# The Risks of CBDCs ##### Why Central Bank Digital Currencies Shouldn’t Be Adopted February 22, 2023 • Visual Feature By [Norbert J. Michel](https://www.cato.org/people/norbert-michel) and [Nicholas Anthony](https://www.cato.org/people/nicholas-anthony) ![Digital currency concept](/sites/cato.org/files/styles/aside_3x/public/2023-02/digital-dollar-frame-min-teal-2_1.jpg?itok=TRVIq4ev) # The Risks of CBDCs ##### Why Central Bank Digital Currencies Shouldn’t Be Adopted February 22, 2023 • Visual Feature By [Norbert J. Michel](https://www.cato.org/people/norbert-michel) and [Nicholas Anthony](https://www.cato.org/people/nicholas-anthony) ![Facade of the Federal Reserve building partially covered in fog.](/sites/cato.org/files/styles/aside_3x/public/2023-02/Fed-Reserve-Fog-Transparent-BG-2.png?itok=zvszgQaW) What is a Central Bank Digital Currency? A central bank digital currency, or CBDC, is a **digital national currency**. **Like** paper dollars, a CBDC would be a liability of the Federal Reserve. **Unlike** paper dollars, it would offer neither the privacy protections nor the finality that cash provides. That direct, digital liability—a sort of **digital tether between citizens and the central bank**—makes CBDCs a radical departure from the digital dollars millions of Americans already use today. While a CBDC would not offer any unique benefits to Americans compared to existing technologies, it would pose serious risks. For example, a CBDC could **spell doom** for what little financial privacy protections remain. ![Chairman of the IMFC and Bank of Mexico Governor Agustin Carstens speaks during an IMFC press conference.](/sites/cato.org/files/styles/aside_3x/public/2023-02/Carstens-Transparent-BG-2.png?itok=jfJpY6pX) “We don’t know who’s using a $100 bill today and we don’t know who’s using a 1,000 peso bill today. The key difference with the CBDC is the central bank will have **absolute control** on the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that.” BIS General Manager Augustín Carstens Put simply, a CBDC would most likely be the **single largest assault** to financial privacy since the creation of the Bank Secrecy Act and the establishment of the third-party doctrine. The threat to freedom that a CBDC could pose is closely related to its threat to privacy. With so much data in hand, a CBDC would provide countless opportunities for the government to control citizens’ financial activity. ![Facade of the Federal Reserve building partially covered in fog.](/sites/cato.org/files/styles/aside_3x/public/2023-02/Fed-Reserve-Fog-Transparent-BG-2.png?itok=zvszgQaW) How might such financial control occur? Freezing or seizing assets Governments have long recognized that freezing someone’s financial resources is one of the most effective ways to lock them out of society. However, a CBDC could make the process **easier and faster for governments** by establishing a **direct line between citizens and the government itself.** Negative Interest Rates While interest rates are typically thought of in terms of positive rates, a CBDC could allow policymakers to also set negative rates. In effect, **a negative interest rate would result in people losing money.** Proponents argue that this strategy could be implemented to spur spending. Programmable Spending Programm- able Spending The programming capabilities of a CBDC could mean that **people would be prohibited from buying certain goods** or limited in how much they might purchase. For example, policymakers could try to curb drinking by limiting nightly alcohol purchases or prohibiting purchases for people with alcohol related offenses. ![Li Bo, deputy managing director at the International Monetary Fund, speaks via video link during the 25th Havard College China Forum.](/sites/cato.org/files/styles/aside_3x/public/2023-02/IMF-Bo-Li-Transparent-2.png?itok=L6K922Mk) “CBDC can allow government agencies and private sector players to program…targeted policy functions. By programming a CBDC, **money can be precisely targeted for what people can own** and what \[people can do.\]” IMF Deputy Managing Director Bo Li A CBDC could undermine both the foundation and future of financial markets by **reducing credit availability, disintermediating banks,** and **challenging the rise of cryptocurrency.** ![Juda Agung, Assistant Governor at the Central Bank of Indonesia, speaking.](/sites/cato.org/files/styles/aside_3x/public/2023-02/Juda-Agung-Transparent-BG_1.png?itok=Y7kOPjqL) “A CBDC would be one of the tools to **fight crypto**.” Juda Agung, Assistant Governor at the Central Bank of Indonesia Image: InfoP​ub​lik​.id Another concern is the **central storage of financial information.