Nicholas Anthony on *Digital Currency or Digital Control: Decoding CBDC and the Future of Money*

Nicholas Anthony is a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives, a fellow at the Human Rights Foundation, and is also a returning guest to the podcast. Nick rejoins David on Macro Musings to talk about a new book he has authored titled, *Digital Currency or Digital Control: Decoding CBDC and the Future of Money.* Specifically, Nicholas and David discuss the history of CBDCs, their challenges and drawbacks, Nick’s recommendations for the future, and a lot more.

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Read the full episode transcript:

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 back to the program.

Nicholas Anthony: Thank you for having me on, David.

Beckworth: It's great to have you on, and on the last show— I believe we talked about this— but you and I have something very special in common. We both have survived George Selgin. He was my advisor in grad school. You had worked for him at Cato. We love George. George is probably listening to the show right now, but just to let the audience know, he's very exacting and very precise. If you write something up and it's not done perfectly, he'll let you know. So, kudos to you for graduating from the School of Hard Knocks with George Selgin.

Anthony: And, likewise, thank you for paving the way to show— I saw that you were the light at the end of the tunnel. It could be done. So, thank you.

Beckworth: Yes. I know there's been a number of people who have gone to work for him who couldn't get as far as you did, so kudos on that. Also, the last time we were together, we talked about your other work on central bank digital currency, and you were keeping track of legislation before Congress. And [I’m] just curious, is there an update on that? Where does that stand now? What's the future prospects for CBDC legislation in Congress?

The Future Prospects for CBDC: From Congress to the White House

Anthony: So, really, a big update to share is that Representative Tom Emmer had passed his legislation through the House. He got almost all Republicans to sign on. Only a couple Democrats joined on, but they were able to push their bill through that, namely, said that the authority to issue a central bank digital currency, or CBDC, rests primarily with Congress. It's something that Congress has to give the green light to before the Federal Reserve can go forward. Now, on the floor, it did have a few amendments tacked onto it at the last second, and I'm still trying to make sense of where those stand, because one's a sense of Congress, one has a sort of prohibition on pilots, and then one goes a little bit further, and I'm still trying to make sense of that. But so far, that's a pretty big step for Congress, especially a Congress that doesn't get a lot of bills passed.

Beckworth: Now, this has to go to the Senate too, right?

Anthony: Correct.

Beckworth: What are the prospects there?

Anthony: So, it'll probably get some action in the near term. So, we're talking right now on July 1st. I imagine that it'll get some action in the next, maybe, two to three weeks, especially considering that Senator Ted Cruz introduced a companion bill. So, before the House had passed Representative Emmer's bill, Senator Cruz had introduced the same exact language in the Senate to get that moving. So, with the House having it passed, it's likely that he'll want to strike while the iron is hot. Now, whether he includes those amendments to try to streamline it further, or if he adds his own amendments, that's still to be seen, but I imagine that we'll see something before the August recess, and I definitely imagine that we'll see something before the election.

Beckworth: Okay, we'll see something, but will it be passed, signed by the president, or will it become a defining issue? That's a next follow-up question. President Trump has said that he wants to be the "crypto president". So, I imagine, then, that he would probably be sympathetic to legislation like this, and it might be a defining marker in the ground between, say, Biden and Trump. So, where do you this playing out in the election?

Anthony: So, I think you're right that, if we see a second-term President Trump, that he's going to want to support this, because like you said, he's taken a surprise stance of supporting cryptocurrency, which clashes with his previous views, so that's a whole thing to dig into. But amidst this, he's also said that he does not support a central bank digital currency, and he would stop one in its tracks if he is elected. So, if it was to manage to get through the Senate and get to President Trump's desk, then he would probably support it. Now, if it manages to get through the Senate and gets to President Biden's desk, that's a different story, because he went from being quite supportive of the idea of having a central bank digital currency to [being] largely silent, since he really ramped up things on the campaign trail. So, where exactly he stands, where exactly the administration stands, in 2024 and beyond, is a little unclear.

Beckworth: Okay, but early on in his administration, President Biden's administration, they were very pro-CBDC, right?

Anthony: Oh, yes. Two clear examples of that were when President Biden signed an executive order in 2022 to study cryptocurrency and, also, [to] place the quote, I think it was, “the utmost urgency on developing a central bank digital currency.” Also, as I'm sure I don't need to tell you or many of the listeners of your show, when he brought on Lael Brainard from the Federal Reserve, during her time at the Federal Reserve, she was probably the loudest proponent of CBDCs, dating back, really, to probably 2016, 2017-ish.

Beckworth: Now, was she and the Biden administration— when they were pushing, when they did have a sense of urgency— were they pushing for retail or wholesale CBDC?

Anthony: It sounded like they were pushing for retail CBDC, because they were framing it within the context of helping financial inclusion, helping faster payments, and the like. However, I will put a small disclaimer on it. I'm not sure if they explicitly made the distinction. A lot of times in conversations, things default to, it's an implied retail CBDC, when people say CBDC. In fact, I make a similar note in my book. After explaining the different models, I note that, going forward, we're largely talking about retail and intermediated models.

Beckworth: Okay. Well, let's move into your book, and again, the title of your book is, Digital Currency or Digital Control: Decoding CBDC and the Future of Money. And I think, just based on our previous conversation, people know why you wrote the book. This is something that you've been following, you've been doing. We'll provide a link to the previous show where we had you on and talked about it. But you began by talking about the motivation for CBDC, the big push for it, and interestingly enough, it begins when Facebook pushed its stable coin, Libra.

