Nicholas Anthony is a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives and works on issues relating to financial privacy, cryptocurrencies, and the use of money in society. Nicholas joins Macro Musings to talk about central bank digital currencies (CBDCs) and the recent developments surrounding CBDCs at the Fed and in Congress. Specifically, David and Nicholas discuss the arguments for and against CBDCs, the preemptive, behavioral, and punitive applications of these currencies, who would benefit from the development of CBDCs, and a lot more.
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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: Nick, welcome to the show.
Nicholas Anthony: Thank you for having me on, David.
Beckworth: Thanks for joining us. You've been doing a lot of work on CBDCs over at Cato, and I understand that George Selgin is the person who hired you, brought you on board. Is that right?
Anthony: Yes, that is correct. I got very lucky in that I made it through the gauntlet. George brought me on in about 2019, and the rest has really been history.
Beckworth: Yes. I bring that up because you and myself were [some] of the few people who've ever made it through George Selgin in terms of going to the next level. You were brought in as an RA, now you're an actual policy analyst, so congratulations to that. I was a grad student under him, and it was very grueling, and he would acknowledge as much. We are in a very small elite club of people who have made it through George Selgin, so congratulations. More importantly, you're doing fascinating work on cryptocurrency, stablecoins, and the main focus of today's CBDCs. We're going to talk about that, central bank digital currency.
Beckworth: So, Nick, preparing for the show, I went around trying to gather up why are CBDCs such a hot pressing issue. They seem to come up a lot. In fact, I was recently visiting Capitol Hill as part of my job, and we went to a number of offices and a number of staffers, and almost every last one mentioned CBDC as an issue. Now this is, of course, on the GOP side. Unfortunately, I think they were being mentioned in part because of FedNow. I think FedNow mistakenly has gotten attached to CBDC. It's like pouring fuel on a fire, and boom. There's a lot of confusion, and we'll correct that today on the show, but that has, I think, definitely added to it.
Beckworth: I think, though, on top of that, we have a presidential campaign where Ron DeSantis has made this a big deal. That's put it on the radar of what I would call the GOP ecosystem. You see it on Fox News and other outlets. In fact, I have many personal friends and family members who have come to me and asked me about CBDCs, probably more than anything else. No one asked me about nominal GDP targeting or the Fed's balance sheet. They do ask me about CBDCs, so we have that going on. I think it's a political issue, but we also have the Federal Reserve working on this.
Beckworth: We have the Federal Reserve, regional banks, the New York Fed, and the Boston Fed, right, have done pilot programs. We'll talk about those later. Of course, that definitely sends a strong signal if you do a pilot program. What exactly are you doing a pilot program for if not to have a CBDC later? On the flip side of that, though, Nick, we have Fed officials expressing some skepticism. Governor Waller, for example, has been very skeptical. He has had two speeches, I'm aware of, maybe more, but I know of two. One of them was basically, the gist of it was, CBDC is a solution looking for a problem. Governor Bowman also had a very similar skeptical speech recently.
Beckworth: And then Fed Chair Powell, I would note, he has been generally skeptical, but I know you have some reservations, but he has said many times, this is something Congress has to do, at least on the retail CBDC side. So it seems at least that the leadership at the Fed's been like, "We don't want to touch this, at least not now." Now, I know previously, Governor Brainard was a little more supportive, but she's gone. It seems at least [that] the leadership's not for it, but you have all this rumbling down beneath at the regional bank level. Although, I should give credit to Neel Kashkari, who has said the same thing, he's very skeptical.
Beckworth: It's easy, at least for me, to get comfortable saying, well, maybe this isn't that big of a deal. Maybe the Fed officials aren't, but maybe they are. But you've brought up some other things, in these projects that have happened. There's been a number of people in industry who are excited about it, and we'll talk about that in a bit as well. There's a number of things going on that have kept this exciting, on the radar. I guess the last thing I would mention before I wrap up this little spiel I'm giving here, and that is that there's been proposed legislation, which you've documented as well. That's also keeping this on the map, so to speak, keeping it on the radar. Am I leaving anything out that would also add to the reasons why we are having so much discussion right now about CBDC?
Anthony: I think that captures most of what's going on. The only other element is really the international element. The experience that we're seeing, for instance, in Nigeria, in a worst case scenario where… we can get into that later, but it led to protests and riots, or in Jamaica, where adoption just isn't happening. Then in China, where [they are] still technically in the pilot phase, but raising a lot of concerns still.
Beckworth: I should also have mentioned that the BIS has also been actively involved. That's another technocratic party. We had the regional Fed banks, and the BIS, they actually have an innovation hub, if I understand correctly, for this very thing, which also can raise eyebrows, concerns among some people. They have been promoting that as well. We have all of these developments, the international one as well. I would just also mention, Nick, that I have come across some stories where there's been some pushback overseas as well. In England, the UK, Andy Haldane had an article in the FT about, he's driving down the street and he sees all these people protesting CBDCs in London, which is pretty amazing. Then the FT had another article about the ECB getting protesters against the digital euro. It's not just the US, right? There are concerns about this overseas. Is that fair?
