Treasuries, exchequers, ministries of finance, central banks, currency boards, and other economic authorities worldwide are in a mad rush to develop central bank digital currencies (CBDCs). According to the Atlantic Council, 130 countries (which account for 98 percent of the world’s economic output) are currently in various stages of developing CBDCs. Of particular note, the European Central Bank recently launched a CBDC initiative. A number of cross-border projects are additionally underway.

In the US, a wholesale (bank-to-bank) CBDC is being investigated. Wholesale CBDCs would serve as digital currencies for interbank transactions and settlements among financial institutions, with the ostensible objective of improved efficiency, transparency, and security. The New York Fed, for example, is partnering with the Bank for International Settlements to research implementing a wholesale CBDC dubbed Project Cedar. (The completed Phase One report is available online.) Simultaneously, the Federal Reserve Bank of Boston, in conjunction with the Massachusetts Institute of Technology’s Digital Currency Initiative, have already concluded a similar undertaking dubbed “Project Hamilton.”

US Treasury Undersecretary for Domestic Finance Nellie Liang recently revealed the formation of an interagency working group including Treasury, Federal Reserve, National Security Council, and other government agencies to investigate CBDC implementation in the United States along the following lines:

As a digital form of a country’s currency, a CBDC would likely have three core features. First, it would be legal tender. Second, it would be convertible one-for-one into other forms of central bank money — reserve balances or cash.  Third, it would clear and settle nearly instantly. Beyond these core features, creating a CBDC would involve many design choices. An especially important decision is whether to have a wholesale CBDC, a retail CBDC or both. In characterizing wholesale and retail options, we have found it useful to think about how each would differ from central bank reserves – in particular, whether the core differences relate to ‘technological features’ or ‘access features,’ i.e., the users that would be able to access the CBDC.

With respect to retail CBDC development, one intended for use by individuals, households, and businesses in everyday transactions and payments, the Undersecretary made the following comments.

With retail CBDC, by contrast, the most important difference from central bank reserves is related to access features, not technology features. Unlike central bank reserves,  a retail CBDC would be a digital liability of the central bank that is accessible to the general public. In its CBDC discussion paper, the Fed has stated that a potential U.S. CBDC, if one were created, would best serve the United States by being ‘intermediated,’ meaning that the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments. In terms of technology, a retail CBDC might involve a different architecture compared to a CBDC that is intended solely for wholesale use.

Nearly three years ago AIER sounded the war tocsin over what were then called “programmable digital currencies.” More recently, proposals for developing retail CBDCs have met appreciably louder and more mainstream resistance. A handful of presidential candidates have voiced unqualified opposition to CBDCs in all forms. Fed Chairman Jerome Powell has indicated that while wholesale CBDC could be issued without Congressional approval, a retail CBDC would have to be authorized by Congress with Executive support.

Will the US be ‘Left Behind?’

Massachusetts Senator Elizabeth Warren is in favor of a US CBDC; her analogy of CBDCs with Bitcoin reveal that she is referring to CBDCs in the retail context. California Representative Maxine Waters, no stranger to digital finance, has characterized resistance to CBDC development an “anti-innovation stance.”

One justification for rapid CBDC development is that if the US isn’t among the first movers in the space it will find itself shut out of the establishment of standards and practices. It’s flimsy reasoning on two accounts. First, when put up against the numerous privacy concerns and worries regarding the potential for authoritarian overreach that could arise from embedded functionality (think, a father who’s missed child support payments may find himself unable to buy beer; a vocal policy dissident could be blocked from traveling) smart calculus is squarely in favor of wariness. Second, the assertion that the US might wind up trailing the world by not leaping into the CBDC space doesn’t accord with reality.

• The entire world with which the United States imports and exports trillions of dollars worth of goods and services annually employs the metric system. Nevertheless, America remains essentially alone in using the imperial system.

• Cellular phone communication standards are a technological potpourri. In North America, the United States primarily utilizes 4G LTE (Fourth Generation Long-Term Evolution) and 5G (Fifth Generation) as its main cellular technologies. CDMA (Code Division Multiple Access) has been phased out, while GSM (Global System for Mobile Communications) is used by smaller carriers. Across most European countries 4G LTE and 5G are the dominant technologies, although GSM is still supported in some areas. In Asia, China relies on 4G TD-LTE (Time Division Long-Term Evolution) and 5G, Japan mainly utilizes 4G LTE and 5G, and South Korea primarily uses 4G LTE and 5G. Latin American countries including Brazil and Mexico mainly use 4G LTE and 5G technologies, although some GSM networks remain in operation. In the Middle East, Africa, Australia, New Zealand, India, Southeast Asia, and various African countries, 4G LTE and 5G technologies have become prevalent, while some pockets of 2G (GSM) and 3G (Universal Mobile Telecommunications System) remain. In addition to this alphabet soup of standards are TD-SCDMA (Time Division-Synchronous Code Division Multiple Access), TETRA (Terrestrial Trunked Radio), PDC (Personal Digital Cellular), WiMAX (Worldwide Interoperability for Microwave Access), and a handful of others. Yet roaming agreements, backward compatibility, and multi-mode devices make it possible to call nearly any individual, anywhere in the world on any type of phone seamlessly.

