“Give me control of a nation’s money,” an 18th-century banking oligarch once said, “and I care not who makes its laws.” That may have sounded like hubris at the time, but digital technology could soon make it an understatement.
Central bank digital currencies (CBDCs), currently in various stages of development around the world, are being created as a new form of money that, depending on how they are structured, could give government bureaucrats more control over citizens than any law ever could. In contrast to what most Americans today understand as money, commercial bank deposits denominated as dollars, a U.S. CBDC could be issued directly by our central bank to individuals in the form of a “digital wallet.” A digital dollar could also be programmable with controlling features.
On March 9, President Biden took a first step toward creating a U.S. CBDC, directing his administration to report to him by this fall on whether and how to implement a federal digital dollar. And in February, the Boston Fed completed the first phase of Project Hamilton, a CBDC simulation it has been developing together with MIT’s Digital Currency Initiative.
“My Administration places the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC,” Biden’s order stated. Among the goals he cited for a U.S. CBDC were faster and cheaper payments, financial stability, fighting financial crime, maintaining the preeminence and security of America’s currency, and “financial inclusion and equity.” Biden also ordered a report on “the potential for these technologies to impede or advance efforts to tackle climate change.”
Biden instructed Attorney General Merrick Garland to determine whether or not he will need congressional approval to implement a CBDC, and if so, to draft legislation by October, leading some observers to speculate that Democrats may try to introduce a bill before the midterms. Federal Reserve Chairman Jerome Powell said in March 2021 that he would not move forward with establishing a U.S. CBDC “without support from Congress, and I think that would ideally come in the form of an authorizing law, rather than us trying to interpret our law to enable this.” But what the administration would do if it cannot get legislation passed is unclear.
Nine countries have established CBDCs thus far, and 15 others, including China, Russia, and Sweden, currently have pilot programs in place. Altogether, 87 countries that collectively represent 90 percent of global GDP are in some stage in the development of CBDCs. The European Central Bank (ECB) is also moving forward with the implementation of its own CBDC, the digital euro, and Deutsche Bank predicts that central banks collectively representing one-fifth of the world’s population will issue CBDCs by 2025.
Agustin Carstens, general manager of the Bank of International Settlements, explained one of the key motivations to create CBDCs at an October 2020 IMF seminar: “We don’t know who is using a $100 bill today, we don’t know who’s using a 1,000-peso bill today. The key difference with a CBDC is the central bank will have absolute control of the rules and regulations that will determine the use of that central bank liability, and also we will have the technology to enforce that.”
China has taken the lead on implementation among the world’s major economies, issuing its e-CNY, or digital yuan, in 2020. By the end of 2021, the digital yuan had 261 million users, representing about one-fifth of China’s population, according to the People’s Bank of China.
China issues the e-CNY directly from its central bank to consumers, who set up a digital-wallet app that allows them to buy from vendors by scanning their phone at the point of sale, thereby transferring digital yuan directly from the buyer’s government account to the vendor’s without transaction fees. For those who don’t have a smartphone, a British company called Walletmor now offers microchips that are implanted into a person’s palm. The buyer makes payments by placing his hand over a vendor’s card reader.
China touts the privacy of these transactions; users can set the app so that purchases are anonymous between buyer and seller, just as with cash. Unlike cash, however, the Chinese government can observe and track every transaction.
“They’re dealing with vast amounts of data, so it’s difficult even today with the computers we have to handle it all,” said former Fed official Chris Whalen, chairman of Whalen Global Advisors. “But over time, these networks are only going to get more efficient and more robust, and they’ll be able to chew on this data and follow everything you do, financially.
“A central bank digital currency is not a herald call for freedom,” Whalen said. “In an authoritarian society, it will be used as a means of control.”
“China’s reasons for doing this ought to horrify us all,” said former Fed Vice Chair Randal Quarles, now chairman of the Cynosure Group, “but there’s a concern that we’ll somehow fall behind them.”
“There is a concern that the ECB is doing this, Sweden is doing this, the Brits are looking at it, the world is moving forward, and we’ll be left behind,” Quarles said. “I just don’t think any of that is true. Anyone who has a teenager has heard this argument and pushed back against it. It can’t be just: everyone is doing it, so I need to.”
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The big questions regarding the architecture of a digital dollar system include whether Americans’ CBDC accounts would be held at private banks or the Federal Reserve, and what form the CBDC should take, with proposals ranging from an anonymous digital token to one that is traceable and programmable. Many progressives want the Fed to set up personal CBDC accounts, claiming that such accounts would eliminate banking fees and allow Americans without bank accounts to access our financial system. But some Republicans reject this approach.
In January, Rep. Tom Emmer of Minnesota introduced a bill to ban the Fed from establishing retail CBDC accounts, stating that “not only would this CBDC model centralize Americans’ financial information, leaving it vulnerable to attack, but it could be used as a surveillance tool that Americans should never tolerate from their own government.”
Among American consumers, there does not appear to be significant demand for the government to replace private commercial banks. According to an FDIC report, 94.6 percent of U.S. households had at least one bank account as of 2019, and 97.3 percent of account holders were “very or somewhat satisfied with their bank.”
Private initiatives such as the nonprofit Cities For Financial Empowerment Fund’s Bank On project are working to connect underserved people with affordable banking services, which may prove a simpler and more effective way to achieve inclusion than turning the Fed into a retail bank. Furthermore, it is questionable whether the Fed, or any government agency, realistically could handle hundreds of millions of individual accounts, process trillions of transactions, respond to customer inquiries, and conduct the required anti-money laundering and “Know Your Customer” inquiries that private banks currently perform.
