The Federal Reserve finally took its first step toward setting up a Central Bank Digital Currency (CBDC) last week with the publication of a long-awaited report on the matter. In the report, the Fed reiterated that no decisions have been made yet, as they’ll continue to explore the wide range of design options for a CBDC.
The eventual design of the first American CBDC will have tremendous geopolitical, economical, and social effects—so it’s nice to finally have some news about what it could look like. But we need a lot more engagement in public discussion if we want to see the Fed issue a CBDC that truly commits to American values.
The Fed’s report highlights some benefits that a CBDC could offer. It notes how a CBDC could grant entrepreneurs a platform on which to create new financial products and services, support faster and cheaper payments, preserve the dominant international role of the U.S. dollar, and expand consumer access to the financial system. “The introduction of a CBDC would represent a highly-significant innovation in American money,” the paper reads.
But the report barely mentions decentralized cryptocurrencies that offer peer-to-peer payments (like BTC and ETH). The only relevant thing said about these cryptocurrencies was that they haven’t been widely adopted as a means of payment in the United States because of their price volatility. It seems like the Fed is wary of saying something that could significantly impact the market before they feel they understand better the role of these digital assets in the modern economy.
However, the Fed had much more to say when it came to stablecoins—the digital assets designed to maintain a stable value relative to a national currency and to facilitate trading of other digital assets. Apparently, the Fed believes stablecoins don’t possess a risk to the financial system and can support faster, more efficient, and more inclusive payment options. But the paper also admits that there are risks with stablecoin-related activities—activities which require regulation.
Therein lies the rub.
Giving governments access to better surveillance tools is one of the crypto community’s biggest fears about a CBDC.
Although the Fed did well to consider and address the public’s privacy concerns, the arguments presented in the paper aren’t enough to satisfy the crypto community´s desire. In fact, the paper suggests that the Fed might be leaning toward what it called an “intermediated CBDC,” more popularly known as a “retail CBDC.” According to Norbert Michel, director of the Center for Monetary and Financial Alternatives at the Cato Institute, it’s the retail CBDC that poses the biggest risk to both personal and economic freedom. This design option would give the Fed more control over the banking system than ever before, and it doesn’t provide private firms more of an incentive to innovate or expand services.
Jerome Powell and Co. deserve recognition for how they’ve handled this situation thus far. This engagement with the public is a clear continuation of the open communication trend that central bankers have been following in recent years. It’s certainly worth celebrating that the Fed has promoted a public discussion on this topic. Nations in which that public discussion doesn’t happen run the risk of designing a rather Orwellian CBDC.
In December, for instance, the Mexican government tweeted about their plans for a 2024 CBDC and it was announced in the daily populist spectacle, La Mañanera—all before the Mexican central bank said anything! And of course, that public discussion never happened in China, a nation that’s way ahead of the U.S. in this area.
Hopefully the Fed continues to engage in this public discussion, and issues something completely different from the current government-heavy CBDCs in other nations. Despite the fact that a large part of the crypto community wants to get rid of government intervention completely, they would do well to get involved in the process and engage in the public discussion that the Fed just began. This is the one and only way to prevent an Orwellian CBDC from arising in the land of the free.