** Where an IRS breach puts all 331 million Americans at risk, a breach at a private financial institution would only affect a fraction of citizens—leaving customers at other banks free from harm. In short, a CBDC would **fail to offer** the benefits its proponents suggest… …**threaten** financial privacy and financial freedom… …and **undermine** the banking and cryptocurrency industries. “CBDCs would give the government virtually complete control over the monetary system… but from an individual’s perspective, a CBDC would be a historic blow to privacy and individual liberty.” -Joseph Wang, Former Federal Reserve Trader “Without doubt, a CBDC could have sinister consequences for the U.S. should the government gain granular insight into Americans’ everyday transactions, potentially directing them to favored public policies.” -Paul Jossey, Competitive Enterprise Institute “CBDCs are a nightmare for civil liberties. They put governments at the center of every transaction, giving governments visibility into financial transactions and the ability to revoke money. This is the exact opposite of the purpose of cryptocurrency technology.” -Marta Belcher, Filecoin Foundation “At some point, a CBDC that fails to provide a high degree of financial privacy will be used to monitor and censor the transactions of one’s political enemies. It is foolish to think otherwise.” -William Luther, American Institute for Economic Research “America has plenty of digital currency. Every swipe you make, you’re transacting in digital currency. Adding a new form of digital currency from the central bank does little to change the fundamental issues facing lower-income Americans.” -Aaron Klein, Brookings Institution “In authoritarian societies, central bank money in digital form could become an additional instrument of government control over citizens rather than just a convenient, safe, and stable medium of exchange.” -Eswar Prasad, Cornell “In a fully implemented CBDC system, governments could financially exclude individuals or entire groups of people with the press of a button, leaving them with nothing. Governments like the CCP could target dissidents, sexual minorities, ethnic minorities, or religious minorities. If banknotes don’t exist and access to government‐​issued digital cash is revoked, then they are truly helpless.” -Alex Gladstein, Human Rights Foundation “In other words, those calling for the rollout of a CBDC are naïve to believe that this can be done without establishing a centralized surveillance system for all financial transacting. Quite simply, even if such surveillance is not included in the \[initial\] design, it would be trivial to add it at a later stage. Once a door to surveillance is opened, it is virtually impossible to close.” -Natalie Smolenski, Bitcoin Policy Institute “Contrary to popular belief, a U.S. CBDC is not necessary to “digitize the dollar,” as the dollar is largely digital today. However, the issuance of a CBDC would fundamentally rewire our banking and financial system by changing the relationship between citizens and the Federal Reserve.” -Rob Morgan, American Bankers Association “With a CBDC, central banks would have a backdoor directly into your bank account, as well as the means to monitor every digital transaction made.” -Dante Disparte, Circle “A centrally managed, centrally controlled, Central Bank Digital Currency (CBDC) is a tool for coercion and control.” -Representative Warren Davidson (R‑OH) “The prospect of government surveillance of Americans’ individual financial transactions through a CBDC and Fed accounts raises serious privacy concerns, not to mention concerns about government control and politicization of loans, online payments, credit scores, tax compliance, federal contracts, monetary policy and the like.” -Representative Andy Barr (R‑KY) “Private stablecoin issuers have the same parochial objection that the banks do. They see CBDCs—and I think rightly so—as a potential threat.” -Representative Jim Himes (D‑CT) “A digital U.S. currency would be one of the most dangerous developments in history. When government can simply flip a switch to block all your transactions, it controls your entire life. We need a wall of separation between money and state.” -Former Representative Justin Amash (L‑MI) “We would not want a world in which the government sees, in real time, every money transfer that anyone makes with a CBDC.” -Federal Reserve Chair Jerome Powell “As I have said before, the introduction of a U.S. CBDC would come with a number of costs and risks, including cyber risk and the threat of disintermediating commercial banks, both of which could harm, rather than help, the U.S. dollar’s standing internationally.” -Federal Reserve Governor Christopher Waller Congress should prohibit the Fed and Treasury from issuing a digital national currency. CBDCs have **no place** in the American economy. It’s due to these fundamental threats to the American economy that policy analysts, industry representatives, and even government officials themselves are pushing back against CBDCs. ![Jerome Powell speaking at a Senate Banking, Housing and Urban Affairs confirmation hearing.](/sites/cato.org/files/styles/aside_3x/public/2023-02/Powell-Transparent-3_0.png?itok=kpf2BMKk) “We would not want a world in which the government sees, in real time, **every money transfer** that anyone makes with a CBDC.” Federal Reserve Chair Jerome Powell ![Natalie Smolenski of the Bitcoin Policy Institute speaking at a conference.](/sites/cato.org/files/styles/aside_3x/public/2023-02/Smolenski-Transparent-BG_0.png?itok=H4lh2xH_) “In other words, those calling for the rollout of a CBDC are naïve to believe that this can be done without establishing a centralized surveillance system for all financial transacting. Quite simply, even if such surveillance is not included in the \[initial\] design, it would be trivial to add it at a later stage. **Once a door to surveillance is opened, it is virtually impossible to close.”