What most proponents of central bank digital currency envision isn’t a currency that would circulate peer‐to‐peer as dollar bills or bitcoins do without the banking system’s knowledge. Rather, most favor a model in which the Fed would provide households and nonbank businesses with transaction accounts on its own books, giving government the ability to track all payments and eliminating the anonymity provided by physical cash today.
Advocates say a national digital currency would make retail payments almost instantaneous, costless and secure, and safeguard the Fed’s ability to conduct monetary policy. These claims are dubious, and there are easier ways to speed up payments in the U.S. The Fed could facilitate faster check settlement by expanding the operating hours of the settlement services it provides to commercial banks, a move favored by the National Automated Clearing House Association.
A central bank retail‐account system cannot be costless if it hopes to provide the level of customer service that consumers expect. The Fed deals only with commercial banks, the U.S. Treasury and other central banks, and knows only how to process payments at the wholesale level. To match the level of service provided by commercial banks today, the Fed would need to invest in branch offices, ATMs, websites and phone apps, and hire tellers and service representatives to process account applications, answer customer questions and more.
Given the government’s poor record on efficiency, the likely outcome would be a system that falls short on customer service or loses money at taxpayers’ expense—or both.
Consumers also want a payment system that continually improves through innovation. Entrepreneurs have launched successful digital payment platforms like PayPal and Venmo in the U.S., Alipay and WeChat Pay in China, Paytm in India and M‐Pesa in Kenya. Private initiatives have introduced bitcoin and other cryptocurrencies. Central‐bank bureaucracies? Not so much. The central bank of Ecuador launched a retail‐account system in 2015, but the project failed to attract users due to poor design, poor marketing and lack of public trust in the system. It was terminated after three years.
Those who say the U.S. government needs to act to ensure the dollar doesn’t lose its dominance to another nation’s digital currency or a private cryptocurrency have it backward. The best way to improve the speed and convenience of dollar payments is through entrepreneurial competition, not the heavy hand of government. The dollar will reign so long as the Fed keeps the dollar inflation rate low.
Some economists are pushing a Fed retail‐account system as a way to abolish most or all paper currency with less public inconvenience and complaint. Once that happens and the public can no longer cash out, the Fed will be free to impose negative nominal interest rates on all dollar‐holders. This will improve monetary policy, they say. Some improvement.
A Fed retail‐account system also raises serious concerns about privacy because the government would be able to track where every dollar goes. Unlike private firms that encrypt customer data, the Fed as an arm of the federal government can’t be expected to protect users from surveillance. Other federal agencies—such as the Internal Revenue Service, Drug Enforcement Administration, Bureau of Alcohol, Tobacco, Firearms and Explosives, and Immigration and Customs Enforcement—would likely meet less resistance when they pressure the Fed the way they pressure commercial banks to share account information.
Finally, moving retail accounts to the Fed would diminish funds in commercial banks, shrinking the volume of growth‐enhancing small‐business loans they make. In principle, that could be avoided if the Fed agreed to auction all of its retail funds back to banks with no strings attached. But given recent history, the Fed can’t be expected to maintain a fair neutrality in credit allocation.