Anthony: Yes, absolutely.
Beckworth: It's definitely very important here, and maybe very pivotal, because the dollar is the most important currency in the world. If it were to go digital completely, I'm sure it would have a bearing where all of the other countries go. If the other countries go digital, it's probably not such a big deal. There's other alternatives, financial innovation, fintech, stablecoins, ways that the private sector could carry the load, so to speak. Let's talk about CBDCs. I want to begin with an article you have written. I think our audience knows what a CBDC is. But just to be clear and articulate the arguments for a CBDC, I want to turn to your policy brief titled, *Central Bank Digital Currency: Assessing the Risk and Dispelling the Myths.* You go over a number of arguments for the CBDC. So, I'll list them and then you respond to them. The first one, and you hear this a lot, is financial inclusion.
Addressing the Arguments in Favor of a CBDC
Anthony: It sounds great. It's a great offering to have people thinking about, but I just don't see a CBDC or a central bank digital currency as a solution by any means. When we ask people why they don't have a bank account, for example, we see things like privacy and trust at the top of the list. I probably don't have to belabor the point that Americans are very suspicious of the government at this point in time, this point in history. Also, the reason that banks look into customers, part of the reason that they look into them so deeply, is because of existing laws. Now another element of that is that people don't have enough money to maintain bank accounts, or they can't meet some of the minimum requirement fees. There, we get into a stranger situation of, what is a CBDC really? Because you could have accounts subsidized, you could have the fees removed, at least for the individual users. We have to ask, "Well, are people really banked if they have a CBDC, if they have this account?" To that, I don't think that's a solution because it's really more like we just gave them prepaid cards. It's like we handed out debit cards to every citizen. It's not opening the door to lines of credit, loans, or other financial services. It's a little bit of a misnomer as well to think that it's a one-for-one replacement. For financial inclusion, I just don't see it as a solution at all.
Beckworth: As you mentioned, many people who would benefit from a CBDC are probably the ones least likely to trust government or to trust big banks to begin with. So why would you trust another behemoth, the Federal Reserve, with government arguably looking in on you? We'll talk about that in a minute. That's the financial inclusion argument. Another argument is faster, better payments.
Anthony: This is another side of it where it seems that a CBDC is really offering too little too late, because in the U.S., as George Selgin has been on this podcast many times to discuss, the U.S. has been behind the curve in terms of adopting faster payments. Aaron Klein at the Brookings Institution has talked about this a lot as well, some of the costs that people bear for that. We're at a little bit of an awkward time to be thinking about that, considering just this summer FedNow launched, and that wasn't anything new. That was something announced back in 2019. We've also long had the real-time payments network in the U.S.
Anthony: That's why, as you mentioned earlier, Governor Michelle Bowman has said that this really isn't a solution because FedNow solves this faster payments problem, and others have echoed the same. I believe it was Governor Philip Lowe from the Australian Central Bank said much the same, that Australia has long had faster payments, so why would they need a CBDC? As people continue to invest in upgrading infrastructure, it really seems that this was just too late to the party. They've already made the changes that were needed. This really isn't going to be the knight in shining armor to speed up payments.
Beckworth: Would the private sector also provide a solution to that, innovations in the fintech space, apps on your phone, things like that?
Anthony: Yes, absolutely. That's actually a really interesting element as well, is that… so in the United States, at least, we had a real-time payments network get off the ground as it was starting to get its footing, FedNow was announced. Then amidst all of that, we have innovations like cryptocurrencies, stablecoins, and different fintech services that have stepped in and recognized these gaps in the system where faster payments really do matter, and they've stepped in to offer them. Those are already on the ground. It's really important to think about, even though there are CBDCs that are out there, it would probably take the United States somewhere between five and ten years to truly get off the ground with one. Those are the estimates coming out of the Federal Reserve. Considering what we already have on the table and the ground that's being made, it just seems like it's too little, too late.
Beckworth: So, if you really care about financial inclusion, if you really care about faster payments, we already have the infrastructure for it. Let's run with that as opposed to [waiting] another five more years to get this system, which may or may not be effective given political constraints and other issues surrounding it. Let me ask one question about the payment part, and that is the international transaction side. I guess in my view, that's probably the strongest argument I've heard for it is that there are challenges to do international payments, and maybe like a wholesale CBDC, something between banks might be useful. I think the counterargument to that would be, well, a stablecoin or some private sector alternative would also work. What are your thoughts on that?
Anthony: I do agree with you that that is one of the strongest arguments. However, I struggle with it a little bit because when we look at some of the problems that are turning our national borders into these insurmountable walls, some of the problems that are there are by choice. It's not a question of technology. It's a lot of the regulatory burdens that are in place to surveil for terrorists, drug runners, or any other criminal, and in the process, surround everyone else. When I see some of these proposals, that a CBDC will fix international transfers, it's hard for me to accept that when we could fix the system today to make it more efficient and refine the process for how we treat these payments. There are some software aspects to be sure, but I think the bulk of the problem is really aligning these different regulatory systems, especially within the context of the Bank Secrecy Act and the Patriot Act and other measures to combat terrorism.