• In Europe, Asia, Australia, Africa, the Middle East, and among international organizations A4-sized paper (8.27 x 11.69 inches) is standard versus the Letter (8.5 x 14 inches) and Legal (8.5 x 14 inches) used in the US and Canada.

Other examples abound. Back to CBDCs, and to the point. The size of the US economy, our (relatively) strong commitment to private property rights, the global use of the US dollar and demand for US Treasury and agency securities — indeed, approaching ubiquity — essentially ensure that the US cannot, and will not, be frozen out of any monetary or financial technology standards.

Innovation in the Worst Possible Hands

The argument that lagging digital dollar development is necessarily bad for Americans ignores a long history of US government promises about gathered data and its use. Whatever the assurances made, whether by the Federal Reserve, US Treasury, Congress, Presidential candidates, or interagency groups: the likelihood of regulatory capture and misuse is high, while higher still is the likelihood of mission creep. Even if regulatory bodies sincerely intend to make transactions secure and private (a big if) the technology and its chokepoints could be used to enforce certain ideologies, promote special interests, and financially punish the politically unpopular.

Section 215 of the USA PATRIOT Act, which passed in the wake of the 9/11 attacks, permits government collection of business records, bookstore and library transactions, and other personal data. It was set to expire, yet persists to this day. Portions of the FISA Amendments Act of 2008 authorized warrantless surveillance of international communications involving American citizens: certain provisions within it were to end in 2012, but were subsequently renewed and extended. The use of administrative subpoenas to obtain records without a court order known as National Security Letters (NSLs) have been reformed, but continue to be used with little oversight. Consider as well the No-Fly List and US government mass surveillance programs, the latter of which were exposed by Edward Snowden in 2013: both involve a large degree of bureaucratic discretion and have led to legal challenges, yet both are still operational.

George Orwell’s 1984 is set in London. In the real London, the originally limited use of closed circuit television (CCTV) cameras throughout the 1960s led to their growing deployment and eventual ubiquity. The Ring of Steel after the Bishopsgate bombing in August 1993 invested tens of millions of pounds in surveillance systems that blanketed the city. And though peace came, by 2004 there was one camera for every fourteen London residents. Billions of images are captured every hour, augmented by motion-activated and facial-recognition technology. A CBDC system would put similar cameras inside your bank account, mapping every financial move and tracking your spending routes. Big Brother would undoubtedly approve.

Any pledges or guarantees made regarding what a CBDC will or won’t be designed or permitted to do, either now or in the future, regardless of source, should not be taken seriously. Certainly some technology, financial, commercial, and other groups which benefit from the most pernicious versions of a CBDC that might eventually materialize. As Eisenhower warned regarding the military-industrial complex, “the potential for the disastrous rise of misplaced power exists and will persist.”

A bill for restricting the uses and forms of a future CBDC, the CBDC Anti-Surveillance State Act (ASSA), was introduced in January 2022 and re-introduced in September 2023. It passed the House Financial Services Committee later that month and has since garnered 75 co-sponsors. ASSA bars the Federal Reserve, and specifically the Federal Open Market Committee, from using a future CBDC to implement monetary policy, and from offering CBDC products or services to members of the public. In early 2023, legislation was introduced forbidding the Federal Reserve from introducing a consumer focused or linked (retail) CBDC that would enable the tracking of citizens’ spending and transfer data.

Monetary Ludditism as Ultra-Innovation

The global push to develop central bank digital currencies is being portrayed as a race that the United States must not only join, but win. In light of the considerable risks to the privacy and liberty of Americans that such a paradigm shift poses, discretion is, more than ever, the better part of valor. We only win by not engaging.

The choice offers a truly unique opportunity for the United States. We may immediately revitalize our limp and sapped dollars, reduce (if not eliminate) central bank mismanagement, and deal a decisive blow against the growing trend toward de-dollarization. By resisting the CBDC tide and instead strengthening our money with a commodity backing (preferably gold), the US would in one fell swoop create the world’s soundest and most stable monetary unit. Such a dollar would not only instantly become the safest, most sought-after financial asset on Earth, but would improve both monetary and fiscal discipline and additionally aid US citizens who are pummeled by falling purchasing power. A worldwide monetary reset is underway, one in which America can participate — on a divergent path.