US should not join the move to central bank digital currencies

Photo taken on July 15, 2021 shows the US Federal Reserve in Washington, DC, the United States. US Federal Reserve Chairman Jerome Powell said on Thursday that he is “legally undecided” about the benefits and costs of issuing a US central bank digital currency CBDC. “I think our obligation is to examine both the technology and the policy issues over the next few years. That’s what we’re going to do so that we’re in a position to make an informed recommendation,” Powell said during a hearing before the Senate Banking Committee when asked to explain his position on the CBDC. (Photo by Liu Jie/Xinhua via Getty Images)

From Algeria to Zimbabwe, governments are pushing forward with central bank digital currencies, or CBDCs. In fact, it even occurs here in the United States. According to the Human Rights Foundation’s CBDC Tracker, more than 125 different jurisdictions, ranging from territories to currency unions, are investigating, piloting, and piloting CBDCs.

But what did this effort mean in practice? On the one hand, it appears to be a waste of taxpayer money. On the other hand, it also indicated a worrying future. As I explain at length in my new book, “Digital Currency or Digital Control?”, neither side looks good.

Consider the experiences in the Bahamas, Jamaica and the Eastern Caribbean Currency Union. Despite the introduction of publicly available CBDCs, these Caribbean governments have struggled to encourage adoption. To combat this, their governments have tried to encourage adoption through incentive programs and giveaways.

Yet, as the Central Bank of the Bahamas reported, usage of its CBDC continued to drop dramatically. Natalie Haynes, deputy governor of Bank of Jamaica, similarly acknowledged that merchants simply aren’t interested in taking on another payment system.

This problem is not unique to the Caribbean. China boasts that more than 261 million CBDC accounts have been opened, but few people seem to be using the CBDC to make regular payments. Even government employees who were paid in the Chinese CBDC said: “I prefer not to put the money in the [CBDC] app because there is no interest if I leave it there. Also, there aren’t that many places, online or offline, where I can use it [CBDC].”

With that said, the lack of adoption may have a silver lining. The creation of CBDCs puts financial privacy, freedom and markets at risk by giving governments complete oversight and control over money, but the impact of those risks is limited as long as adoption remains low or non-existent. The only open question is how much longer this will be the case.

Around the world, governments have launched CBDCs alongside bans on alternatives such as cryptocurrency. China, India, Iran, Russia and Nigeria have all introduced various bans on cryptocurrency. In fact, shooting itself in the foot, Nigeria even went so far as to limit alternatives to orchestrating a cash shortage. And many other officials have openly said that the introduction of a CBDC will help eliminate cash.

So whether the lack of adoption is allowed to continue is indeed an open question, and one that people need to pay attention to.

Much of the rise of CBDCs has occurred abroad, but Americans should pay close attention as well. President Joe Biden issued Executive Order 14067 in 2022 to “place the highest urgency on research and development efforts into the potential design and deployment options of a US CBDC,” but at this point the Federal Reserve already has years of CBDC development worked .

For example, the Board of Governors has published several updates, speeches and studies on CBDC over the years. Similarly, the local Federal Reserve Banks tested a hypothetical CBDC platform, developed the technical framework for a wholesale CBDC, and built a proof-of-concept project.

To be clear, research and experiments are not a problem.

What is a problem, however, is if those programs move beyond theoretical models or closed experiments. For example, despite more than 261 million CBDC accounts opened under the Chinese CBDC, the Chinese government still refers to itself as being in the “pilot” phase. Although the motivations are unclear, several countries have blurred the lines with similar practices.

These developments were in part what inspired the House of Representatives to pass Rep. Pass Tom Emmer’s (R-Minn.) bill to prohibit both the Federal Reserve and the Treasury from creating a CBDC without congressional authorization.

During the debates surrounding the bill, some tried to argue that it was unthinkable for the United States to lose the “CBDC race.” For example, before joining the White House as one of President Biden’s economic advisers, Lael Brainard said: “If you have the other major jurisdictions in the world with a digital currency, a CBDC offering, and the US has neither, I just can’t wrap my head around it.” Still, as Rep. Chip Roy (R-Texas) countered during these debates, the idea of ​​America cutting its own independent path is a welcome one.

Roger Huang said it best at the Oslo Freedom Forum when he observed, “The more control you give a government, the more they will exercise that control.” As we head into election season, Congress would be wise to remember that power may sound appealing when you’re in charge, but who’s in charge can change quickly and dramatically.

Since the risk of abuse is so high with the sweeping powers a CBDC can offer governments and yet there are little or no benefits to helping citizens, the rise of CBDCs is a path the United States should not follow .

Nicholas Anthony is a policy analyst at the Cato Institute, a fellow at the Human Rights Foundation, and the author of “Digital Currency or Digital Control? Decoding CBDC and the Future of Money.”