Anthony: Yes.

Beckworth: So, walk us through that history, and tell us the reaction of policymakers, US government officials. Why did they freak out so much?

The History of CBDCs

Anthony: Well, this is something that, I think, surprises a lot of people, and that’s that it was really Facebook and Libra that lit the fire under here. Central bank digital currency was an idea before 2019. You had, all the way back to the '90s, in Finland, with the Avant card, and then, in 2014, you had the People's Bank of China [who] started looking into this idea. You also even had a CBDC-like system going on in Ecuador with a mobile payment system. So, it was very much on the table, but it was largely this strange idea in the back of monetary economics. It really wasn't until the summer of 2019 that Facebook either knocked or kicked down the door and said, “We want to introduce our own stablecoin. We want to introduce Libra.”

Anthony: And I want to be very clear that they did not create it on the spot and put it in the market. They had just introduced the idea with a white paper, but that was enough to send policymakers in Congress, in the Federal Reserve, in the European Central Bank, and around the world, into a frenzy, because they were scared that, okay, we saw Bitcoin. It hasn't gotten this global use yet, but, wait, Facebook already has a global user base. They have so many people already integrated into the system. And so, the threat of Libra was that all of those millions, or however many people, that were integrated would use it overnight.

Anthony: Instead of having that slow burn of Bitcoin rising, this organic crowd around it, you had this switch flipped, and that was something that really sent people into a frenzy, and you still hear people talking about it. You still hear the ranking member of the Financial Services Committee, Representative Maxine Waters, talk about it. You hear European Central Bank President Christine Lagarde talk about it, and this never got off the ground. And yet, it was something that really ignited the conversation and made them realize, “Wait, we want something to compete with this,” and, “Wait, we want to have something before the ‘next Libra’ comes around.”

Beckworth: So, Mark Zuckerberg and Facebook created some PTSD for central bankers and policymakers who deal with this issue.

Anthony: It's a sad reflection on our world, but I think that that's an apt way to describe it.

Beckworth: Well, if Elon Musk is listening and he wants to experiment, it would be fun to see what he could do with Twitter. Now, Twitter has a much smaller base of users, but he seems very ambitious. So, maybe he'll be the next person to attempt something like that, but it's a great point. There's a greater network effect set up with Facebook, so they definitely were shaken by it. And I could understand other currencies. I guess, I'm still surprised that the Fed reacted as much, because the Fed has such an advantage [with the] global network effects with the dollar.

Beckworth: It just seems like [there’s] no need to lose sleep. In fact, you cite in your book, Governor Chris Waller— He had a speech where he made this very point. He goes, "What exactly is a CBDC going to do that the dollar doesn't already do?" In any event, we'll move on from the history of this and why we got so excited about CBDCs in the first place. Now, let's go and define CBDCs. We've already touched on that, but walk through these three definitions that you give in your book for types of CBDCs.

Breaking Down the Three Types of CBDCs

Anthony: The three main types of CBDCs, like we already said— The first one that most people think of is what's [called] a retail CBDC. So, that's a CBDC designed for you and I to use in shops on the street, in a retail setting. We can pass it between each other. We can spend it at shops. We can send it to friends. The second most common type that people talk about is a wholesale CBDC, and that's really for the back-end plumbing of the financial system, something for banks to transfer between one another, as you would think with wholesale payments. It's a business-to-business type relationship. But then there's this third model, that the Fed didn't invent but popularized, which is the intermediated CBDC. And that's when you blur the lines between the two.

Anthony: So, you would have banks that would be in charge of it, except it wouldn't be for just their back end. Rather, it would be for us to make payments. So, they almost become this sort of custodian of sorts. It's still the liability of the Federal Reserve, or the central bank in whatever country it's happening, but the bank is going to be in the middle there, in effectuating the payments as they go through. And that's really been popularized as a type of way to not, for lack of a better word, stress out the people working in finance, as seeing their jobs on the line. I've tried to warn folks that it's not quite so simple, that there is very much still a threat to financial stability, and through the strength of our financial system, if you have an intermediated CBDC. But I will say that it is lessened compared to a retail CBDC.

Beckworth: It's interesting to think through this case of an intermediated CBDC, and I can hear proponents of it saying that, well, in reality, even regular deposits are implicitly backed by the Fed and the FDIC. This is just taking it one step further, which is fair. But for reasons that you outline in your book, maybe we don't want to take the next step for privacy reasons and such. If we did end up in that world, would it look much different than where we are today? We would just reclassify a bunch of bank accounts. So, a bunch of accounts at Bank of America would now be CBDC versus Bank of America accounts? So, Bank of America would still use these to fund itself, to create loans. Would it be fundamentally different or just window dressing?

Anthony: Unfortunately, there's a lot of window dressing with CBDCs, in general, but this is one place where you do have a fundamental problem, and it really depends on what they're going to do with that CBDC. So, because it's a direct liability of the central bank, if Bank of America is going to hold it for you, [then] they cannot use it to fund their loans. They cannot use it in that capacity. Now, they can get around that, because a common argument that I receive in response to pointing this out is, well, what about cash? That's a liability. And so, when you're transforming it into a deposit, you can switch it, in that status, and now, back to a CBDC, though, where that matters.