Beckworth: Those same concerns strike me as a reason why the Fed and the U.S. government would not be excited about CBDC, at least retail versions of it. One of the constraints that drug dealers face with carrying physical cash is you have to carry a lot of it, right? It is a way to get money across borders illegally. If you had a true token-based retail CBDC, size doesn't matter. You could have a million dollars easily going across borders. It strikes me, if nothing else, that the Fed, the U.S. Treasury Department, Congress would be against at least that version of the CBDC, given these same laws you just have spoke to.
Anthony: Exactly. That is something that we've heard a lot of central bankers say out of concern, where people bring up, well, if there's going to be a CBDC, it needs to protect people's privacy. We've seen countless examples of central bankers or other policymakers [saying], "Well, we hear you, we hear your concern, but we can't allow this system to operate like cash. We have to have the know-your-customer or KYC, the anti-money laundering or AML requirements in place to watch what people are doing and know who they are.” That's what gets us right back into a lot of the concerns about privacy and financial surveillance that would probably be a barrier to financial inclusion.
Beckworth: Yes, so it defeats the purpose of a CBDC. Just right off the gate, it undermines why you would want to have a CBDC. That gets us into some of the concerns that you have listed. Before we continue with that list, one last argument for a CBDC is it maintains reserve currency status. I'll tell you right now, Governor Chris Waller thinks that's a crazy idea, but what are your thoughts?
Anthony: I'll say I'm often very critical of the Fed, central bankers, policymakers, and governments at large. Waller nailed it right there. In my eyes, he couldn't be more right. The status of the dollar is not due to technological features. It's due to the strength of the US economy, the legal protections, and the freedoms that people are allowed in this country. It's very unfortunate to see so many people look at other countries using a CBDC or considering a CBDC and saying, "Well, that's concerning. We should do that too." I very much worry that, for example, many policymakers in Congress are worried about China creating a CBDC that it serves no purpose other than surveillance. They'll then say, "We need to create a CBDC." I very much worry that, even in the best of cases, that type of offering could make it so that people don't want to use the dollar, because they only see a CBDC as this epitome of a surveillance state, and even if there were somehow protections made that lasted, they would want to stray from the dollar, because they saw what China did with this, and now they think that the US is following suit.
Beckworth: Yes, and I think it undermines the argument for reserve currency status. If it has this poison pill attached to it, then why would you use it internationally? The Chinese yuan, the third version of the CBDC, it's really not going to make a difference internationally if China monitors it and you're fearful. More importantly, China has all of these other policies in place that prevent it from really becoming a reserve currency power. Alright, so I mentioned one more, and I have to add to that, and that is better monetary policy and better fiscal policy. That's the last argument for a CBDC. What's the argument there, and what are your reservations on that?
Anthony: I've noticed that a lot of folks that propose CBDCs see it as the key to better monetary policy. The rough idea is that by being able to surveil individual transactions and have a hand in individual transactions, you can get to a more granular level and a more individual level, where you can fine-tune the economy. To be kind, I think that's very interesting from a modeling perspective. If you're doing a research paper, and you're considering a closed model, just on the page, it's just homo economicus. It's not Nick or David. It's just this agent. That's really interesting. But when we get into the messiness of the real world, and we think about Nick and David, and all of your listeners, and people that have agency, and rights, and lives to live, suddenly that gets into a pretty concerning space, because we have policymakers that will take the best academic idea and translate it into something very different when it hits the ground. I don't think it's going to work as they see it. They typically phrase it as, by having that fine-tuned control, you can use positive and negative interest rates to really shape the demand for money.
Anthony: With positive interest rates, we can encourage people to save, and that would be a good idea. If we see the economy's overheating, we need to pump the brakes. This is something that will be more direct than going through banks. But if we see it going in the other direction, into a recession, and we want to spur spending, then the idea goes that we go into negative interest rates, where we take money out of people's accounts. It almost becomes a fine or a tax for saving. On both counts… although negative interest rates, they capture our attention much more because we're losing something. I think both counts suffer from this idea that we can fine-tune to that degree. We can have full control over the model of the real world. Again, it's something that's really fascinating to consider within the confines of the page, but when we get into the 3D world, I look at the history of the Fed, and I look at some of the performance aspects, and it only worries me for what might happen out of that.
Beckworth: It would be nice from a policymaker's perspective, at least sitting from 30,000 feet up looking down, you need to stimulate the economy, we'll put a little bit more in each person's account, so adjust rates. I've also heard you could actually inject, do helicopter drops into their accounts, so both fiscal policy and monetary policy would be very precise, very targeted. You would, as you said, bypass banks and the financial system, so you'd go right to households that could spend. I've even heard some say it would be Milton Friedman's dream. It'd be pure monetarism because you would literally add to the money supply and take away from it. Nothing in-between, no banks to mess up the process.
