"If the US is walking away from CBDCs, then it’s a sign that others should be too."
An interview with Nicholas Anthony of the Cato Institute
On the go? No problem. We have you covered with the audio version:
Over the last years the idea of central banks issuing digital fiat currencies (CBDCs) increasingly came to look like an inevitability. CBDC-trackers like the one from the Human Rights Foundation show that over 1.5 billion people live in countries where CBDCs have been rolled out. This May, however, the US House of Representatives has initiated the first step in a potential unraveling of the CBDC narrative. With bi-partisan support the House passed a bill banning the Fed from issuing a digital dollar. But will the bill really become law and what impact would that have on other central banks in the free world? Besides, are the concerns of US lawmakers really legitimate?
To comprehend the impact of this monumental decision I interviewed a scholar whose work has been shaping America’s CBDC debate: Nicholas Anthony. He is a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives and the author of a new book titled Digital Currency or Digital Control? Decoding CBDC and the Future of Money. In my interivew with him, he explains why CBDCs pose a fundamental threat to financial privacy, freedom, markets, and security.
Igor: Privacy concerns about CBDCs takes center stage in your book. What is the biggest danger and do you see any possibility to get it under control?
Nicholas: The biggest danger with financial surveillance is what happens after governments collect this data. Financial information reveals who we are, our relationships, our travel, and so much more. Having direct access to this information with a CBDC would allow governments to directly target opposition groups, political enemies, and other disfavored groups. It’s possible that safeguards could be created, but political history shows that those efforts are often either abandoned or do not last long. The United States has been expanding financial surveillance without stop for decades. As I explain at length in the book, efforts to create a “privacy-minded CBDC” are unfortunately likely to prove to be a wolf in sheep’s clothing.
Igor: This May the House of Representatives passed a bill banning the Fed from issuing a CBDC. Does this mean that a CBDC is off the table in America and what kind of effect do you believe this will have on initiatives such as the ones in the EU or UK?
Nicholas: The U.S. House’s vote in favor of banning the Federal Reserve from issuing a CBDC does not mean a CBDC is off the table, or at least not yet. The bill still needs to pass in the Senate and be signed off by the President. So it was great news for those concerned about the risks of CBDCs, but it does not mark the end of the story. Looking beyond U.S. borders, news of the bill’s passage has likely shown officials in the EU and the UK that CBDCs are not inevitable. So much of the CBDC momentum has been built on a “fear of missing out,” but if a major nation like the United States is walking away, then it’s a sign that others should be too.
Igor: Disregarding authoritarian regimes, what is the actual benefit of a CBDC in a free and democratic society over existing monetary systems?
Nicholas: Put simply, there is not a unique benefit that justifies governments intervening in the market with the issuance of a CBDC. Proponents have claimed benefits ranging from financial inclusion to faster payments, but I show in the book that these claims do not stand up to scrutiny.
Igor: Let’s assume CBDCs become even slightly popular among end-users. Wouldn’t this result in a liquidity shock for commercial banks?
Nicholas: Yes, and this issue has created a sort of tradeoff when it comes to CBDC design. Put simply, the tradeoff is between a useful CBDC that undermines the market or a useless CBDC that is a waste of resources. In other words, the tradeoff is between making something people will want at the expense of the larger financial system or making something no one will want at the expense of taxpayer resources. If these are the options when it comes to the CBDC tradeoff, the best choice is not to introduce a CBDC at all.
Igor: CBDCs are one of many examples where the government is pushing the adoption of a specific technology. More generally, can such a strategy be sustainable or is it better to let the market decide?
Nicholas: It is unsustainable. Unfortunately, this issue applies across all policy areas. The market is far more flexible when it comes to adapting to technological innovation. Businesses rise and fall depending on their ability to adapt. In contrast, governments are much more locked in (for better and worse).
Igor: For my last book Big Tech in Finance I interviewed George Selgin, who told me that CBDCs are so dangerous, because there is no way commercial banks can fairly compete with central banks, because per definition central banks cannot fail. Also, they have the power to regulate their competition. This would in turn kill the innovative power of private actors that brought us blockchain and digital assets. In light of this, do you believe there can be a co-existence of CBDCs and privately-issued stablecoins?
Nicholas: George is absolutely right. The issue he described mirrors what would likely be the experience with stablecoins. However, what’s perhaps worse is that several governments that have launched CBDCs or are in the process of doing so have also put forth varying bans on cryptocurrency use. In fact, it was the announcement of a Facebook’s Libra Whitepaper (an idea for a stablecoin of sorts) that got many governments moving on CBDCs. Around the world, officials wanted something to use to combat Libra and CBDCs were the idea they latched on to.
Igor: Thank you for the interview.
Should CBDCs really fail to become the backbone of the future financial system, the question becomes what could possibly be an alternative. Assuming cryptocurrencies continue to linger as an investment asset, rather than a means of payments, it can only be a stablecoin of some sort. To learn about one of the most promising contenders check out my article on deposit tokens. And if you want to get the full picture of blockchain’s role in the financial system of tomorrow, don’t miss my highly popular course Blockchain Masterclass for Banking and Finance
Note: None of the content of this article and this newsletter, nor my books, presentations, and seminars is legal, tax, financial, or investment advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments. The content is gathered from publicly available information and the expertise of the author. It does not contain any insider information. Also, as an Amazon Associate I occasionally earn from qualifying purchases.
Right on spot. Nobody needs CBDCs. Not central banks. Not investors. And certainly not the people.