CBDCs Would Be the End of Any Remaining Central Bank Indpendence

In a well written piece, the CEO of the Cato Institute, and a friend of mine, Peter Goettler, explains the dangers central bank digital currencies (CBDCs) would pose not only to the privacy of America’s citizens, but also to the Federal Reserve itself. He writes:

In fact, implementing a CBDC could exacerbate many of the existing privacy violations that are already built into the financial system. The United States is often heralded as a free country with substantial protections for civil liberties, but the reality often does not live up to such expectations or constitutional dictates. And this is especially true in the financial arena.

Personal and financial privacies are key components of citizens’ lives, and in a free society, they must be respected and safeguarded. Individuals are supposed to enjoy private spheres free of government involvement, surveillance and control. The Fourth Amendment to the Constitution of the United States embodies the idea that a citizen should be free to live his or her life unmolested and unsurveilled by the government unless there is a reasonable suspicion that he or she has committed a crime. Little by little, this key principle has been cast aside⁵ in financial markets.

Unfortunately, this reality is not well known. A Cato Institute survey in 2022 found that 83 percent⁶ of Americans believe a warrant should be required for the government to access an individual’s financial data, a standard that ended in the 1970s with the Bank Secrecy Act of 1970 (BSA) and the third‐​party doctrine. Now, all kinds of “financial institutions”, including pawn shops, car dealers and jewellers, must collect detailed personal information about their customers and share it with the government upon request.

The federal government regularly collects records on millions of these transactions⁷ without warrants. In the case of a suspicious activity report (SAR), which is effectively an accusation of possible wrongdoing, the financial institution is forbidden from discussing the report with the accused customer. The existing regime is the culmination of a sweeping, warrantless surveillance initiative that has steadily grown over decades.

Despite this regrettable situation, a CBDC would endanger financial privacy to an even greater degree. It would serve as the capstone for more than 50 years of expanding financial surveillance, making every financial transaction available to the government by default.

In fact, many of the purported benefits⁸ promised by CBDC advocates depend on complete visibility into individual transactions. It makes no difference, under existing laws, if a financial‐​transaction database is held by a private financial institution or the central bank itself. Private firms have been co‐​opted into this surveillance system.

Virtually no central bankers talk publicly about rolling back this surveillance system. So, it’s not a surprise that, at the same time, most of them openly espouse the purported benefits of a CBDC and seem completely unconcerned with the privacies or freedoms of their citizens.

In fact, Augustín Carstens, the general manager of the Bank for International Settlements (BIS), has bemoaned the privacy of paper currency by pointing out that with a CBDC, the central bank “will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that”. Bo Li, the deputy managing director of the International Monetary Fund (IMF), has advocated for the implementation of CBDCs because they will “allow government agencies and private sector players to program…targeted policy functions”, such that “money can be precisely targeted for what people can own”.

Such pronouncements make it clear that a CBDC is ill suited⁹ to serve the public’s needs for freedom and privacy. CBDCs are being developed precisely because they provide governments with increased control and power. This kind of threat to individual rights will naturally drive people toward private solutions, while governments are sure to work hard to thwart such alternatives since they undermine the increased government control and power CBDCs create.

Fortunately, these fundamental problems, and many more,¹⁰ seem to be hampering the rise of CBDCs. For example, Nigeria’s CBDC has failed¹¹ to gain adoption, and even China’s CBDC seems stuck in a perpetual pilot phase. Governments worldwide may be busy evaluating and launching CBDCs, but perhaps such challenges will provide them with the opportunity to realise it is a mistake to forge ahead.

In the United States, a CBDC would embroil the Fed in politics in a way that would make the governors long for the days of the dual mandate’s maximum‐​employment component. There is no doubt that members of Congress would constantly push the Fed to do more with a CBDC, as in providing more money to more people for an ever‐​expanding set of tasks. It would be impossible for a central bank to maintain any semblance of political independence in such an environment.

Read much more from Peter here.