Our second link to City Journal this week.
March 22:
Few likely paid much attention when, on March 9, President Biden signed an executive order directing the government to begin developing a “central bank digital currency” (CBDC) to be issued by the Federal Reserve, alongside a framework to regulate private cryptocurrencies. But this was a moment to which close attention is very much due. CBDCs have the potential to become an unprecedented totalitarian nightmare.
As the term implies, a CBDC is digital money that a central bank issues directly. You might assume that you are already using “digital currency” regularly if you rarely use physical cash anymore and instead buy almost everything with a credit card or a digital payment app. In truth, the process of moving money from A to B is vastly more complicated than that. It involves a tangle of payment processors, banks, financial clearinghouses, and, if your money is crossing borders, international communication and exchange systems, such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The money itself doesn’t move anywhere fast, so each intermediary institution must assume risks to fulfill your transaction by accepting promises, sending transfers, verifying receipt of funds, and so on. Many fees get collected along the way for such services.
A CBDC system would be radically simplified. A customer would open an account directly with a country’s central bank, and the central bank would issue (create) digital money in the account. Crucially, this makes the money a direct liability of the Fed, rather than of a private bank. Using a simple smartphone app or other tools, the customer can then initiate direct transactions between Fed accounts. The digital money is deleted in one account and recreated in another instantaneously. Moving money across borders no longer requires something as complex as SWIFT or wire transfers, and currencies can be exchanged instantly as long as friendly central banks have agreements to do so. No promises or trust are necessary; every transaction is permanently recorded on a digital cryptographic ledger in real time—a bit like Bitcoin, but exquisitely centralized rather than distributed.
Such a system technically no longer needs such middlemen as banks or credit card companies. The Fed retains complete oversight and control over the creation, destruction, and “movement” of money, no matter where it is “held” or who “has” it. As Agustin Carstens, general manager of the Bank of International Settlements put it at a 2020 summit of the IMF: “We don’t know who’s using a $100 bill today and we don’t know who’s using a 1,000 peso bill today. The key difference with the CBDC is the central bank will have absolute control [over] the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that.”
Biden’s order described “research and development efforts into the potential design and deployment options of a United States CBDC” as a matter of “the highest urgency” for his administration. Why should such a seemingly obscure and technical monetary innovation be of such urgency to the U.S. government? Since cash has been working at least fairly well for a few thousand years, what reason has been given for why central banks should receive “absolute control” over money? A Fed report from January portrays CBDC as a way to “support faster and cheaper payments,” and “offer the general public broad access to digital money that is free from credit risk.” And it would promote “financial inclusion—particularly for economically vulnerable households and communities.” That, the report notes, “is a high priority for the Federal Reserve.” Biden’s order also calls for the need to “promote equitable access to safe and affordable financial services.”
But this can hardly explain the urgency. After all, it wasn’t long ago that Fed chairman Jerome Powell warned that, when it came to a CBDC, it was “more important to get it right than to be first,” given “potential risks” and “important trade-offs that have to be thought through carefully.” Why is the administration now pushing for accelerated development?....
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