Anthony: If the bank is going to transfer it into a deposit account, and then you're just using a deposit account, what is the point of having a CBDC at all, though? We're just back to where we were before. If we keep it as a CBDC, though, and keep it as a direct liability of the Federal Reserve, where they're just watching over the wallet, then they can't use it to fund loans, and they can't use it for any other banking activity. So then, they're stuck in losing out on what is normally the full deposit base, and you have all of the same concerns that you would have with a typical retail CBDC. One of the ways that I think I describe it in the book is that an intermediated CBDC kind of just boils down to a retail CBDC with extra steps, and, unfortunately, that's not really how we want to rebuild our financial system, if that's how we're going to do it.

Beckworth: Yes, okay. On retail CBDC— and some of this that I'm bringing up now comes up later in your book, so we may jump around a bit. But one of the challenges of a retail CBDC is that people would like to have a digital equivalent of cash. Cash is great because it's anonymous. You can change hands. Now, as you also outline in your book, the government really has cracked down on any large cash transactions. So, maybe it's not as ideal as we think it is, in practice, but they'd like it to be a digital equivalent. However, as you also note in your book, most officials have said that there is no way on God's green earth that we're going to allow a digital CBDC to be anything like cash when it comes to privacy, because then, all of those money launderers, all of those criminals would just have a field day.

Beckworth: So, it's one thing to launder, for example, $1 million in physical cash. Well, man, you've got big bags that you've got to move, but if you had digital money, it would be so much easier to launder that money quickly. And so, they don't want to deal with it, and I understand that, but the thing is, you can't do retail CBDC, it sounds like, according to these people, unless they have full access to your information. There is no safe way to do it. And I bring this up because there have been some people who've advocated for a CBDC that preserves the privacy, that preserves the anonymous nature of physical cash. So, let's just say for the sake of argument, we do come out with such a thing. I think the point you raise in your book is, well, how long would that last?

The Challenges and Drawbacks of CBDCs

Anthony: Yes, and I hate to be so pessimistic. I do love, I'll say, that people are working to try to figure this out, but I think that there's a fundamental distinction between what can be done, what should be done, and what will be done, and when you throw in the politics of everything, it really makes a mess of things. So, if we assume that, somehow, the perfect solution gets put on the table and it protects everyone's privacy, absolutely stunningly— Sadly, the way history has gone, not just in the United States, but around the world, is that it only takes one crisis for that to be thrown awry. We can look to, here in this country, the Patriot Act, as being a clear example of how a terrible crisis happens and we lose tangible freedoms in response to that.

Anthony: And I really worry about that as well, because I'm really not confident that we could ever reach that perfect entry point to where the best case scenario is just waiting. A good example of that is that, just this week, out of the European Central Bank— I think it was either a blog or an article that was published where the European Central Bank said, "We want to create a truly private digital euro, a truly private CBDC for the Euro area." And there was a great line in it that said, “You want to have your transactions private. The amount you send, who you're sending it to, that it's even you sending it, you want that private, [and] so do we.” That's great, that's amazing.

Anthony: Then, you read two lines later where they say, "However, ultimately, this is going to be a decision that is out of our hands. It's up to the legislators to figure this out, how they're going to balance the Know Your Customer, KYC, and the Anti-Money Laundering, or AML, regulations with consumer privacy." That's really what it boils down to, is that they say that they're going to offer this great thing, but it's kind of out of their hands, and you can see that here in the United States as well. Look at any time a bill is introduced, and then look at what the end product was. Look at how much it changes along the way. And that's what I very much worry about when it comes to ideas of offering or proposing a— as I call it in the book— a sort of privacy-minded CBDC, is that what we hand off to Congress is probably not going to be what Congress hands off to the American people.

Beckworth: So, you have a whole chapter on losing more financial privacy with the CBDC, and I want to go there for a bit. I want to come back to the wholesale CBDC later, but since we're talking about the privacy issue— and I want to highlight one thing, and then I'll turn it over to you, but even with physical cash, again, we really don't have as much privacy as we think we do. Yes, some small transactions, we can do it, but what is the dollar amount? If I go to the bank and I have a certain dollar [amount], is it $10,000? They have to report it, right?

Anthony: Yes.

Beckworth: Then, also, [with] any really large cash withdrawal or deposit, if [there is] any suspicion at all, no matter what the size, they're supposed to look into it and ask questions and report to the government. You mentioned some ridiculously large number of— millions of reports that have been filed by banks, know your customer. So, even though we worry about losing physical cash and all that it offers us, it already has lost a lot of its privileges and benefits.

Anthony: Yes. This was something that Naomi Brockwell and I wrote about recently, and that's that we really don't have financial privacy in the United States. We have this illusion of privacy. We think that everything is hidden away, we're confidential, and that's just not how it works. And cash is another element of this, because, like you said, anytime you make a $10,000 or more transaction with your bank, with cash, they're reporting that to the federal government. But it's actually a little bit worse than that, because, sure, you might think, okay, well, $10,000 is a lot of money. Except, they don't just report you for crossing that threshold. They'll also file a different type of report if you get near the threshold.

Anthony: And so, they'll file a report for almost crossing it or getting in the general vicinity of it. And so, it almost makes one wonder, why is there even a threshold at all? They're handing off so much of this. In 2022, it was about 26 million reports in total for people just making those transactions or making transactions that the bank found to be unusual. For instance, they weren't sure where you got the money, or they weren't sure what you were doing with it afterwards. None of these are really smoking guns. When you really look to things like suspected terrorism, human trafficking, or any other truly heinous crime, those are down at the bottom of the list for the reasons why these reports are filed.