Beckworth: I do think you're right. It would raise concerns about people and their right to money, also just the uncertainty of a dollar. Now, maybe this wouldn't be an issue, but I know this is an issue, for example, with bondholders. There's a reason that the Treasury market for nominal fixed-price bonds is much larger than TIPS. People like the certainty that here is a fixed price. Yes, inflation may erode the value. Yes, there may be interest rate risk down the road, but I'd rather hold onto that fixed nominal debt contract than have one that adjusts for inflation. It's one of the reasons we don't see state-dependent or income-dependent debt contracts. People don't like that uncertainty.
Beckworth: It's money illusions, is what it boils down to, but I think this same concern might arise if you had a CBDC that was constantly changing values, even if those value changes were driven by good policymaking. I understand where policymakers are coming from. During the 2010s, we had inflation below target. There really wasn't much more they could do, so why not go negative? But then going negative tended to impact the banking system as opposed to affecting household decisions. I understand the motivation, but like you, I'm not so sure it would work out quite as cleanly in practice. Those are the arguments for CBDC, financial inclusion, faster payment, maintain currency reserve status, and better monetary and fiscal policy. We've touched on the concerns, but let's list them out. You have both financial privacy and financial freedom as the first two, so walk us through those issues.
Outlining CBDC Concerns: Financial Privacy and Freedom
Anthony: I think they're really intertwined. With financial privacy, we've danced around this. A lot of this depends on having greater financial surveillance. A lot of these purported benefits really depend on being able to see individual transactions and individual actions. It's not just that the benefits depend on that. There's also the problem that, in the United States, financial privacy is not something to write home about already. It's already an issue. One place to narrow that down is just with the third-party doctrine. That really boils down to, the Supreme Court had decided or held that if you share your financial information with a third party, then you cannot expect to have a right to privacy. You cannot expect that your Fourth Amendment protections carry over to that. This is very much a problem today. It's part of the reason that banks are able to report information under the Bank Secrecy Act and the Patriot Act. It's part of the reason that there's no need to get a warrant to get your financial information and the like.
Anthony: The problem that a CBDC really poses in this realm is that for that last bastion of protection, that last air gap that we have, it closes it. It closes it and makes it so your information is sent to the government by default. Just to frame that a little bit more, last year, I believe there was about 26 million reports filed under the Bank Secrecy Act by banks to the Financial Crimes Enforcement Network under the Treasury. That's 26 million reports. Some might be on the same people, but let's just assume it's 26 million people affected. In contrast with a CBDC, all of those transactions that people are making that are not reported would be with the government by default. It's really unfortunate because I've seen a lot of proponents try to say that the existing system is so bad that you shouldn't care about a CBDC. I think that is the opposite of what people should take away from this. I think people should really take away that a CBDC would make the system much worse, and that's something that we don't want. On the same token, we should want to fix what's currently out there, have an actual expectation of privacy.
Beckworth: So, for example, if we had a CBDC and you were someone that the government didn't like, if you were a drug dealer selling marijuana, or if you're a truck driver in Canada protesting COVID, this would be an easy way to shut you down. I bring that example up because it actually happened. Now that's, of course, a different country and I doubt that would happen as easily here. That's that cushion, that buffer, you've talked about, that even though we are highly monitored already in our banking system. That's what I tell people who come to me, "Hey, what about CBDCs?" They ask me this, they're worried about it.
Beckworth: I'm like, look, "You already are largely tracked. The government has the capacity to track you as it is. This just takes it to the last mile, takes it to the finish line." The difference is we lose the last buffer there. It's the flip side of the previous argument for CBDC, and that is it's programmable. You can change the amount, how it's used, where it's used. That's in the good case, to help the economy. This would be the bad case where you could prevent, you could exact punishment. In fact, you mentioned three categories. It's preemptive, behavioral, and punitive applications of how you would tweak the value or the use of a CBDC.
Preemptive, Behavioral, and Punitive Applications of CBDC
Anthony: Yes, unfortunately, it's pretty limitless what the options are. Its only limit is the creativity of policymakers, and we've seen throughout history that that is a force to be reckoned with. I think they do fit in those categories where you can prohibit or limit purchases. One example that I like to give that a lot of people seem to recognize is this idea of, well, what if there was a limit on how many alcoholic drinks you could buy on a night out? Rather than have taxes that try to discourage heavy alcohol consumption by increasing the cost, we can just limit how many drinks can you have. We could take that one step further. You spend the CBDC on a parking ticket. Then all of a sudden, the limit that you're allowed to have for that night goes down to zero or maybe one, under the idea that if you paid for parking, you probably drove into this nightclub district, then you really shouldn't be drinking at all. You can have that type of preemptive measure.
Anthony: You can also get into behavioral measures as well where, like what we were talking about with positive and negative interest rates, that's another area that you can try to control how people are spending their money, try to determine what's going to be the right place for them to… or rather not the right place, but the right time for them to spend their money or save their money. Again, this unfortunately takes this larger assumption that the CBDC is the only option, because then you start getting into this prohibition of currency choice. If a CBDC goes negative, the first thing that I would do if I was a CBDC holder is convert to cash or to Bitcoin or to Circle or to gold. I would get my money out of it so I stopped losing it.
