COLUMN: Central Bank Digital Currencies are not a great idea (2024)

Let’s talk about money. Filthy lucre. Cash. Moolah. Legal tender. The big bucks. Central Bank Digital Currencies.

What, what was that last one? Central Bank Digital Currencies, or CBDCs for short, are the latest fad among academic economists inside the world’s national governments. They’re a great idea. As long as you hate financial privacy and economic freedom.

CBDCs are basically a type of digital dollar, an electronic form of Federal Reserve Notes (what we use as paper money). That in itself is nothing special. You use digital dollars whenever you use a credit card, a debit card, PayPal, Venmo, or any other digital payment service. We’ve had digital dollars for a decade or two now, and are better off for it.

Digital dollars on deposit are a liability of the private institution that holds them. Deposit a digital dollar in a bank, and the bank becomes responsible for returning to you when you ask for it. When you take out a digital loan, the dollars become a liability for you until you pay them all back.

But a CBDC is always a liability of the Federal Reserve, America’s central bank (that’s where the CB comes from). That means the Fed has the responsibility to do with it what ever is required. In other words, whenever you use a dollar of CBDC, there’s a direct connection between you and the Fed. Not a good idea.

Of course, paper dollars are a liability of the Federal Reserve, too; the Fed is standing behind their value. That’s what cash is.

So why are CBDCs different? There, my friends, lies the financial rub.

One reason people like cash is because it is anonymous. Cash is private and virtually impossible to trace. Yes, drug dealers like cash, but law-abiding citizens have plenty of legitimate reasons to value financial privacy. And some people just don’t trust banks. That’s their right.

Like cash, a CBDC is a government currency. But unlike cash, it’s digital. Things that are encoded digitally contain information. A CBDC can be “programmed” to only be used in certain ways, to only purchase certain goods, or conversely to be prevented from use in certain transactions. The director of the Bank of England has publicly expressed interest in programmability. Is this really yet another power we want to cede to a central authority?

Note how different this is compared to, say, bitcoin. Bitcoin is also a digital currency, but its encoding actually enforces anonymity and privacy. As a bonus, it is inflation-proof, and needs no central authority to stand behind its value. In fact, the bitcoin network has never been hacked since its first block (the “genesis block”) was mined in January 2009. The math is simply too strong. None of this is true for a CBDC.

Fortunately, at least for now, most Americans understand that CBDCs are a bad idea. The latest polls show barely 15% of Americans support them. But that doesn’t mean they won’t happen anyway. The ability to exert political control over digital money is like catnip for “progressive” social engineers and right-wing authoritarians alike, who of course have the best of intentions and would use their power only for good. Right.

China has been aggressively implementing its CBDC, the “digital Yuan”, since 2019. Its propaganda machine is screaming to the world how wonderful it is. Need we say more?

Don’t let this happen here. Write your representatives and senators to tell them you support The CBDC Anti-Surveillance State Act, sponsored by Representative Tom Emmer (R-Minn.). It is making its way through the legislative process. Your children and grandchildren will thank you.

Barry fa*gin is senior fellow in technology policy at the Independence Institute in Denver. His views are his alone. He is also a computer science professor who regularly teaches cryptography and publishes original mathematics in the field. Readers may contact fa*gin at barry@fa*ginfamily.net.