Beckworth: You mentioned in your book that there was a proposal in 2021 for any transaction above $600. That sounds like it was shot down, but what was really striking— besides the fact that it seems like a really small number for the government to be checking in on you— is the justification, I believe it was the Treasury Department gave. It was really shocking. So, share with the listeners, what did the Treasury Department say when it was pushed by Congress and the public about lowering this threshold to $600?

Anthony: So, this really was just the epitome of saying the quiet part out loud. When everybody got upset about this proposal, and people were calling their members of Congress, and people were calling even the Department of the Treasury to say, “What is going on here?” The Treasury came out with a statement to say, "Well, we actually collect a lot of information on Americans and a lot of it comes from your W-2. A lot of it we can just see by default, and a lot of it gets reported to us. So, this really isn't that big of a deal." And, oh my gosh, I really don't even know where to start with making a statement like that to really say that you shouldn't be upset about losing privacy because you never had it to begin with. That is a truly shocking statement.

Anthony: I give them credit for saying it a little smoother than that, but that was effectively what was on the table, and I think that that was a major wake up call for a lot of Americans, to see, “Wait, this isn't quite how I thought all of this worked. I thought they needed a warrant for that. I thought they had to go to a judge before they could get my information.” Now, they're seeing, “Wait, no, they can just change the number with their pen, [and] make it go from a $10,000 threshold to $600.” But then there was another component that would have taken it from a $20,000 threshold, for a separate type of transaction, down to $600. And when you have jumps like that, people take notice.

Beckworth: To be clear, this proposal— it was to change the minimum amount that banks have to report from $10,000, and that's huge. You also highlight in your book that that $10,000 was first passed in the '70s. So, on an inflation adjusted basis, it's really low. I think that the value, in today's terms, would be around $75,000. So, they haven't kept up with inflation. There's a lot of, already, shortfalls of privacy, and, I think, if anyone's being honest with themselves, we have been tracked through our phones. We give up a lot of privileges. So, at least this illusion— let's preserve the illusion. But more than the illusion, you do highlight a little buffer. There is some difference between going all-in CBDC and the existing shortfalls of privacy. So, walk us through that.

The Buffer Between CBDCs and Privacy

Anthony: This buffer is not ideal. This is not what I want at all, but it's there. It's at least something. And that is, if a federal agency wants your information, they need to at least call up to find out what bank you're at and make sure they go through all of the proper paperwork. They're at least adhering to the Right to Financial Privacy Act, unless, of course, they have one of the 20 exceptions to that, and then they get streamlined through. But they at least need to work with the legal team at the bank, and they're questioning the decisions and making sure only the necessary information is getting over to them, and that's something.

Anthony: But that's really why I describe a CBDC as being a capstone in financial surveillance, because where we have that little something, this is really the icing on the cake for people who favor financial surveillance. They no longer have to track down the bank or other financial institution. They no longer have to deal with private lawyers on the other side. They can have that information by default, and they can have it within arm's reach. And just to frame it a little bit differently, right now, banks are forced to report about 26 million reports to the federal government each year, somewhere in that neighborhood. You would have trillions of transactions with the government, by default, which opens the door to such a host of problems. But just on its face, from a financial privacy standpoint, that is not what we should want the default condition to be.

Beckworth: Yes, we'll come back to this point a little bit later when we talk about potential problems that it would create for the Fed. If the Fed is this repository of trillions and trillions and trillions of records of private individuals, it's easy to imagine how it could get politicized even more. The FBI [or the] DOJ wants to tap into those records, or some other organization. So, we'll come back to that. It would really, I think, undermine the Fed's effectiveness by making it really susceptible to political pressure. But just to park here for another minute or so on the privacy issues— So, my colleague, Brian Knight, has done work surrounding January 6th. So, to be very clear, January 6th was awful. I see it as an insurrection.

Beckworth: It was a terrible thing that happened in our country. However, the way that the federal government responded afterwards is very troubling. As he has shown— and he testified before Congress, and we don't know all of the details— but based on what we do know is that the government went and searched anyone who'd been visiting the DC area around January 6th, looked up all of their bank transactions, and looked up all of their purchases, without a warrant.

Anthony: Yes, that's exactly right.

Beckworth: And if you had bought religious books at Amazon, if you bought guns— there's a certain criteria that they went through, without a warrant, looking at, also, your bank accounts. That is troubling that they could so easily do that. So, if there's anything, I guess, that I would leave here for our listeners is that we should be troubled, without even going to a CBDC, that this is the case, and my hope is that the CBDC discussion, if nothing else, awakens an interest to deal with the Bank Secrecy Act, Know Your Customer, AML, all of those things. So maybe, just briefly, is there any interest in Congress to address some of those pervasive laws that already encroach and take away our privacy?

Anthony: There is some interest, I'll say. There are members of Congress who have been getting more involved. Just off the top of my head, Representative John Rose and Senator Mike Lee both come to mind. But one of the problems here is that a lot of these reports are confidential, so people never find out that they're filed on them, and a lot of this is kind of complicated and in the weeds, so people don't know that it's going on. And so, they're not calling members and saying, “Hey, stand up for my rights, stand up for the Constitution.” And without that type of pressure, well, there's other more important things. Unfortunately, that's been the case for a long time, but you're absolutely right that the CBDC conversation has ignited that in a big way. So, I do hope that you're right that this changes over time.

