The introduction of bitcoin and other cryptocurrencies has led the U.S. Treasury and Federal Reserve to ask: Why shouldn’t America roll out digital cash — or Central Bank Digital Currency — with the same technology used for these privately issued currencies? After all, anyone can create a shared digital ledger and issue their own currency on it.
But not all cryptocurrencies are created equal. Some, like bitcoin, prioritize the privacy and autonomy of the individual by enabling free transacting without trusted third parties. Other cryptos — including CBDCs — are built to be fully programmable — controllable — by the trusted third party that issues them. This is a major difference, and governments are counting on the fact that most people don’t know it.
The goal of CBDCs is to eventually replace paper cash — the last vestige of private financial transacting. CBDCs are issued on centralized digital ledgers that give governments full visibility into every cash transaction conducted by anyone, anywhere in the world. Every transaction is fully identity-verified. CBDCs can also be programmed to only spend with government-approved vendors for government-approved purchases. Central banks can directly implement negative interest rates on CBDCs to punish saving — Americans could see, for example, 2% shaved off of our cash balances every day, week, or month — however often the Fed wants in order to “stimulate” spending. And of course, nothing prevents the government from simply confiscating your cash at any time.
Certainly, the U.S. dollar is already fully digital in today’s global banking system and the government could simply direct private banks to implement all of these policies already. But the fig leaf of separation between commercial bank money and central bank money makes this kind of control politically and procedurally more difficult. With a CBDC, those roadblocks would be removed, and the government would have direct control over the cash in consumer bank accounts.
It is not surprising that authoritarian governments like China and Russia are implementing CBDCs. But liberal democracies want to implement them, too.
In a talk at Columbia University, the president of the Minneapolis Federal Reserve, Neel Kashkari, said: “If they want to monitor every one of your transactions, you could do that with a Central Bank Digital Currency; you can’t do that with Venmo. If you want to impose negative interest rates, you could do that with a Central Bank Digital Currency; you can’t do that with Venmo. And if you want to directly tax customer accounts, you could do that with a Central Bank Digital Currency; you can’t do that with Venmo. So I get why China would be interested. Why would the American people be for that?”
Former IMF official Eswar Prasad, now a professor of economics at Cornell University, echoed Kashkari’s concerns: “If we all had CBDC accounts instead of cash, in principle it might be possible to implement negative interest rates simply by shrinking balances in CBDC accounts. It will become a lot easier to undertake helicopter drops of money.” He added that CBDCs would eliminate the last vestiges of central bank independence from elected officials — fully politicizing monetary policy.
As the Cato Institute pointed out, “this brave new world of monetary policy equates to the government saying that your money isn’t really your money. … This level of government control is not compatible with economic or political freedom.”
This year, Congressman Tom Emmer and Sen. Ted Cruz introduced legislation to prevent the Federal Reserve from issuing CBDC accounts directly to retail customers. But the ECASH Act, also introduced in Congress this year, instead requires the Treasury to issue the CBDC, with retail accounts to be managed by commercial banks. If a CBDC is implemented in America, it will likely be through the private banking system — but the back-end ledger will be fully controlled by the federal government.
Let’s be very clear: people have rights. Governments do not have rights. The government of the United States does not have the right to see and control how Americans spend their money or how much money they have. If Americans want to use cryptocurrency, they can already use bitcoin or other privacy-preserving coins that offer them virtually all the advantages of a CBDC without the drawbacks.
The United States of America must show that we are different from authoritarian governments around the world by rejecting a Central Bank Digital Currency.
Natalie Smolenski is a Dallas-based startup founder. She also founded the Texas Bitcoin Foundation, a public charity, and co-founded the Texas Blockchain Council, a trade association. She is also a senior fellow at the Bitcoin Policy Institute. She wrote this column for The Dallas Morning News.
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