Anthony: So, [then], a big question comes up. Is the US government to protect the efficiency of these behavioral incentives, are they going to prohibit currency choice? There's already some nudges in the US system that prevent currency competition, some larger than others, but it's not nearly at that level. Then just to wrap up, the last one is really what you had mentioned with the Canadian truckers, this idea that it is going to be used as a tool to freeze or seize people's assets. We saw from, I think it was 2013 to 2017, the experience here in the United States with Operation Choke Point, where the DOJ tried to target politically disfavored organizations or businesses to lock them out of the banking system.
Anthony: Then with the Canadian trucker situation, what was so interesting and concerning there was that when Prime Minister Justin Trudeau invoked the Emergencies Act, one of the first things that he did was ordered the banks to freeze the accounts of anyone involved. It was 200 to 300 different bank accounts. He had to go through the banking system. That was very different than what happened in the other side of the spectrum with cryptocurrency use, where, I forget the exact group, but one group was ordered to freeze accounts. They said, "This is a decentralized system. We have no control. We cannot do anything to help you here." Unfortunately, a CBDC is on the other side of that field, where rather than asking someone who can't do anything or the banks and going through their compliance department, a CBDC would have given the Canadian government the immediate option to freeze those accounts. So, across all of these examples, we see that everything is somewhat in reach today. Again, a CBDC really offers the opportunity to close that gap and allow governments, for better and worse, to have a direct hand in people's finances.
Beckworth: Justin Trudeau would be sitting at his desk and [would be able to] just open his laptop and hit a button and boom, it would be done. That's a scary thought. Let's move on to a few other concerns. For the sake of time, I'm going to summarize some of them, and I want to add a few to your list. The next one you mentioned is that this would undermine traditional banking. If there were a bank run, if there's some crisis, people might take their money out of banks like this March and run to the Fed, and the Fed would be the ultimately safe place to park your money. I think that's a real concern, and I don't want to spend too much time on that, but let me add a few other concerns.
Beckworth: And I think one would be the loss of innovations in payment technology. If the Fed became the main banking institution, competition goes away, there's less incentive to compete on the margins. I know some people who advocate Fed accounts think that would still be there, but I'm not so certain. That would be troubling. The other thing is, this would be very costly for the Fed. The Fed had to become a big bank. Again, you could argue maybe it works through other banks, but still, it's going to take on a huge amount of cost to make this work. For these reasons, I don't think the Fed is excited about doing retail CBDC. From a pragmatic perspective, if I'm Jay Powell, there's these arguments for, these arguments against. I think politically, it's toxic. You don't want to probably go there, particularly if Republicans are in power. Also, just pragmatically, the bill could get very large if you become the bank that everyone parks their funds at, or a lot of people park their funds at. I think that by itself would be a big hesitation for the Fed to get involved. It's just so costly. It would… huge additions to the number of employees at the Fed. It would make them much more political, too.
Beckworth: I just think that the Fed sees this and is worried about it. Now, I know you have some hesitation because they have said some things that suggest maybe there's some interest. Again, the fact that two regional banks… Is it two or more? It’s at least two. It’s the Boston Fed and New York Fed have done these trial runs. Okay, so those two banks have done that. That does suggest some interest. I can't completely dismiss that out of hand, but it does strike me as, it's cost prohibitive. Let's move from there to another piece you have written. This one takes more of a public choice view or a more cynical view, and it centers around who would actually benefit from a CBDC. We've touched on one, one would be government itself. It would have more control, whether it's doing macroeconomic policy, trying to fine-tune the economy, or if it wants to enforce a certain agenda, a.k.a., social engineering at some level. That would be one advantage for the government to do that. But, there would also be some private partners that might benefit from that as well. You have a piece that you co-authored that talks about some specific examples. Walk us through that.
Who Would Benefit from a CBDC?
Anthony: This was something that… I just found it so interesting that I started to notice not just government officials talking about CBDCs, but I started to notice, really, people in the cryptocurrency industry talking about this more and more. It started to catch my eye, and that's when I started to dig through to see, "Hold on. Didn't cryptocurrency emerge out of libertarian ideas and this idea of creating money outside of the hands of the state? Are we just walking right back in? What is going on?" That's when I started to see that there was this whole industry that had emerged of different consultants and contractors that, some had worked on cryptocurrency, some had worked in traditional finance. Now they were pivoting to, "How can I be the one to build CBDCs for central banks? How can I be the one to get that contract?" It's definitely a lot of money on the table when you consider the contracts that currently exist for the paper and ink behind U.S. dollars in their physical form. I think they see it from that same example. It started to make sense to me that, "Oh, this is a sector that has a large incentive for there to be CBDCs." Everyone from Accenture to Consensys, the Digital Dollar Project, E-currency, all the way to Visa and Wells Fargo, there's a huge list of folks that are working in this space trying to make them a reality because they see the profit opportunity.