Beckworth: In short, ignorance is bliss when it comes to privacy on financial issues. Okay, well, we can hope that people will be more cognizant and aware, but I get your point. It's technical, it’s in the weeds, and most people may not know that their transactions are being reported to the federal government. I want to go back, now, to this wholesale version of a CBDC. In the book, you say that, basically, that's a nothingburger. It's like a little bit too much, too late. Tell me why that's the case. Why should we not think that it's where central banks are headed with CBDCs?

Wholesale CBDCs, Real-time Payments, and Cross-border Payments

Anthony: Well, it's where some central banks are headed with CBDCs. There are some interesting projects, for instance, in France and Italy. They're looking at wholesale CBDCs pretty heavily, and I can't recall exactly where, but I believe that in Southeast Asia, there's one country that is actually looking at a wholesale CBDC as a sort of stepping stone to get to a retail CBDC. The problem is, when we've already updated the infrastructure behind our payments system, it really calls into question why we need to do that all over again from scratch. A clear case in point is that all of the developments that have been happening, both internationally and domestically, are improving the speed of payments.

Anthony: We have a FedNow and a FedFaster, maybe, would kind of be the distinction, and that's where I'll give him credit. Coming from the Cato Institute, I'm often criticizing the Federal Reserve, but Chair Powell had said it correctly when he pointed out that Congress asked him, “Are we going to do a wholesale CBDC?” He said, “Well, we started looking into it and it kind of looks a lot like what we've been doing and what we've been setting up and all of the technical changes we've been making on the back end.” So, it makes me ask, why would we do this in the first place? And that's where I think it kind of sits for most advanced economies. Elsewhere, it might make more sense that that is the technical decision that's needed. I'm not entirely convinced, but if you're talking about somewhere that is even further behind than the United States was a decade ago, then it might be a different set of costs and benefits.

Beckworth: Okay. So, in the book, you note that the real-time payments, the private sector's real-time payments system, it's run by the big banks. [Then there is] FedNow, which is also a real-time payment system, and of course, there's an interesting story there. The Fed encouraged the banks to make the real-time payments system, and then suddenly, they reappeared. As George Selgin has noted on the show, having two of these big utility providers— essentially, they may end up both being white elephants, because you've got to have economies of scale. It's very costly to run this. And so, it may be that the Fed just shot itself in the foot by having two of them.

Beckworth: So, we'll see what happens. Nonetheless, they do provide a mechanism for instant payments, which [is an area where] the US has been behind other countries. You also mention stablecoins, the private sector version or alternative. Finally, [there] is Fedwire, and you note that, why can't that run 24/7? In fact, you have a quote in your book where Chair Powell is asked about this, and he goes, "I'm not sure why we are not 24/7," when he was questioned before Congress in March 2023. So, do you have any idea why we don't have that running 24/7? It seems like it could be a technological issue, at best.

Anthony: I have to say, this probably comes off [as] pessimistic, but from what I've seen, I feel like this is a realistic take. I think that the Federal Reserve weighed the decision between, “We can either update Fedwire and have it run 24/7/365, or we can make a brand-new system with FedNow.” If you just updated Fedwire, then the political movement to get— and not political in the traditional sense, but the inertia behind it— is kind of lost for FedNow, because it's like, “Well, we already fixed this problem.”

Anthony: And the more I look at it, the more that seems to be the case, because the Federal Reserve spent a decade almost thinking about this, or at least claiming that they were thinking about updating Fedwire. And so, for Chair Powell to say before Congress— I think it was Representative French Hill questioning him at the time— to say that, “I don't really know why we're not there,” [is] a hard answer for me to swallow. I try to be kind, and I try to be understanding, but that's one where it just doesn't sound quite right.

Beckworth: Yes, I wrote on the side of my page there, where it's listed, and I put, "Wow, he does not know why it can't run 24/7." Now, the case for the wholesale CBDC, as you noted, may not be as strong because of these alternative, at least domestic, quick payment systems. So, I think that we talked about this last time. To me, the most compelling argument for a CBDC would be cross-border payments. That seems to be an area where we don't do it very well. Is that fair, that cross-border payments is an area where we need improvement, or is that just an argument that some folks are making?

Anthony: It is an area [where] we need improvement, but I will say that I have a similar skepticism of this argument as well. In fact, I was a little upset that it really became popular when I sealed the deal on the book, and I'm already thinking about a second edition to add this in. With cross-border [payments], people are absolutely right that it costs a lot of money to send relatively small payments, and it takes a long time, and it's a very fragmented system. You sometimes have to bounce between multiple service providers to get something where it's going, unless it's a tried-and-true or common route. So, people are absolutely right that there needs to be an improvement here.

Anthony: I am very skeptical that a CBDC is going to be a perfect improvement, and part of the reason for that skepticism is that much of the challenge here is based on policy choices. This really gets us back to financial privacy. A lot of the delays taking place are coming out of the AML or the anti-money laundering requirements, and this was something that— I can't remember the precise number offhand, but international banks and, also, remittance providers were surveyed on this, to ask, where are you having the biggest trouble? Where is the holdup? Why can't you get this money where it needs to go?

Anthony: And time and time again, they were saying that it's the regulatory burden. That is what's slowing them down. And don't get me wrong, it's completely unacceptable, in this world, that it's faster to take $3,000 in cash by plane from DC to London than it is to send it through the banking system. But those are choices that our legislators have made, and again, much like with privacy, I think this is a moment where we need to reevaluate, are those the right choices? Are those costs worth it? And also, are the costs that are in the current system, are those enough— maintaining those that is— are those enough to justify having this creation?

Beckworth: So, you're saying that the problems and challenges with cross-border payments are self-inflicted wounds?

