opinion | Proceed cautiously with the central bank digital currency

Stirring speculation that it intends to create an alternative to the dollar in global finance, China has already launched a prototype digital yuan via a mobile app, which more than 100,000 people are using on a limited basis, according to the Wall Street Journal. Sweden is in the process of testing something similar. In the United States, the Federal Reserve has launched an intensive study on CBDC, with the first results expected to be published this summer.

Some proponents see CBDC as a financial inclusion tool, giving unbanked citizens direct access to Social Security payments or child tax credits — or one day a guaranteed basic income — through their cellphones.

Others hailed the potential for more efficient tax collection: It would be harder for tax evaders to hide from a Treasury Department that would be able to ask the Fed to erase it digital dollars from their accounts. Meanwhile, the Fed could cycle the money supply up and down by paying a positive interest rate or subtracting a negative one. to digital assets.

The risk is, or should be, obvious: we don’t want to create a system that gives government real-time access to detailed information about every single transaction that its individual citizens may be making.

This is not an issue for the Chinese government. Beijing appears to see CBDC as a major step toward its goal of full, digitally-enabled social surveillance and control.

For a free country like the United States, however, the calculus should be different. As the classic phrase goes, money serves three functions: it is a unit of account, a store of value, and a medium of exchange. The reason for government-backed currencies is that they are public goods and a public institution should provide them.

A fourth characteristic or advantage of money is less often recognized – it can facilitate the facilitation of transactions between one or more parties that they may not wish to disclose to anyone.

Money is most privacy-enhancing when it takes the hard-to-track form of cash. But even in today’s rapidly digitizing payments system, banks and other private sector institutions provide a buffer between government and citizen financial records.

Of course, the banks themselves can play around with your data. And the system is indeed vulnerable to money launderers, tax evaders, terrorists and other bad actors.

In the case of a certain irreducible number of transactions, however, those involved have a legitimate interest in confidentiality – for example a competitive business idea or political organization.

“There is a legitimate market for transactional privacy,” wrote University of Illinois economist Charles M. Kahn. “Bitcoin is in this market. Prepaid card providers are represented in this market. To some extent, PayPal is present in this market, as are the credit card companies with their tokenization programs for Internet transactions. And the currency provided by the government is also in that market.”

For this reason, mainstream CBDC proposals would funnel funds through the existing commercial banking system rather than set up retail accounts with the Fed itself. Nevertheless, the data protection challenges, both legal and technological, would be enormous.

Americans and people around the world trust the dollar not only because the government behind it is powerful, but also because it is constrained by a robust body of law, one of whose pillars is Fourth Amendment protections from unreasonable search and seizure.

We should be very certain of the benefits of CBDC before granting the central bank powers that could be twisted for Orwellian purposes, either by this government or, in the event of a hack, a foreign one.

An often-cited reason for creating a digital dollar — to prevent China’s digital yuan from emerging as an alternative reserve currency — seems overdone. Beijing’s controls on capital flows make the yuan unattractive as a store of value and will likely prevent the yuan from crowding out the dollar.

The same is true for Bitcoin, whose recent rollercoaster rating shows how unsuitable cryptocurrencies are as a substitute for government-backed money.

As for the use of CBDC to support the unbanked, according to the Federal Deposit Insurance Corporation, 7.1 million of the 124 million United States households did so in 2019, just 5.4 percent. This is the lowest percentage since the FDIC began collecting data since 2009, suggesting that while the problem is real, it is on the way to resolution.

Such advances remind us that competition between private financial institutions, properly regulated, can produce valuable innovations. However, depending on how it’s done, CBDC could weaken banks by draining them of deposits and revenue.

The dollar takes precedence around the world because it’s a pretty good deal for almost everyone, almost all of the time. Before the Fed launches a digital version, rest assured that nothing will change.

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