Beckworth: Yes, and you cite a comment from MasterCard. I'm going to read that. There's several examples, and I'll encourage listeners to find this piece. We'll link to it in the show notes, but the title of the piece is, *Questions of CBDC Cronyism Emerge as Fed Launches Pilot.* The MasterCard comment is as follows, and this comes from MasterCard. They say, "MasterCard is committed to supporting central banks in their chosen path to payment system modernization, including the development of a central bank digital currency, CBDC, where this is relevant. We are committed to bringing that expertise to bear in support of the design, testing, and deployment of CBDC networks where central banks choose to pursue their development."
Beckworth: That's just an example. You give some others in the piece that they see it's in their interest. You mentioned some of them are banks themselves, which on one hand could be harmed by this, but you mentioned Wells Fargo. Maybe they're also hedging their bets, too. Just in case they lose traditional deposits, they can be the intermediary, maybe working with the Fed or the CBDC. So, there's this public choice cronyism concern that you highlight in your work. Let's move from all of these concerns and potential issues surrounding an eventual launch of a CBDC, which again, you said would be 5 to 10 years out if we did go down that path.
Beckworth: Let's talk about actual developments on the ground in terms of legislation in Congress or what the Fed itself has said. Again, just to repeat what I said earlier, a number of governors seem very skeptical, which would tell me that the Fed's not eager to move, at least at this point. Also, we see regional banks working on it. We have, I guess, two opposing forces at work here. The regional banks would indicate that the Fed is excited about it. The governors would indicate that they're not. Then we have the chair going before numerous committees of Congress and saying, "Hey, we're not going to do retail CBDCs." Now, on that point, you highlight what he's not saying there. Walk us through your concerns. I'm generally painting an optimistic picture from the governors. You can paint a little less optimistic one based on what concern.
Evaluating the Recent Developments Surrounding CBDC
Anthony: Let me be nice, or charitable at least, to begin. Chair Powell, I do commend him for saying, when he came to Cato for the 40th annual monetary conference, he said, "Quite plainly, we would not want a central bank digital currency that can monitor everybody's lives." I do want to give him credit for that. Where my concerns come up is how the Fed has approached the concept of an intermediated CBDC. Just briefly, where we have retail CBDCs that will be directly from the central bank to individual consumers, and wholesale CBDCs that will be just the financial institutions and the Fed, an intermediated CBDC blurs the lines and creates this middle ground where the CBDC will be issued by the central bank, still a direct liability of the central bank, but banks operate in-between. This came up as a concern to me originally when the Fed proposed its CBDC paper and said it wanted to go with this design because the Fed is currently limited, and it's not able to issue individual accounts. It's not able to offer individual services.
Anthony: There's a certain gray area here with an intermediated CBDC of what exactly can the Fed do. Representative French Hill, at an oversight hearing, asked Chair Powell, "What do you think your legal authority is?" Powell said, "Well, we can't do a retail CBDC. We also might be able to do a wholesale CBDC and other forms." It's the latter half of that statement that felt like it confirmed my suspicions when I first read the report. It's something that I very much worry about because when I also did a Freedom of Information Act request just before this hearing about something former Vice Chair Lael Brainard had been asked, she also echoed the same point that the Fed was committed to its position, and it does not intend to proceed with the issuance of a CBDC, and ideally, it would get an authorizing law. It's unclear where Chair Powell really stands on CBDCs, but it does seem that he's trying to preserve, or at least the Fed at large is trying to preserve a certain legal gray area. That very much does concern me in the larger scheme of things.
Beckworth: Okay, so what do you think, though, about my comment earlier that just the cost of doing the CBDC in that space, that gray area, would be so costly, both an actual resource cost, would cost the Fed money, but secondly, politically, I think it would be costly, and the Fed is smart. Don't you think that is enough to have them say, "We will wipe our hands altogether?" Maybe best case scenario, we do wholesale for banks. Or am I being optimistic here?
Anthony: I think you are right in many ways. I've thought about this a lot, of writing a piece of the central banker's case against CBDC-
Beckworth: That'd be awesome, yes.
Anthony: -to try to frame it that way, because I think you're absolutely right on all counts that there's a huge cost here. It makes them a political target. It threatens their independence. It puts them under the limelight. There's so many reasons for central banks to not want to do this. Where I still have reservations is in how many central banks are pushing forward on this, still. How many are still pushing forward on this? Also, the risk that if the door is left cracked, it might be pulled open in a time of crisis. We've seen that the Fed has an extraordinary ability to expand its footprint in a time of crisis. I could easily see something like this being just another instance in a laundry list of facilities, and then it being the one to stick around, or the expansion to stick around, after the crisis. I do think it's in their best interest not to proceed. However, I've just seen too many examples of that logic not being followed.
Beckworth: Yes, so to paint this scenario out a bit more, go back to the pandemic. Had they had some legal framework for CBDC in place, even though it wasn't supposed to be retail, you could imagine them telling banks, set this up as a way to get money quickly to households in a dire situation, so I hear you. There's that potential, and also, I guess [what] I would be careful about is that I'm depending upon the current batch of governors, the current people in Congress who are hesitant about it, and leadership changes. Eventually, Powell will go, and you don't know who the next person will be.