Anthony: Unfortunately.

Beckworth: So, let me give one other example that I'm aware of, of a potential solution involving CBDC. So, the Bank for International Settlements has been working on this mBridge, which is a number of Southeast Asian countries, and I think China is a part of it now. But my understanding, correct me if I'm wrong, is that it's actually wholesale just between central banks, so it wouldn't be like private people across nations. So, it may be a very limited scope. It would use the distributed ledger and tokenization. So, it sounds like this CBDC version would be very similar to something you might get from the crypto world. It's distributed ledger, tokenization. So, what reservations would you have with that version of a wholesale CBDC?

Anthony: So, the big problem on that front, just to flag it from the onset, is that it is very much pulling threads out of the cryptocurrency camp. However, it's still very different. Unlike an open blockchain or truly distributed ledger, where people can scrutinize it and evaluate it and it has that transparency that people have come to know in the cryptocurrency space, these are privately operated blockchains. So, it would be reserved only to the financial institutions that have been given the green light. Another way to think about this is that it's almost like master accounts, in that way.

Anthony: Only the people who have been approved for it are allowed to have accounts with the Federal Reserve. And so, my big reservations there are that there's just not enough information out about how mBridge functions in comparison. When I look at it, the two things that really stand out to me that are missing are, what does it cost to operate this, for each individual country involved? And then, also, what is it going to cost in terms of getting it up to scale, if we are going to replace the traditional system? And until I have those two answers, I'm not comfortable weighing either for or against it too heavily, because those are the largest deciders.

Beckworth: Okay. But even if it was a system that worked as the proponents claim, it would still be very narrow, right? It wouldn't be like, I guess, the version of CBDC that some have in mind. It would be between central banks. And I guess the question I would have is then, how is it different than the current currency swap line, say, the Fed has with the ECB? And maybe it's among other banks outside of the dollar's orbit. So, that might be part of the question there. Well, let's move on. You have multiple chapters in your book. We don't have time to do all of them, but let's move on to how CBDCs could destabilize banks and cryptocurrencies themselves.

The Potential Destabilizing Effects of CBDCs

Anthony: Yes. So, this is something that we touched on early on. I'll say that on the banking side, quickly, that this is that distinction of having a digital direct liability and making that decision between, are you truly holding a CBDC or has it been swapped out for how we understand deposits now? To the extent that you are holding it, those are fewer dollars for the deposit base, and fewer dollars that could be used to fund loans, and, in effect, it ends up pushing up the price of credit. On the cryptocurrency side, this is something that's also really interesting, because it's much different.

Anthony: Whereas central banks have tried to massage their way through the traditional financial sector, they've kind of taken a very loud approach towards cryptocurrency, where CBDCs have been explicitly charged with competing with cryptocurrency, if not knocking it out completely. This was something that— I may be misquoting the name, so take it with a grain of salt, but I believe it was Daleep Singh from the Biden administration, [who] told Congress at one point, “This is why we want a digital dollar, or a US CBDC, is because the more CBDC we can get out there, the more we can crowd out and push out people from using cryptocurrency.” And that's what we've seen as a hand-in-hand guide of countries around the world introducing CBDCs with one hand, and a ban on cryptocurrency with the other. That's what happened in the lead up to China introducing its CBDC, the lead up to Nigeria introducing its CBDC. The same is true in India and other places as well.

Beckworth: So, the government is trying to maximize its revenues that it can pull in. In the case of these assets, seigniorage is trying to pull in any income that it could earn off of money creation and not let it go to the private sector. So, that would undermine the crypto world. How would CBDC potentially weaken cybersecurity?

Anthony: Well, this gets back to when we were talking about those trillions of transactions. Think about— In fact, I'll say to anyone listening that has not done this before, go look at your bank account, and look at your latest statement, and just look through the transactions. Think to yourself, who is this person? What does this person do? You're going to start seeing, probably, your paycheck, your local eateries, where you get gas, maybe tolls along the road, and slowly, you're going to start seeing this picture painted of who you are.

Anthony: And this isn't like Facebook, where you can say, "Oh, yes, I was just hanging out with Dwayne ‘The Rock’ Johnson," because you got that one second picture. Really, this is putting your money where your mouth is. These are revealed preferences. And so, we have trillions of revealed preferences in one pot, and that is a huge target. I cannot emphasize that enough. I do not endorse or support the idea or recommend the idea of targeting the US government. That is a bad idea no matter who you are.

Anthony: However, for people who are this country's enemies, they're going to see that pot, and they're going to say, "Well, getting into a beef with the US government was a bad idea before, too, but the reward, now, is that much higher." And that's a very serious problem, especially when you look at [how] the Federal Reserve, the Securities and Exchange Commission, the Financial Crimes Enforcement Network, and pretty much every federal agency that is involved with financial information, has had either a leak or a breach. So, this is very much on the table, and it's a very big problem.

Beckworth: It's interesting that you bring up a leak. So, the IRS, for example, had a leak on President Trump's taxes, and somebody did that— naughty, naughty— but what you're saying is, even more so if the Fed had everyone's transactions. Now, to be fair, the CBDC advocate might say, "Well, they won't have all transactions. Maybe not everyone will use the CBDC." But the potential is there. The potential is far more records. It could either be hacked or it could be leaked.

Anthony: Yes.

Beckworth: That's the potential danger. So, we want to minimize the opportunity for things to go wrong. Alright, I want to move into, now, the challenges that a CBDC would make for monetary policy. This is Macro Musings. We talk about the Fed a lot. We talk about targets a lot. And let's talk about how CBDCs would maybe make its job easier, but as you outline in your book, how it could also make it tougher. What are the pros and cons here?

