The U.S. government is thinking about creating an electronic currency backed directly by the dollar, an idea dubbed the “digital dollar” or “Fedcoin.” Such a step could severely damage trust in the dollar and risk Americans’ privacy.
Blockchain technology has allowed countries across the world—most notably China—to create central bank digital currencies (CBDCs), which allow people to exchange money electronically without going through a bank or a secondary service such as PayPal or Venmo.
In a recent video, U.S. Federal Reserve Chair Jerome Powell announced that the Fed intends to issue a discussion paper about the “benefits and risks associated with CBDC in the U.S. context.” While Powell’s statement was generally neutral, stressing the importance of taking time to assess “the broader risks and opportunities,” other oficials have more pointedly favored the idea. Fed Governor Lael Brainard endorsed a digital dollar at a recent conference sponsored by CoinDesk, and Sen. Sherrod Brown (D-Ohio) wrote in March that a CBDC could help create a more “fair and equitable financial system” by allowing unbanked Americans to pay electronically without a bank account, credit card, or internet connection.
CBDC boosters also argue that the currencies are more efficient, since transactions that use them would not have to travel through as many intermediaries. This, they say, could reduce the friction of international payments and make global transactions easier.
It’s not clear how big these benefits really are. The Federal Deposit Insurance Corporation reported in 2019 that only 5.4 percent of Americans lacked a bank account—a total that has been dropping rapidly. And we already have intermediaries, such as PayPal and Venmo, that can make international payments virtually instantaneous. Are these reasons enough to put Americans’ privacy at risk?
Paul Jossey, an adjunct fellow at the Competitive Enterprise Institute, says the potential impact of a CBDC on Americans’ financial privacy is “at best very scary.” At worst, he adds, it’s “nightmareville.”
China’s digital yuan shows how CBDCs could be a tool of government surveillance and control. “Unlike many anonymous and decentralized cryptocurrencies, [it] is monitored and backed by the [People’s Bank of China], affording China’s leadership supreme control over all transactions,” reports Asia Times. This “allows the Chinese government to integrate data collected on other platforms like the social credit system to generate a more detailed picture of individual users’ buying patterns.” In a video released by CGTN, a state-controlled media outlet, a fist with a symbol of the digital yuan punches the ground as a symbol of how the currency will be used to find and crush those who disobey the law.
The European Union has floated plans for a CBDC with “privacy anonymity vouchers,” which consumers could exchange to protect the privacy of their transactions. “But if you run out of vouchers, then that’s it,” says Jossey.
Meanwhile, tech writer Naomi Brockwell is worried that CBDCs could allow the government to “automatically deduct taxes,” “freeze funds more easily,” and “program money that sits in a bank account to become worthless if it sits too long in order to encourage spending.”
And while Powell and Brainard have been careful to say that CBDCs would not replace cash and other payment systems, some supporters of CBDCs have other ideas. Deutsche Banke, the largest banking institution in Germany, stated in a November 2020 report that “in the long term, central bank digital currencies will replace cash.” As Reason has pointed out on many different occasions, cash remains the only truly private form of transaction; a cashless society is a “pay-as-the-powers-at-be-will-let-you” society.
Competitive private sector organizations have at least some incentive to prioritize privacy, as we’ve seen in the cryptocurrency market. The federal government has…