Who really benefits from CBDCs? It is not the public

It’s hard to imagine why anyone would be in favor of a central bank digital currency, or CBDC. The benefits are few and far between, but the risk of abuse is serious.

Even longtime proponents of central banking acknowledge that CBDCs would offer no unique benefits to the general public. “I keep asking anyone … to explain to me what problem [CBDCs are] resolve,” said Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. “And all I get is a bunch of hand-waving.”

As we’ve explained at length in a new policy paper for the Cato Institute, a libertarian think tank, CBDC proponents have been quick to list many potential benefits — but those benefits largely fail under any scrutiny.

Consider just one of the arguments: that a CBDC will improve financial inclusion. According to research by the Federal Deposit Insurance Corporation (FDIC), people most often lack bank accounts because they either don’t have enough money to meet the minimum requirements, want to preserve their privacy, or don’t trust banks. A CBDC is unlikely to help with any of these issues.

Let’s start with trust. A CBDC might sound like an attractive option for people who don’t trust the banks, but there’s a problem: People don’t trust the government either. Pew Research has found that trust in the US government is at an all-time low. Scratch that off the list, then.

What about privacy? Banks ask a long list of questions and make customers jump through several hoops. But it would be a mistake to think that a CBDC is a solution when much of this information is collected because the government has designated banks as law enforcement investigators under the 1970 Bank Secrecy Act regime. Although privacy-enhancing technology is available, central bankers from the Federal Reserve to the European Central Bank have already said anonymity is off the table. In other words, a CBDC could very well be the cornerstone of the Bank Secrecy Act regime.

Only the minimum balance requirements remain to be considered. Put aside that income levels are a broader economic issue and suppose a CBDC is subsidized so that there are zero minimum requirements and even zero fees. It may solve the cost barrier at first glance, but it brings to light a bigger problem that has been lurking in the background all along: money and economics are not the same thing.

A free CBDC account may allow someone who has cash to then convert it to be able to shop digitally, but a person is no more integrated into the financial system than if they just got a prepaid card. And giving them a prepaid card is something that can be done today. Even better, it doesn’t require finding the money in everyone’s pockets.

It only takes a small amount of scrutiny to see how problems plague other purported use cases. Simply put, CBDCs are ill-suited to helping financial inclusion, too late to improve payments, unlikely to advance monetary policy and simply no solution to maintaining the dollar’s world reserve currency status.

So why would people be in favor of CBDCs? Most people who know about CBDC are not for them. Yet government officials, CBDC advocacy groups and government contractors are another matter.

Unfortunately, governments seem to recognize that CBDC is one of the best tools to strengthen their control over money and payments. It was only recently that a former adviser to President Biden testified before Congress that a CBDC would be the “best step” to displace cryptocurrencies.

European Central Bank President Christine Lagarde even said that if central banks do not push ahead with CBDCs amid the rise of cryptocurrencies, they risk losing control over money and payments. Indonesia’s central bank has said much the same.

Public officials are not alone in thinking this way. An entire industry of private sector players has emerged hoping to profit from the CBDC development. From advocating for CBDC research to developing CBDC technology, many have recognized that there is a huge profit opportunity on the table. Indeed, at a time when the Securities and Exchange Commission (SEC) has declared war on cryptocurrencies, it should not be a surprise that some are moving the use of cryptocurrency technology to the CBDC.

Government officials and their cronies may benefit from the rise of CBDC, but the potential for abuse will likely leave everyone else paying for it. It is for this reason that Congress should prohibit both the Federal Reserve and the Treasury from moving forward with any form of CBDC. Fortunately, it just might happen. Representative Tom Emmer (R-Minn.), Senator Mike Lee (R-Utah) and Senator Ted Cruz (R-Texas) have all introduced legislation to ban a government CBDC. Even state officials, like Florida Governor Ron DeSantis, have taken notice.

If efforts like this are successful, the public just might not end up paying the price for a CBDC.