CBDCs should not go forward
“A CBDC could fundamentally change the structure of the U.S. financial system.” The Federal Reserve’s recent paper on whether to adopt a central bank digital currency (CBDC) included candid assessments on its macro-economic risks but less on individual citizens.
The proffered benefits of this gamble involve hazy feel-good sentiments about inclusivity, aiding entrepreneurs, propping up the dollar internationally, and smoothing cross-border transactions. But design choices, governmental priorities, and prevailing attitudes erase these benefits whilst leaving the risks. Instead of entering the digital currency race, the government should encourage private innovation already afoot via stablecoins (digital assets pegged mostly but not exclusively to the U.S. dollar).
As I detail in a new paper ‘Central Bank Digital Currencies Threaten Global Stability and Financial Privacy,’ CBDCs provide little value for mature financial systems like the U.S. where banks, payment providers, and stablecoin issuers provide consumer options. Conversely, they invite huge risks through digital bank runs, distorted monetary policy, transaction monitoring, involvement in contentious social issues, and international strife. The paper admits these risks are real and inadvertently agrees design choices make them likely.
CBDCs don’t live up to the hype
The most prominent supposed CBDC benefit is financial inclusion, providing the unbanked access to central bank money. Currently around 5 percent of the U.S. population lacks a bank account, and more “underbanked” use expensive options like money orders. But a CBDC alone would help little. As the paper admits, CBDC accounts would be “intermediated”—administered through the existing fee-charging financial system. Thus, it would not quell major reasons people forgo bank accounts: lack of minimum balance requirements, mistrust of banks, and high or unpredictable fees.
The paper also asserts smoothing the archaic cross-border payment system as a potential CBDC benefit. This also has little merit. First, the paper admits it would require “significant international coordination.” Yet even accomplishing this Herculean task would only provide limited benefits because, as the Bank Policy Institute states, the real culprit is insistence on Anti-Money Laundering/Combatting Financing of Terrorism (AML/CFT) reporting.
The paper’s other proffered benefits of helping entrepreneurs and maintaining the dollar’s global status carry even less purchase. Dollar-pegged stablecoins with their functionality and flexibility already fill this role. At least before the latest crackdown they were very popular in authoritarian China and the rest of East Asia, as well as providing needed purchasing power in socialist-torn countries like Venezuela. A U.S. CBDC requiring tedious international agreements will never achieve this global utility.
CBDC risks are off the charts
But where benefits shrink risks explode. CBDCs would be liabilities of the Fed not commercial banks. This means banks could administer CBDC accounts but not lend them out like ordinary deposits. Thus the $10 trillion in currently outstanding loans would fall, raising rates on what’s left. This would affect the economy in good times. Economic stress would invite the further issue of digital runs—panicked conversions into CBDC from other money for its perceived safety. The paper counters it could temporarily limit access to CBDC, which would invite political outrage and quick reversal. If foreigners convert in large numbers, international tensions will follow.
Problems would not end there. CBDCs would require enlarged Fed balance sheets with possibly riskier assets, distorting credit markets and monetary policy. It may also force the Fed into contentious political issues if CBDC purchases include unpopular products like firearms or donations to disdained political groups or causes.
None of this necessary.
But the biggest downside would be privacy infringement. The ability to surveil is the ability to control. China make no secrets its CBDC will help enforce party discipline. The paper avers “consumer privacy is critical,” yet immediately follows with the need for AML/CFT monitoring. The government would have access to every CBDC-conducted transaction. Appropriate protections would supposedly ensure limited bureaucratic access. But after repeated leaks of sensitive information and oppressive behavior toward everyone from blue-collar Tea Party activists to the President, should anyone trust them? CBDCs solve no problem stablecoins don’t already address but they invite intervention and abuse on an unprecedented scale. The Fed roundaboutly admits this. The CBDC conversation should stop there.
By Jossey PLLC
A version of this piece originally ran in the Washington Times, https://www.washingtontimes.com/news/2022/feb/10/fed-discussion-should-end-central-bank-digital-cur/