The Pros and Cons of a CBDC for the Fed

Anthony: Well, I have to give you credit, and if you didn't see it— although, I know that you actually went through all of the footnotes. So, to all of the readers out there, I'll say that you will find David's name in the footnotes here, because I gave him credit for really pushing me to jump on this idea the last time we talked together. I had it rumbling in my mind, but it was really you that had poured fuel on the fire to make it happen. So, thank you for that, and it's something that really hasn't gotten enough conversation, is that this is going to make the job on central bankers much harder, if you're having a retail CBDC where everybody is opening accounts.

Anthony: One way to just think about it quickly offhand is that the Federal Reserve Board has somewhere around 2,000 employees. Tack on the regionals, [and] you're up to about 19,000 employees. The Bank of Americas of the world have 200,000 employees. It's almost hard to get my mind around that. Every time I look at it, I'm still shocked by that, but that's a huge change. The Treasury, if you want to involve them, [has] somewhere in the 90,000 range. Granted, 80% of that is just IRS. But the point being, if you wanted to onboard every American, that is a huge challenge, just from an operational perspective. Just having the customer service, the technical support, the administrative levers to keep everyone in line— that's a huge problem.

Anthony: And at the end of the day, that makes one wonder, do we really want all of the resources going there, when the decisions are supposed to be about shaping monetary policy, and those decisions are hard enough to make or get right as [it] is? Is that really what the Fed's priority should be? And just one small anecdote that I'll add in on this, is that it almost is hard to believe. I saw just the other day that the International Monetary Fund, or the IMF, had put out a— I believe it was a report showing that it was kind of stressing itself out with all of its work on CBDCs. It was pushing the limits of its budget and its workforce. And so, they have to decide whether to scale back, drop other programs, or expand further just to keep up with them promoting CBDCs.

Beckworth: Yes, we don't want to see a central bank— at least I don't want to see a central bank get so large and so important that it sets itself up to be politicized. Again, I stress this repeatedly on the show. If you set the Fed up to be the warehouse for people's deposits, it's going to be hard not to become politicized. It's going to become, probably, the most important institution, if it's not already, but even more so, right? Just think. The more important a federal agency gets, the more it gets grilled before Congress, the more it's on the news.

Beckworth: I think that's the last thing someone like Jay Powell wants, is that. I would add that, on top of that, [there is] the operating cost, right? You've noted that it could get very expensive, especially with the floor system. It just gets more and more costly to run it. And then, I would note another challenge— and this is something that Bill Nelson and I have talked about— but the ability to see big swings between the liability side of the Fed's balance sheet. So, let's say that we have a limited amount of CBDCs, so, maybe this intermediated case, or maybe not everyone adopts a retail CBDC. So, some folks have it, some folks don't, but there's a panic. There would be a mass dash for CBDCs, and you would see reserves fall through the floor.

Beckworth: You would see CBDCs go up on the liability side of the Fed's balance sheet, and that would create problems in the financial system. It would also create problems for the Fed and how it manages itself. And so, Bill Nelson gives the example of 2020. It was a dash for cash. But in that case, it was a dash for bank deposits, money market funds, and some Treasury bills, but that would have been all dash for CBDC. You've seen big swings, and, again, when you see big swings in reserves, what happens is that interest rates shoot through the roof.

Beckworth: Maybe a better example would be the repo crisis [in] 2019, and that was just a small amount compared to like March of 2020. [During] the repo crisis, there was a swing in reserves due to corporate taxes, and to some other things happening, and repo rates shot through the roof. And Bill says that, look, if you have a panic, and everyone races into the CBDCs, [and] reserves drop precipitously, you're going to see a spike in rates. The Fed loses control, at least temporarily, of interest rates. Then, the Fed has to step in and do large-scale asset purchases. And that's the other thing.

Beckworth: If, in fact, you did have a massive migration from the commercial banking system to the Fed— so, not just a panic, but a permanent increase on the liability side— guess what? A permanent increase on the asset side, so the Fed would have to buy up a bunch of Treasuries, [create a] bigger footprint. This story is just getting worse and worse, so maybe we should stop there and just say, look, there's a lot of challenges, and I think that the Fed is aware of this. [There are] a lot of challenges to running a central bank if the public really goes all in, in CBDC. Now, let me just be fair and give the other side.

Beckworth: The other side would say, "Well, now the Fed could perfectly control interest rates if the CBDC had rates on it. Then, it could even maybe make negative rates in a zero lower bound environment." That's one argument given. The other one is that they'd have better information. But both of those can be flipped on its head. Like, I don't want the Fed— the very point we talked about— I don't want the Fed to know everything about me. So, yes, it has better information, but also it knows everything that we're doing. Then, if it does start doing negative rates, that could be very costly to the Fed, too.

Beckworth: And many of the advocates would say, "We don't want to go that far." In fact, I wanted to bring this up, because this is someone who's been championing CBDC. This is Ulrich Bindseil, and I know him because he's actually been on the podcast, and [he’s] a co-author. [They] have a recent paper called, *Macroeconomic Modeling of CBDC: A Critical Review,* and they go through the literature and respond to people like you and others who are critical. And they say, "Whoa, whoa, slow down, cowboys. Look, what we are proposing, and what many central banks are proposing, are limited amounts. So, we would have a quote on how many CBDCs. We would guarantee that there'd be no remuneration, [and] there'd be no interest to CBDC. We would guarantee that. It'd be limited to domestic sources." So, all of these promises up front, but I think I know what your response to that would be. What would you say to Ulrich Bindseil with all of these protections?

