<p><span style="font-size: 12pt;">CBDCs invite government abuse.</span></p>
<p><span style="font-size: 12pt;">The Biden administration and Congressional Democrats are intensifying calls for government crypto regulation. On May 19, Senate Banking Committee Chair Sherrod Brown (D-OH) wrote a scathing <a href="https://www.banking.senate.gov/imo/media/doc/brown_letter_to_hsu_-_crypto.pdf">letter</a> to Treasury. In it he urged a scrapping a Trump administration policy granting bank charters to some cryptocurrency firms.</span></p>
<p><span style="font-size: 12pt;">Yet Brown and other <a href="https://www.thecrowdfundinglawyers.com/citizen-jay-clayton-should-shut-it-about-crypto/">crypto trolls</a> want the Fed to charge ahead with its own “central bank digital currency” (CBDC). Chairman Brown in a March <a href="https://www.banking.senate.gov/imo/media/doc/Federal%20Reserve_%20Letter%2003012021.pdf"> letter</a> urged the Fed to “lead the way” on CBDCs while restricting privately run 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.”</span></p>
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<p><span style="font-size: 12pt;">Dubbed the “digital dollar," a CBDC would extend government control over the creation of the money supply -- which it already has through interest rate-setting and other policies -- to control over which business and individuals U.S. currency is distributed to.</span></p>
<h2 style="text-align: center;"><strong>CBDCs won't deliver on their promise</strong> </h2>
<p><span style="font-size: 12pt;">But despite rhetoric about imposing fairness and equity in the financial system and financial technology (FinTech) landscape, a government digital currency will not solve financial inclusion, illegal activity, or the dollar’s global status.</span></p>
<p><span style="font-size: 12pt;">Most Americans already have access to banking. The FDIC states <a href="https://www.fdic.gov/analysis/household-survey/index.html"> only 5.4%</a> of Americans are unbanked, a percentage that has steadily dropped and is currently at a nadir, in part of because of private FinTech solutions like 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.</span></p>
<p><span style="font-size: 12pt;">In fact, certain 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 <a href="https://cei.org/studies/government-run-payment-systems-are-unsafe-at-any-speed-2/"> the poorest consumers paid the biggest price</a>.” The Durbin Amendment made free checking accounts unfeasible for low-income consumers, resulting in over one million Americans leaving the banking system, according to a George Mason University <a href="https://www.law.gmu.edu/assets/files/publications/working_papers/1418.pdf"> study</a>. </span></p>
<p><span style="font-size: 12pt;">Just as CBDCs would not save the poor from bad government policies, they also would not curtail illicit activity such as money laundering and terrorist financing. Despite perception, blockchain analytics firm Chainalysis <a href="https://cryptoforinnovation.org/resources/Analysis_of_Bitcoin_in_Illicit_Finance.pdf"> found</a> from 2017 to 2020 illicit transactions accounted for less than one percent of crypto activity. Cash is still king for illegal trades, and not even CBDC zealots like Sen. Brown would <a href="https://www.banking.senate.gov/imo/media/doc/Federal%20Reserve_%20Letter%2003012021.pdf"> remove it</a> from our monetary basket.</span></p>
<p><span style="font-size: 12pt;">Domestically, CBDCs would invite more financial instability than widespread use of 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 got “<a href="https://www.banking.senate.gov/imo/media/doc/Federal%20Reserve_%20Letter%2003012021.pdf">Fed accounts</a><u>”</u> through government-controlled digital wallets or the minimalist bank-intermediated version, where select banks and credit unions performed customer service and recordkeeping functions, instability looms.</span></p>
<h2 style="text-align: center;"><strong>CBDCs could destroy the banking system </strong></h2>
<p><span style="font-size: 12pt;">As a recent Bank Policy Institute <a href="https://bpi.com/central-bank-digital-currencies-costs-benefits-and-major-implications-for-the-u-s-economic-system/"> report</a> 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.</span></p>
<p><span style="font-size: 12pt;">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.</span></p>
<p><span style="font-size: 12pt;">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.</span></p>
<p><span style="font-size: 12pt;">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.</span></p>
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<h2 style="text-align: center;"><strong>CBDCs will wreak havoc on financial privacy </strong></h2>
<p><span style="font-size: 12pt;">The control would differ in degree, but not 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 “<a href="https://s3.us-east-1.amazonaws.com/files.cnas.org/documents/CNAS-Report-Chinas-Digital-Currency-Jan-2021-final.pdf?mtime=20210125173901&amp;focal=none">enforce party discipline</a>.”</span></p>
<p><span style="font-size: 12pt;">Whilst US officials declare the Chinese system unworkable here; they simultaneously eschew anonymity. Fed Chair Jerome Powell <a href="https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407279"> has called</a> for “balance” and “appropriate protections.” Whatever that entails will not secure Americans’ privacy.</span></p>
<p><span style="font-size: 12pt;">The past decade shows a bureaucracy—either politicized or incompetent—that regularly exposes sensitive data in their charge. In 2013, the IRS was caught targeting Americans supporting the Tea Party movement. Less publicized scandals reveal organizations repeatedly victimized with <a href="https://www.washingtonexaminer.com/why-the-irs-will-pay-this-conservative-group-50-000"> donor</a> and <a href="https://publicintegrity.org/politics/irs-outs-handful-of-donors-to-republican-group/"> sensitive-data</a> leaks. Bureaucrats likely sneaked the <em>New York Times</em> President Trump’s tax returns. The recent Supreme Court case <em>Americans for Prosperity vs. California</em> revealed repeated data breaches that Justice Samuel Alito <a href="https://www.scotusblog.com/2021/04/justices-doubtful-on-california-donor-disclosure-requirement/"> labeled</a> “grossly negligent.” </span></p>
<p><span style="font-size: 12pt;">In the current politicized era, the government will likely continue its dismal track record. That risk is not worth taking for an unneeded program that will curtail private innovation and embed the Fed with unprecedented power. Congress and the Fed should resist pressure to solve nonexistent crypto problems and instead allow entrepreneurs to innovate and empower our lives.</span></p>
<p>A version of this article appeared in National Review on June 3, 2021 https://www.nationalreview.com/2021/06/central-bank-digital-currency-the-feds-coming-power-grab/</p>