Whether or not private banks remain as intermediaries, however, the Fed’s ability to control the economy would be greatly enhanced if the CBDC were programmable.
“When the White House was asked about the CBDC, they talked about how the currency could be used to improve diversity and equity and inclusion and all these other things,” said Justin Haskins, a director at the Heartland Institute. “The only way that any of this works the way they’re promising is if it is a programmable currency, and that means it can be controlled.”
“This fits right in line with all the ideological justifications for having more regulations, for having the Federal Reserve print more money, for giant welfare programs, for diversity, equity, and inclusion,” Haskins said. “You could accomplish all of those goals with a CBDC that is programmable in a much more effective way, and in a way that gives you political cover because you don’t need to pass a law to do it. You could just do it all through the Federal Reserve.”
In order to make stimulus payments more effective, for example, CBDCs could include negative interest rates, which are a tax on savings, or even expiration dates. This would impel Americans to spend rather than save.
The Fed could also pose restrictions on what CBDCs can be used for. Environmental policy could be implemented through the Fed by, for example, limiting the amount of CBDC a person can spend on gasoline. If the federal government wanted to expand gun control, it could limit CBDC payments for firearms and ammunition. Americans’ ability to access their digital wallets could even be tied to something like vaccination status.
Another critical issue related to CBDCs is their effect on credit. Under our current system, banks leverage dollar deposits and lend them out, effectively creating money for our economy. According to the FDIC, the percentage of households that used credit cards or bank loans increased from 67.9 percent in 2015 to 72.5 percent in 2019. A CBDC system could reduce the availability of credit and lead to its politicization.
“We think of [Europe] as more instinctively socialist than the United States, but there’s not pressure from the left there to disintermediate the private banking system and have the [European Central Bank] become a retail bank,” Quarles explained. But even with private commercial banks still in place, “they estimate that [a digital euro] will still end up taking 12 to 20 percent of the deposits out of the banking system into the central bank, and they have to figure out some way to put that back in. That will come with strings.”
Banks would be unable to leverage CBDC into loans, and it would be left to government authorities to dole out these funds to those individuals whom it favors. Indeed, the ECB is already pursuing a policy of Green Quantitative Easing, in which the central bank provides financing to “non-polluting” companies. Some U.S. officials would like the Fed to also become more active in promoting climate and social justice policies.
Lael Brainard, the current Fed vice-chair, stated in October 2021 that the Fed should get in step with the ECB and other central banks and develop new ways to fight climate change. She pointed to the Fed’s recently established Stability Climate Committee and a Supervision Climate Committee. Regarding social issues, the San Francisco Fed stated that “achieving racial equity fits into the Federal Reserve’s mandate for maximum employment, which is central to our mission.”
The Biden administration has fervently pursued these political and social goals, but many believe this single-minded approach has come at the expense of Americans’ civil liberties. This perception could undermine public trust regarding a digital dollar.
“It will never be a priority of the Biden Administration to defend individual liberty or to ensure that the design of a central-bank digital currency is not going to prevent people from purchasing the products they want or doing things they want,” Haskins said.
Biden-administration agencies, including the CDC, OSHA, the SEC, and the DHS, have been accused, often with the concurrence of federal judges, of unlawfully exceeding the authority given to them by Congress. The administration’s actions have raised concerns about individual liberty, like its attempt to force Covid vaccines on American workers (which a federal judge overturned), its institution of an unpopular mask mandates (also overturned), its proposal that the IRS monitor bank transactions more than $600, its establishment of a Disinformation Board within the Department of Homeland Security (likely to be shut down after public backlash), and the Justice Department’s intimidation of parents who protested at school-board meetings.
But even under ideal leadership, many say the federal government is not the best vehicle to foster financial innovation. America’s private banking and payments system is generally efficient and affordable, and conservatives argue that whatever improvements and innovations Americans may want should come from the private sector, not the Fed.
“The reason the U.S. economy is so resilient and able to generate the growth that we do is because we have a private financial system,” Whalen said. “People who argue for efficiency and say, ‘Let’s have one big public bank,’ they don’t understand. There’s no leverage in a system like that. Then you essentially have China… an allocation system.”
“I’m 100 percent in favor of advances in digital technology,” Quarles said. “But if we want to lead the world in this, we will do that by allowing our private-sector companies to do that, as opposed to having the government come in and do that, with all of the attendant problems of politicization of credit and sacrifice of privacy that come with that.”
Actor Jeff Goldblum famously told dinosaur-engineering geneticists in the blockbuster movie Jurassic Park that their “scientists were so preoccupied with whether they could, they never stopped to think if they should.” Likewise, much of the discussion from central bankers and tech consultants regarding CBDCs has focused on solving logistical problems, with less thought going toward what sort of society the technology would usher in.
“People come at this as just a technical discussion,” Whalen said, “but it is much more. A lot of the researchers I interact with are fascinated by the functionality, but they don’t consider the implications for our system of political economy.”
“It’s one thing to have the government recognize that individuals should be able to have an electronic version of their money, just like we are able to have cash, and not have to hold most of our money in a bank,” said former Assistant Treasury Secretary Greg Zerzan, now an attorney at Jordan Ramis. “But the danger is that well-meaning government officials decide: This is how you should use your money, or we want to take a look and see where your money is going, or we don’t like how you’re using your money so we’re just going to freeze your account.”
Requests sent to the Federal Reserve and MIT’s Digital Currency Initiative for comment for this article were declined.
Kevin Stocklin is a writer, film director, and founder of Second Act Films, an independent production house specializing in educational media and feature films. Previously, he worked in international banking for more than a decade.