Responding to Pro-CBDC Arguments

Anthony: I would say that I appreciate the thought, but if the tradeoff is between something that's so great that everyone wants it, and it's going to undermine the system, and cause either a flight of deposits or a full-blown crisis, and something that is restricted, with caps on how much you can own, how much you can sell, where you can sell it, where you can use it, or any of the like, then it's really not the tradeoff that I want to make. I don't want to have a tradeoff between something so good that it ruins the entire world, and something so bad that no one wants to use it.

Anthony: I give him credit. This is a tough position to be in, but I see the tradeoff as being quite a clear question. If those are the two options, [then] I don't want either of the options. I don't want to disrupt the system or waste the resources on the project, and I think that's something that some central bankers out there are coming to terms with, because many are looking at, "Alright, how do we remove features? How do we remove everything that this was supposed to do, before we realized all of the concerns people had?" And if we end up with something that really isn't that different— again, I'm just asking myself--

Beckworth: Why do it? That's interesting. So, you have seen this trend, too, that many of the central banks who have been talking about CBDC are now saying, "Let's guard ourselves, let's be cautious, only so many CBDCs per person, only in our country."

Anthony: Oh, yes. In Western governments, this is such an amazing divide that has come up in recent years in response to criticism from myself and others. One of them is that, in a lot of countries— or, for example, in the Euro area, or in the United States, central bankers say, "A CBDC will not replace cash. It will not happen. Don't worry. We're not coming for your cash." In other areas, like the Caribbean, or in African countries, or Pacific Island countries, they say quite loudly, "We want a CBDC to replace cash. That is the purpose. We want to get rid of cash, and we'll use this instead."

Anthony: And Western countries had similar effects, but largely quieted down when there started to be backlash. The same way that they started to move away from saying, "We'll pay interest on this, and you can have as much as you want." That got turned into no interest and account caps when the banking institutions started to say, "Whoa, what are you all doing? This is what we do. Why are you stepping in and taking away our jobs?" That's when they really backed off it as well. However, there's exceptions to that as well.

Anthony: The [Bank of Israel’s] Andrew Abir had specifically said, "We are creating a CBDC to compete with the private banks, and one of the ways we will do that is through interest rates and having interest paid on CBDCs." So, there's absolutely been this kind of shift away. It was almost like there was a wide expanse of options up through 2019, 2020, and then, since then, as people have become more and more concerned, those options have been refined, and further refined, and further refined, and a lot of the CBDCs on the table— they really just make you scratch your head, because they don't offer anything really novel or different from the existing system, and they really aren't in a position to take over the economy. And so, it really just makes you wonder, what is the point of all of this? And that's not a decision that I think should be made by most economies.

Beckworth: Yes. Well, it sounds like, to me, that we may end up in a place where the only thing that we do have is some version of a wholesale CBDC that somehow addresses cross-border payments. And you would come back and say, "Well, we can do that with stablecoins, some other crypto private technology." I guess, the other thing I would say to Ulrich Bindseil— and, by the way, he's really good on the operating system. We'll provide a link to the show where we had him on. I would say to him that, in a panic, in a crisis, how robust would those controls be? And I think that people might drop them. I think that it's a crisis, [so], okay, everyone can run into the central bank. We're going to increase the cap from $10,000 per person to $20,000. I'm making some numbers up here. That, to me, would be the other problem with this.

Anthony: That also gets back to the point that things are complicated. When you have politics involved, the best laid plans work out in models with agents. When we have this very, very messy world of ours, and we have the even somehow messier politics involved, it can quickly go awry. And even if it would have worked perfect on paper, you throw in a couple of wild cards— and we sure have enough of those these days— it'll quickly get sent in a very different direction.

Beckworth: Okay, well, in the time we have left, then, where do you want this to go? What would you recommend in terms of making progress in the right direction? And where do you think it will go?

Recommendations for the Future of CBDCs

Anthony: So, in the right direction— I think the biggest thing that I want, when I look at all of this, is that I want more people to be involved. I want more people to know what's going on here, both at home and abroad, because we're talking about reinventing the money in everybody's pockets, effectively. This is something that truly does affect everyone, and I think that's something that people should have a voice in. It's something that people should at least be aware of, when they're thinking about who they want to support. And I hate to be pessimistic, but I do think that, before that happens, we are going to see more CBDCs launched in more countries, and more issues come to the surface.

Anthony: And it's really unfortunate, because when you say it in a sentence like that, it sounds very clean. It sounds like, "Oh, yes, there were some issues in some far-off place, with some weird new monetary technology." But oftentimes, we're talking about real people, with real lives, just trying to live about their days. To share a brief story, I can't help but think about when the government created a cash shortage in Nigeria to try to push people into the CBDC, and central bank governor, Godwin Emefiele, celebrated it as a success, to say, "This was the currency of choice. This is what people went to." And people were rioting in the streets, people were in lines around the block, outside of banks. This was not an enjoyable experience for anyone, and it's really unfortunate that those things seem to need to happen before people wake up to the issues at hand. But I'm hopeful that it won't take at least too many issues before people really take notice, en masse.

Beckworth: Well, with that, our time is up. Our guest today has been Nicholas Anthony. Thank you so much for coming on the program.

Anthony: Thank you for having me, David. It's always a joy.