The world’s central banks are moving briskly, and it would seem inexorably, toward introducing digital forms of cash. But I think they are underestimating the backlash from people who worry that digital currencies issued by central banks will become instruments of government control over their lives.
Figures on both the left and right fear that a digital currency would replace paper money, giving the government a way to track people’s spending and even control it — say, by making it impossible to buy certain things with digital currency. In theory, a digital currency could be programmed to lose value — a form of negative interest — to get people to spend it quickly.
Those concerns have penetrated the public’s thinking deeply enough to surface in the Republican presidential campaign. Central bank digital currencies will allow the government to “prohibit ‘undesirable’ purchases like fuel and ammunition,” Gov. Ron DeSantis of Florida, one of the G.O.P. candidates, contended in July. Vivek Ramaswamy, a rival candidate, has made opposition to central bank digital currencies one of his signature issues.
It’s unsettling that the first large nation to test a central bank digital currency on a wide scale is China, which surveils its own citizens. (Mu Changchun, who leads the digital currency project of the People’s Bank of China, wrote last year that it provides “anonymity for small amounts, traceability for large amounts in accordance with the law” to prevent crime.)
Concerns about Big Brotherism came up last week when I moderated a panel on the “digital euro” that was hosted by the European American Chamber of Commerce New York. The speakers argued that some of the fears are grounded in conspiracy theories. While that’s true in some cases, it feels a little too dismissive.
A surprisingly small portion of the world’s money is government-issued. The money in your checking and savings accounts is an obligation of the bank where you have those accounts, not the government. The only government-issued money that the general public can hold is physical cash and coin. (When you take money out of an A.T.M., you’re converting private money to public money.) The reserves that banks hold to transact with one another are issued by the Federal Reserve, but they’re not available to members of the public.
With central bank digital currency, ordinary people would have money with the reliability of government-issued cash along with the convenience of electronic funds, such as the money in your ApplePay, PayPal, Venmo or checking account. For central banks, a digital currency they issued would keep them from being shunted aside by private forms of payment. Having a widely available public currency that “will always be accepted” is “critical for the smooth functioning of the economy,” the Bank of England and HM Treasury wrote earlier this year.
The idea is getting a lot of attention at the Fed, from Chair Jerome Powell on down. The Federal Reserve Bank of Boston is cooperating with the Massachusetts Institute of Technology to study the technical feasibility of a general-purpose central bank digital currency, and the Federal Reserve Bank of New York is working with the Bank for International Settlements on technical research, experimentation and prototyping. The Fed Board of Governors in Washington has a Technology Lab that’s experimenting with a digital dollar.
The Fed has said it would proceed with a digital dollar only if Congress authorized one. The European Central Bank Governing Council voted in October to finalize a rule book for a digital euro and select providers to develop the infrastructure for it over the next two years but, like the Fed, said it won’t issue one without legislative approval.
Central bankers have answers for critics such as DeSantis and Ramaswamy. First of all, cash would continue to be available as an option for people in the eurozone even after there’s a digital euro, Burkhard Balz, a member of the executive board of Germany’s central bank, the Deutsche Bundesbank, said on the panel that I moderated last week.
Digital euro transactions would be anonymous to the central bank, like those done with cash, said another member of the panel, Jan Ceyssens, a unit head of the European Commission specializing in central bank digital currencies. It would be up to banks to monitor high-value transactions to prevent money laundering and other crimes. And as with cash, there is no plan to have a digital euro bear interest, either positive or negative, they agreed.
People who are inclined not to trust government can respond that any such promises could be broken. Once the technology for a central bank digital currency is in place, it takes only a few lines of code to modify how it works.
For citizens, the strongest bulwark against government overreach is that the final decisions about digital currencies will be made by lawmakers, who answer directly to the public. That’s Congress in the United States, the European Parliament in Europe and so on. So even if some authority wanted to abuse a central bank digital currency, the legislature could say no.
It’s hard to know how this will play out. I’m not sure how to weigh the pros and cons of a central bank digital currency. But I do have a suspicion that the technocrats who are rolling out plans for digital currencies could soon find the plans getting rolled right back at them.
Outlook: Ronald Temple
The November jobs report that was released last week suggests that the Federal Reserve is “delivering a goldilocks scenario of lower inflation without recession,” Ronald Temple, the chief market strategist of Lazard, a financial adviser and asset manager, wrote in a statement released to reporters on Friday. “The Fed is likely to keep policy restrictive until mid-2024, at which point inflation should have subsided sufficiently to warrant a modest easing cycle,” namely interest rate cuts, he wrote.
Quote of the Day
“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
— John Maynard Keynes, “The Economic Consequences of the Peace” (1919)