Recent volatility in cryptocurrencies such as Bitcoin, Ether, and Dogecoin has emboldened the Biden administration and congressional Democrats to call for government regulation of digital currencies. Senate Banking Committee chairman Sherrod Brown (D., Ohio) fired off a scathing letter on May 19 to President Biden’s acting comptroller of the currency urging him to scrap a Trump-administration policy granting limited-purpose bank charters to some cryptocurrency firms. Bank charters should not be granted to firms involved with such “risky and unproven digital assets,” he wrote.
Yet Brown and others ostensibly concerned about cryptocurrency risks want the Federal Reserve to charge ahead with its own “central bank digital currency” (CBDC). In a March letter, Brown urged the Fed to “lead the way” on CBDCs while restricting private cryptocurrencies. Brown proclaimed that “the Fed must not stop at regulating a privately issued digital currency. It must go further and explore a publicly issued digital dollar.”
Dubbed the “digital dollar” by some proponents (including Brown) and “Fedcoin” by other supporters, a CBDC would extend government control over the creation of the money supply — which it already has through interest-rate setting and other monetary tools — to control over which businesses and individuals U.S. currency is distributed to.
But despite rhetoric about imposing fairness and equity in the financial system and financial-technology (FinTech) landscape, a government digital currency would not improve financial inclusion, combat illegal activity, or strengthen the dollar’s global status.
A closer look at present realities shows why.
Most Americans already have access to banking. The FDIC states only 5.4 percent of Americans are unbanked, a percentage that has steadily dropped and is currently at a nadir, in part of because of private FinTech solutions such as Dave and Chime. Further, CBDC accounts alone won’t help anyone. Per the FDIC, the top reasons people eschew banking services include insufficient funds, privacy concerns, and aversion to fees.
In fact, government policies have created more problems than solutions. For example, the 2010 Dodd-Frank/Durbin Amendment payment-card price caps shifted nearly all debit-card processing costs from retailers to consumers, “and the poorest consumers paid the biggest price.” The Durbin Amendment made free checking accounts unfeasible for low-income consumers, resulting in over 1 million Americans leaving the banking system, according to a George Mason University study. Yet incredibly, some are still pushing to extend the Durbin Amendment price controls even further to include credit cards as well as debit cards.
Just as CBDCs would not save the poor from bad government policies, neither would they curtail illicit activity such as money-laundering and terrorist financing. Contrary to the claims of many pundits, illicit transactions accounted for less than 1 percent of crypto activity from 2017 to 2020, according to blockchain-analytics firm Chainalysis. Cash is still king for illegal trades, yet Brown and his fellow CBDC zealots do not support removing it from the monetary basket. In fact, despite the decades-long march toward electronic money, cash remains stubbornly popular in the U.S. and abroad.
Domestically, CBDCs would invite more financial instability than Bitcoin or its brethren “stablecoin” currencies — so named for their value pegs mostly but not exclusively to the dollar. Whether in the Brown-envisioned maximalist CBDC version where citizens would get “Fed accounts” through government-controlled digital wallets or the minimalist bank-intermediated version, where select banks and credit unions would perform customer-service and record-keeping functions, instability looms.
As a recent Bank Policy Institute report explains, CBDCs would reduce or potentially eliminate fractional-reserve lending, a practice whereby banks lend out the majority of their deposits. Rather, banks and credit unions would have to hold equal amounts of CBDC at the central bank as they hold for customers to ensure all CBDC requests would be honored. That would deny lenders the leverage of the current fractional-reserve-lending system and vastly increase banking and credit costs. Financial institutions would likely subsidize losses with higher fees, which would further harm the vulnerable.
During high economic stress, digital runs — panic conversions of other forms of money into CBDCs — would further destabilize the system. Even in prosperous times, CBDCs would provide a huge target for hackers and terrorists seeking fortune or havoc.
Worst of all, CBDCs would create all these problems to counter an imaginary threat. Private cryptocurrencies, particularly stablecoins, do not threaten the dollar’s global dominance. In fact, the overwhelming preference for the dollar peg shows its strength and leaves China and the European Union envious.
The Fed would gain unprecedented power over Americans’ financial lives. The government could access reams of personal financial data, including purchases of disfavored items or support for unpopular causes.
The control would differ in degree, but not in kind, from the Chinese CBDC model currently being piloted. Chinese officials make no secret about exploiting this trove for political ends. Chinese rulers will infuse it into the social-credit system and, according to officials, help “enforce party discipline.”
While U.S. officials declare the Chinese system unworkable here, they simultaneously eschew financial anonymity. Fed chairman Jerome Powell has called for “balance” and “appropriate protections.” Whatever that entails will not secure Americans’ privacy.
The past decade shows that the federal bureaucracy — whether out of partisanship or incompetence — regularly exposes sensitive data in its charge. In 2013, the IRS was caught targeting Americans supporting the Tea Party movement. Less publicized scandals reveal organizations repeatedly victimized with donor and sensitive-data leaks. Bureaucrats likely leaked President Trump’s tax returns to the New York Times. The recent Supreme Court case Americans for Prosperity vs. California uncovered repeated data breaches that Justice Samuel Alito labeled “grossly negligent.”
In the current politicized era, the government will likely continue its dismal track record. That risk is not worth taking for an unnecessary program that would curtail private innovation and embed the Fed with unprecedented power. Congress and the central bank should resist pressure to solve nonexistent crypto problems and instead allow entrepreneurs to innovate and empower our lives.
Paul H. Jossey is an Adjunct Fellow at the Competitive Enterprise Institute and founder of thecrowdfundinglawyers.com. Follow him on Twitter @thecrowdfundlaw. CEI Senior Fellow John Berlau contributed to this article.