Beckworth: I do think this issue of cost, both real resource cost and political cost, is probably going to weigh heavy on an institution that tends to be small C, conservative. Even though you're right, they took some big changes in each of the crises, 2008 and 2020. Okay, let's move to this other part of this discussion, and that is actual bills proposed to Congress. You have a piece called, *CBDC Legislation Recap.* It's on your website, and we'll probably link to it. I was actually surprised, Nick, to see that there are this many bills already in Congress. They're just introduced, so they haven't been voted on or anything. There's a number of them, and they, of course, come from Republicans. Although there is one, I think I read properly, that it was bipartisan. Some Democrats are worried about this as well. I would imagine, there's going to be some Democrats who are really concerned about the privacy issue. Things like that would probably touch a nerve over there. Walk us through this legislation. First, maybe summarize what's going on. Then what do you see happening to it in the future?
Current CBDC Legislation and its Implications for the Future
Anthony: At the moment, we currently have five different pieces of legislation. I think it's over 60 different co-sponsors across the board. It's definitely grabbing a lot of attention. The most notable part about it is the common thread throughout all of them, is that they're against a CBDC. They're concerned about the risks that we talked about. They don't want to see the Federal Reserve or even the Treasury take this step. That's really been the common theme, that they're trying to really make it official that the decision to make a CBDC or not to make a CBDC is a decision that should be in the hands of Congress.
Anthony: Now, that's really the common thread. Where they hash out the differences can get into some pretty fine lines. That's why, on that piece, I opened it up with a table that breaks down the lay of the land and shows where they are. Because questions of how it addresses retail CBDCs, intermediated CBDCs, or wholesale CBDCs, are very different, not to mention how they apply to pilot studies are very different. In one case, you have a bill that wants to supervise pilots. Congress would receive reports from the Federal Reserve Board. But then in another, it wants to prohibit pilots entirely. There's a pretty large range of technical lines to be drawn, but again, they really do all take this anti-CBDC approach. It's dominated by Republicans at the moment, but I think that'll start to change over time, especially, as you mentioned for instance, the Power of the Mint Act had representatives, Jake Auchincloss, a Democrat from Massachusetts, if I recall correctly, and Representative French Hill, a Republican from Arkansas.
Beckworth: Let me summarize these bills for our listeners. Again, go to Nick's note that we'll provide a link to in the show notes. The acts are the No CBDC Act, the CBDC Anti-Surveillance State Act, S.887 bill, the Power of the Mint Act, and the Digital Dollar Pilot Prevention Act. When I saw the Power of the Mint Act, I thought maybe they're also going to throw in something about mint the coin, beyond just the CBDC part. Okay, so we have these bills before Congress, and it's getting a lot of attention, I think, especially with the presidential campaign that's happened. I think that's going to keep it, at least, on the surface for a while. Do you see this gaining any kind of traction? I asked that because the flip side of this is the treatment and attention being given to stablecoins and cryptocurrency, that has got a lot of traction in Congress. In fact, I was there, as I mentioned earlier, a few weeks back, and the House Financial Services Committee was marking up a stablecoin legislation. I just happened to be in that day, so I stepped into the room. All the representatives are there. It got pretty testy.
Beckworth: Apparently, they had agreed to go forward between Representatives Maxine Waters and Patrick McHenry. They were going to have a bill that they could agree on, but apparently, the White House comes in at the 11th hour and says, "Nope, I don't like this." I should have mentioned earlier, but the White House actually issued an executive order to study CBDC. They're generally more favorable, but they didn't like the direction that stablecoin legislation was going. You see stuff like this, where stablecoins could play the role that many are hoping CBDCs will play, but they're not getting a lot of traction or they're being fought against. I guess my question to summarize all of this is that, will the CBDC legislation simply be a Republican initiative? Or will it be something more broadly embraced as time goes forward?
Anthony: I think it's going to be, for a little while, a Republican initiative, but as time goes forward, and probably in the not too distant future, probably more like the next six months to a year, we're going to see more Democrats come on board and say, this is something that they are concerned about that they're hearing from the voices in their communities and seeing that that's not something that they're interested in either, because none of these issues are really inherently leaning towards one side or the other. A lot of this broadly is just giving more power to the government to have a role in individual people's lives.
Anthony: I think it's a little easier to not be so worried when your team is in power. When things switch, I think it becomes a very different consideration and people start to realize, "Oh my gosh, I should have never given all of those powers to my guy, because now their guy has it." I think between [that] they can feel a sense of ease of having control. Also, because out of the Biden administration, there was a pretty favorable look with the executive order. I think there's a certain calm in the waters on the Democrat side of the conversation. However, I really do think that's going to change over time, especially as more people become aware. It's important to note that as deep as we can get into it, especially in this field, most people don't know anything about CBDCs. We did a survey here at Cato of the broader American public, and if I recall correctly, it was about somewhere between 39% and 50% of people said they just didn't know enough to have any stance on the issue.
