There’s a lot of discussion all over the world about the future of money. Cryptocurrency has, of course, become a multi-trillion-dollar market. Despite this success, cryptocurrency has not become a fully functional currency, and, for a variety of reasons, most governments do not want it to be. As a result, the U.S. Federal Reserve and other central banks around the world are actively discussing the possibility of creating a “Central Bank Digital Currency,” or CBDC. President Biden, in a recent executive order, declared that his administration “places the highest priority on research and development [of] a United States CBDC.”
But what will such a “digital dollar” look like?
Real dollars — cash — have a set of qualities that are hard to replicate in a digital currency. Cash is universally accessible, universally accepted, relatively stable in value, and can be exchanged for goods and services without transaction fees. And it lends itself to privacy, anonymity, and free expression. Unlike digital mechanisms like credit cards and Venmo, there’s no middleman tracking our every use of cash — or in a position to block transactions it doesn’t like. These are some of the reasons that we think it’s important that the United States preserve people’s option to use cash, for example by requiring stores to accept it. Cash is also used disproportionately by the most needy in our society. And sometimes people need to hide assets — for perfectly legal reasons. Consider a woman enduring domestic abuse whose husband drinks away the family’s income every month.
Nevertheless, it’s clear that there’s a strong demand in today’s world for remote and in-person digital payment systems.
So far, that demand has been met by credit cards and assorted other private-sector electronic payment systems such as Venmo. But these systems have none of the advantages of cash and many problems — most significantly, they are terrible for privacy and not accessible to many people who don’t have phones or aren’t tech savvy. The private companies that run them also suck fees out of the financial system that are out of proportion to the value of the service they provide, imposing barriers on the most vulnerable people.
Advocates have touted the potential for cryptocurrency to fill the demand for digital payments. We share the values of those cryptocurrency and blockchain enthusiasts who embrace the technology because they believe money should be private and permissionless. We also generally view decentralization as a good thing when it comes to technology.
Cryptocurrencies and blockchain, however, are not yet a viable daily currency for people. We can’t predict how these technologies will evolve and what implications such evolution may have for civil liberties. But whatever uses they come to serve in our society, it doesn’t look to us like cryptocurrencies will become a digital dollar anytime soon. The most prominent cryptocurrencies fluctuate wildly in value, are inefficient at processing transactions, inaccessible technology-wise to most people, and inelastic (not allowing the money supply to be adjusted — crucial to avoid the kind of economic instability that plagued the United States before the creation of the Federal Reserve in 1913, and which has led every advanced nation in the world to create a central bank).
Cryptocurrency is also not actually foolproof at providing privacy. Part of that is because it is based on blockchains that are inherently public, which exposes all transactions to public view even if they purport to obscure the identities of those behind them. Once the government succeeds in identifying the owner of a crypto wallet, all their past transactions using that wallet become exposed. (Overbroad application of securities and anti-money laundering rules to cryptocurrency in ways that threaten to expand government surveillance of routine cryptocurrency transactions, which we oppose, is also a threat to privacy.)
The shortcomings of cryptocurrency and corporate digital transactions are one reason why so many people around the world are talking about a government digital currency. A big risk with such a currency, however, is privacy. If the government is running a digital currency, will it be able to see every exchange of money that takes place? Government security agencies would love to see this, no doubt. But I think it’s safe to say that most Americans would not want a currency that creates a government record every time they give a friend money for beer or pay a kid to mow their lawn.
Much of the talk has been around a CBDC, but Jerome Powell, chair of the Fed’s board of governors, recently said that any digital currency issued by the Fed would need to be “identity verifiable” — meaning it couldn’t be anonymous (and would probably rely on some kind of digital identity system, which poses a whole world of additional problems.)
One approach that some have proposed (as in H.R. 7231, the Electronic Currency and Secure Hardware Act, or ECASH Act) would be for the government to issue anonymous digital cash that people could store on a smart card or their phone. Users could transfer the cash directly to each other without any fees, snooping middleman or centralized ledger recording every transaction, or requirement for a smartphone, tech savvy, or an internet connection. It would be a true bearer instrument — as with physical cash, nobody would monitor your transactions, and if you lost your smart card, you’d be out of luck.
Nobody wants to give tax-evading billionaires or criminals new ways to send millions of dollars around the world without accountability. The very wealthy people who deal in those kinds of amounts can fend for themselves when engaging in such transactions. A digital cash system could use devices that will only hold a maximum amount (such as $10,000, which is currently the limit over which cash transactions must be reported to the government). It is true that someone could store large amounts by aggregating numerous devices, but remember too that paper cash as well as assets like diamonds can still be used to illicitly transfer large sums. As with illegal paper money transactions now, the authorities would also still have the plentiful investigatory powers at their disposal to investigate and deal with illicit shipments of digital dollars.
We shouldn’t expect digital cash to be more crime-proof than regular cash — and it’s not worth giving up all our financial privacy for that goal.
Perhaps the biggest question around this kind of digital bearer instrument is whether devices can be sufficiently secured. The technology obviously won’t work if people could break into the devices that store money and make unlimited amounts of “counterfeit” digital dollars, and it’s not clear whether a system can be designed that effectively prevents that. It’s worth trying, however, and research should get underway toward that goal. And we shouldn’t expect perfection. Just as physical cash already is subject to use in crime, so is it also subject to counterfeiting; we have a police force (the Secret Service) charged with combatting it, and have always absorbed certain costs as a society in exchange for the enormous benefits that physical cash brings. We should similarly be willing to absorb proportional costs in exchange for the benefits that a true digital cash would bring.
Creating a new form of money is a big step, and if we’re going to do so we should do it right. It should be a public good that is available to all and to the greatest extent possible replicates the advantages of physical cash, especially privacy, anonymity, and accessibility to all. A digital bearer instrument is the most promising path toward that goal.