How do the arguments for the benefits of CBDCs stack up, versus the risks?

The libertarian CATO Institute recently updated their assessment, and concluded the supposed benefits of government / Federal Reserve issued digital dollars via retail or end user accounts are overstated.

Just as importantly, the analysis, “Central Bank Digital Currency—

Assessing the Risks and Dispelling the Myths,” argues that CBDCs would introduce serious risks to the American financial system.

The analysis also included policy recommendations for lawmakers.

In this article, we’ll summarize some of the Cato Institute report’s main findings.

Benefits Overstated

Cato noted that proponents contend CBDCs will increase financial inclusion by providing underbanked and unbanked Americans with new financial services. 

But it argued that many are unbanked due to lack of funds, not lack of banking options.

It said online and mobile banking had cut the number of unbanked households in the US in half, from 8.2 percent in 2011 to 4.5 percent, as of 2021.

It recommended that instead of restricting market access to safeguard legacy financial institutions, governments should create a regulatory framework that encourages financial sector competition, risk diversification, and customer choice.

Instant Payments

The Cato report said CBDCs were required for instant payments.

It cited The Real-Time Payments (RTP) Network, launched by a consortium of commercial banks in 2017, as an example of how instant payments are already available. There are also solutions from companies like VISA and Mastercard.

The Fed’s announcement that it would implement FedNow, a quick settlement network directly offered by the Federal Reserve to banks (who can offer it to clients), in the spring of 2023, is only disrupting RTP and other private sector progress in instant payments, according to Cato.

Cato said crypto stablecoins, which offer another private-sector solution to payment delays by enabling 24-7 transactions, would also be damaged by CBDCs.

It argued that these developments explain why some government officials are cautious about CBDCs. 

U.S. Federal Reserve governor Michelle Bowman has argued that FedNow solves the difficulties that some have raised regarding the necessity for a CBDC.  She said a CBDC therefore offers no settlement benefit over current options, even defective ones like FedNow, many of which offer instant or near-instant settlement speeds.

Reserve Currency

The notion that a CBDC would keep the U.S. dollar on top as the world’s reserve currency is unfounded, Cato argued. 

It said the dollar’s position has been due to the strength of the American economy and its legal safeguards for private persons compared to most other countries, not technological transactions. 

It recommended that if Congress wants to enhance the dollar, it should improve those fundamental causes, and leave fintech innovation to the private sector.

The Fed’s lack of a CBDC won’t hurt the U.S. currency, according to Cato, especially if the nations adopting CBDCs don’t offer the same economic and legal safeguards.

It argued that China’s digital Yuan had not caught on as a viable alternative to the reserve status of the dollar, due to China’s history of breaching property rights, invading financial privacy, and other human rights.

Fiscal and Monetary Policy

Cato said the potential for CBDCs to be used as programmable currency to direct and influence the economy was unsettling, not something that would likely lead to better economic performance.

It noted that CBDC proponents claim it might allow negative interest rates, fine-tune the economy, and eliminate credit and liquidity problems, and called those “misguided” assertions.

Cato observed that The Fed has failed to meet policy aims since the 1970s. It said that given this dismal record of regulating price levels and business cycles, it has damaged, not enhanced stability. 

Risks Understated

A CBDC would not benefit Americans compared to other available technologies, but instead would pose considerable risks, according to the Cato report. 

CBDCs would threaten financial privacy, freedom, and the banking system.

Cato noted that about two-thirds of the more than two thousand public comments solicited by the Fed concerning a possible CBDC listed concerns about these threats.

As far as financial privacy, a CBDC would effectively destroy Constitutional protections meant to insure it.

The Cato report said a CBDC would provide the federal government total insight into every financial transaction by linking the government to each citizen’s financial activities, which would destroy what little privacy protections still remained for American citizens.

It said a CBDC would certainly be the worst attack on financial privacy since the Bank Secrecy Act and the third-party legal precedent set in the 1970s.

With respect to political and financial freedom, Cato noted a CBDC would allow the government to comprehensively surveil, and if it chose, impose limits, bans and punitive and behavioral modifying actions, via freezing or limiting uses of digital money or wallets of users.

Advocates have suggested far flung uses of CBDC programmability. Some, for example, have proposed programming kids’ lunch money so they can’t buy sweets, and limiting alcohol sales, and banning sales to persons with alcohol-related infractions.

CBDCs could be used to shut individual activity and travel down during a pandemic. 

How about bans on books or periodicals or subscription websites proffering what the government defines as “misinformation”? 

These control concepts might be expanded in countless dystopian ways.

The Death of Crypto Innovation and Counter Balance to Government Corruption and Malfeasance

Bitcoin has shown its value since 2010 as an alternative to whole monetary debasement. Its rise in value has been unprecedented when compared with any other commodity or asset.

And the latest banking crisis, as well as spiraling inflation in various nations and regions, has again underscored how cryptos can offer a counter balance to government monetary abuses that erode the fruits of citizen labor. 

But Cato noted that governments issuing CBDCs have even more incentive than they already do to try to maintain their power to inflate currencies and siphon wealth to pay their debts off the backs of stolen value from citizens.

Its report pointed to a relationship between nations issuing CBDCs and banning or substantially restricting citizen use of crypto technology.

The Cato report concluded by strongly recommending that Congress enact legislation to forbid the Federal Reserve from unilaterally issuing a CBDC.

It said saying no to a CBDC would help protect financial privacy, freedom, free markets, and cybersecurity. 
The full report can be viewed here.