Beckworth: So the only people who are concerned about it, the people who come up to me and say, "Hey David, what do you think about CBDC? Is it really a big danger?" are people in a certain ecosystem of news that's getting worked up because Ron DeSantis is having stump speeches about the dangers of FedNow plus CBDC. What you're saying is that's not a very representative sample. I must have certain friends around me who tend to be watching certain news stations. What about the movements just more generally? We talked about globally, there's other central banks embracing this, but you've mentioned, there's been some failures overseas.
Beckworth: I mentioned earlier, there's been some pushback even at the ECB. Christine Lagarde is very ambitious and energetic. Let me read an excerpt from the Financial Times. This is an article that came out back in May of this year. The title of this article is, *The Digital Euro: A Solution Seeking a Problem?* [It] sounds like Governor Waller's speech. Let me just read the first few paragraphs here. You get the flavor of what's going on, and the article says, "When more than 1,000 demonstrators marched through the streets of Amsterdam in early February, they directed their ire at something that does not even exist, the digital euro. The protesters voiced a kaleidoscopic array of objections to the ECB's plans to issue an electronic version of the continent's single currency. Some feared the state would use it to track and control their spending, while others suspected a plot to replace cash. One protester told Dutch media, she feared the authorities would stop her buying meat or alcohol."
Beckworth: That touches on many things we've covered, but it's interesting to see that's happening in Europe. There's another article I mentioned already, I alluded to it, and that is Andy Haldane talking about how he's driving down the street in London, and there's a bunch of protesters, and they're protesting CBDC. You have this picture, and again, this may not be representative of everyone, but you have this. You also have some of those cases you mentioned, the Nigerian case that didn't work out too well. China, it's used for surveillance. It's not really going to be used for international transactions as much as they maybe had hoped. What is your sense? On one hand, yes, there's push internationally. On the other hand, there's some pushback, I guess, if I'm reading it correctly.
The International State of CBDC
Anthony: It's a little strange to get a sense of what exactly is going on. It seems to be that there's been a push to adopt CBDCs, really, across the world, and we're seeing that to the extent that they are launching, they're not delivering. As other countries get close to launch, for example, I think a decision needs to be made in the ECB, I believe by the end of October. As people are nearing that inflection point, and they're seeing these failed cases in Nigeria, or Jamaica, or the like, they're only seeing that the benefits are not for the people, but rather for the authorities. I think that is something to be concerned about. I think it's a little unfortunate that… I've seen that a number of times that people have said, people are upset about something that doesn't exist. I can understand how that's clever to put forth, but when we do have tangible examples that just are beyond our borders, it's hard for me to understand where that's being taken as a serious point, and when we see some of the comments that are happening around CBDCs, around folks that are pushing for it, such as the BIS, the IMF, and the ECB, it's something that I think is understandable for folks to be so riled up about and so concerned about.
Anthony: One of my least favorite examples was when Christine Lagarde said, "We surveyed the public, and privacy was one of their highest concerns about their finances, but we're not going to give them that." To have that so open is maybe a benefit for someone like myself that is trying to warn about these things, but it's also very concerning at large that that is seen to be acceptable, that that can just be a statement that's thrown on the table. I think it's moments like that where, whether it's a slip of the tongue or someone just feels so strongly that that is the right thing, I think it's moments like that, that really capture people and get them so upset to the point where they are in the streets saying, "We don't even want to try this. We don't want to go down this path. We see what's happening here, there, and everywhere in-between. We see what you're saying about it, you being the folks in charge in this space, and we don't want to go down that path. The risk is just too high, and the benefits are too low."
Beckworth: In closing, let me ask this question. Let's say we do go ahead to CBDC. Gradually, it comes out across many advanced economies. Could it still be the case, though, that it becomes a white elephant in that the private sector leaps ahead of it. It has faster technology, has better innovation, maybe the fintech providers, apps on your phone, instant payments, that way. Might it be the case that we will look back and say, "Ah, the good old days when we were worried about CBDCs, and instead we have a private sector with lots of apps and technology providing the same service?”
Anthony: I hope so. I hope that can be the case. I'm perhaps too pessimistic, but I do have concerns in the sense that in China, as they got their CBDC pilot off the ground, they banned cryptocurrency trading and mining as what was seen as a competitor. In Nigeria, a similar occurrence happened. In India, I remember reading a bill [where] the first sentence said that the central bank will issue a CBDC, and the next sentence said, "And we will ban any private cryptocurrency." We've had similar takes here in the U.S even, where we've had members of Congress try to block tech companies from getting into finance, and then later endorse proposals for CBDCs.
Anthony: I hope that we can get into a situation where if a CBDC were to be launched, that the private sector would just outmatch it, and it would be a distant memory, or maybe something that you keep a CBDC wallet as a memento, just like I have old notes in my drawer from the past. However, I think we have to be mindful that governments have a huge privilege over the private sector in terms of being able to write the laws and enforce the rules, and that means the second they enter the playing field, it's tilted in their favor. I am a little worried, even if one is to be introduced, or were to be introduced, that it may not be smooth sailing.
Beckworth: Okay, well, with that, our time is up. Our guest today has been Nick Anthony. Nick, thank you so much for coming on the show.
Anthony: Thank you again for having me. It's been great, David.
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