetary power of the digital dollar comes from the abolition of bank notes,” Mackintosh writes. “If people can’t hoard physical money, it becomes much easier to cut interest rates far below zero; otherwise the zero rate on bank notes stuffed under the mattress looks attractive.”
Economist Peter St. Onge is another who suggests that digital dollars could be the gateway to negative interest rates. In a recent piece for the Heritage Foundation think tank, St. Onge was particularly blunt in his assessment of the potential monetary policy implications of CBDCs.
“A CBDC could even help force you into that holy grail of economic central planners: negative interest rates,” St. Onge says. “That means money that vanishes if you don’t spend it.”
The prospect of what digital dollars could mean for monetary policy in the U.S. is a weighty consideration, to be sure. But it remains the potential implications for privacy and liberty that sit at the foundation of resistance to CBDCs among American political figures.
And that resistance seems to be gathering steam.
Development of CBDCs of the kind at issue has been going on somewhere in the world for nearly a decade now. But it seems that political opposition by elected officials in this country to a proposed U.S. CBDC didn’t gather significant momentum until this year.
We’re left to speculate why that is. Perhaps it has something to do with the executive order signed last year by President Biden that authorized a “whole-of-government” effort – a full-court press, if you will – at exploring a CBDC. Maybe it’s something else. But one thing’s for sure: Politicians are lining up now to make a stand against development of a digital dollar…and it’s clear their principal objection is the potential of the CBDC to encroach on personal liberty.
Among the highest-profile of those politicians is Florida Governor Ron DeSantis. DeSantis is running for president under the Republican banner. Recently, at the Family Leadership Summit in Iowa, the governor publicly announced that if he wins the White House, among his very first priorities will be to bring the whole U.S. CBDC effort to a sudden end.
“If I am the president,” DeSantis said, “on day one, we will nix central bank digital currency.”
DeSantis is hardly new to the anti-digital-dollar movement. In fact, in his capacity as governor, he signed first-of-its-kind legislation in May that bans the use of all CBDCs as money in Florida, regardless of from where they have been issued.
At the signing, DeSantis left no doubt as to the root of his animus toward the technology.
“Biden’s central bank digital currency aims to increase government control over people’s finances, and we will not allow it,” DeSantis said. “In Florida, we value personal freedom and won’t allow self-interested elites to chip away at our liberty.”
Other lawmakers seeking to deal digital dollars a legislative losing hand include Rep. Alex Mooney (R-W.Va.), who’s introduced a bill in the House of Representatives that would prevent the Federal Reserve from launching any pilot program designed to test a prospective CBDC.
The idea behind Mooney’s effort is to close a loophole that effectively allows the Federal Reserve to test a CBDC without the authorization of Congress.
In a statement to Fox Business about why his bill specifically targets central-bank testing of a prospective digital dollar, Mooney referred to the Chinese surveillance state and its efforts to make standard a digital version of the yuan, China’s official currency.
“Under the guise of a rapidly expanding pilot program, Chinese citizens will soon no longer have the choice of whether or not to use the digital yuan,” Mooney said. “Once it is fully implemented, it would allow Chinese officials to surveil and manipulate the financial activity of not only its citizens but also any foreign individual or firm that does business with China. CBDCs are not about innovation—they are about control.”
It is not only Republicans who’ve come out aggressively against CBDCs. Democratic presidential candidate Robert F. Kennedy, Jr. has done so, as well, saying that CBDCs “grease the slippery slope to financial slavery and political tyranny.”
For advocates of privacy and liberty, the groundswell of anti-CBDC activity may be both heartening and hopeful. But whether it actually serves to bring about the end of the digital-dollar effort is another story.
Let’s talk about that briefly as we close out this week.
Wall Street Journal: “Ready or Not, Central Bank Digital Currencies Are Coming”
According to a recent poll conducted by Cato Institute, a public-policy think tank, just 16% of Americans support adoption of a central bank digital currency by the federal government.
Unfortunately for all the other citizens who apparently are less than thrilled about the idea of a CBDC, it seems that issuance may be less a question of “if” and more of “when.”
According to the Atlantic Council, another think tank that focuses on international affairs, right now there are 130 countries – representing 98% of global GDP – formally considering adoption of a CBDC. Nearly half – 64, to be exact – are in what the council calls “an advanced phase of exploration.”
There’s more: 19 of the G20 countries are in an advanced stage of development. And 11 countries actually have launched a digital currency.
The totality of these numbers – along with the apparent resolve of President Biden in pursuing a CBDC stateside – suggests, as the Wall Street Journal said earlier this year, that “central-bank digital currencies are coming – whether countries are ready or not.”
It could be possible that the legislative stances some Washington politicians have taken recently against CBDCs might result in a meaningful limitation on their deployment. But the general momentum driving the current CBDC development trend suggests otherwise. And that could mean those Americans who wish to limit their exposure to the potential negative impacts arising from CBDC issuance may want to consider the meaningful steps they can take on their own to help realize that goal.
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