** Natalie Smolenski, Bitcoin Policy Institute “America has plenty of digital currency. Every swipe you make, you’re transacting in digital currency. Adding a new form of digital currency from the central bank does little to change the fundamental issues facing lower‐​income Americans.” Aaron Klein, Brookings Institution “Without doubt, a CBDC could have sinister consequences for the U.S. should the government gain granular insight into Americans’ everyday transactions, potentially directing them to favored public policies.” Paul Jossey, Competitive Enterprise Institute “At some point, a CBDC that fails to provide a high degree of financial privacy will be used to monitor and censor the transactions of one’s political enemies. It is foolish to think otherwise.” William Luther, American Institute for Economic Research “In authoritarian societies, central bank money in digital form could become an additional instrument of government control over citizens rather than just a convenient, safe, and stable medium of exchange.” Eswar Prasad, Cornell “In a fully implemented CBDC system, governments could financially exclude individuals or entire groups of people with the press of a button, leaving them with nothing. Governments like the CCP could target dissidents, sexual minorities, ethnic minorities, or religious minorities. If banknotes don’t exist and access to government‐​issued digital cash is revoked, then they are truly helpless.” Alex Gladstein, Human Rights Foundation “A central bank digital currency is not simply paper currency in digital form: its adoption would have profound consequences for the U.S. financial system and economy.” Gregory Baer, Bank Policy Institute “While there are no doubt opportunities for improvement, we believe most, if not all, \[of these opportunities\] can be addressed by innovations in the current financial services framework and through continued public‐​private partnerships, without the introduction of a novel digital currency that could destabilize the system.” Madison Rose, Credit Union National Association “Contrary to popular belief, a U.S. CBDC is not necessary to ‘digitize the dollar,’ as the dollar is largely digital today. However, the issuance of a CBDC would fundamentally rewire our banking and financial system by changing the relationship between citizens and the Federal Reserve.” Rob Morgan, American Bankers Association “\[The\] creation of a CBDC will introduce significant privacy and cybersecurity risks into the nation’s monetary system and disrupt the stability of America’s banking system.” Deborah Matthews Phillips, ICBA “With a CBDC, central banks would have a backdoor directly into your bank account, as well as the means to monitor every digital transaction made.” Dante Disparte, Circle “CBDCs are a nightmare for civil liberties. They put governments at the center of every transaction, giving governments visibility into financial transactions and the ability to revoke money. This is the exact opposite of the purpose of cryptocurrency technology.” Marta Belcher, Filecoin Foundation ![House Majority Whip Tom Emmer (R-MN) speaks during a news conference at the U.S. Capitol.](/sites/cato.org/files/styles/aside_3x/public/2023-02/Rep-Tom-Emmer-Transparent-BG-2.png?itok=XK9rd84u) “Not only would this CBDC model centralize Americans’ financial information, leaving it vulnerable to attack, but it could also be used as a **surveillance tool** that Americans should never tolerate from their own government.” Representative Tom Emmer (R‑MN) “\[Private stablecoin issuers have the same\] parochial objection that the banks do. They see CBDCs—and I think rightly so—as a potential threat.” Representative Jim Himes (D‑CT) “A CBDC would allow the government to spy on us. Congress needs to \[stop\] the Fed from developing a CBDC now!” Senator Ted Cruz (R‑TX) “A centrally managed, centrally controlled, Central Bank Digital Currency (CBDC) is a tool for coercion and control.” Representative Warren Davidson (R‑OH) “Republicans have consistently said the benefits of a potential U.S. CBDC must outweigh the risks—these reports fail to make the case. The Biden Administration has not adequately identified what problems a CBDC would solve or whether private sector payment solutions could provide a better alternative.” Representative Patrick McHenry (R‑NC) “The prospect of government surveillance of Americans’ individual financial transactions through a CBDC and Fed accounts raises serious privacy concerns, not to mention concerns about government control and politicization of loans, online payments, credit scores, tax compliance, federal contracts, monetary policy and the like.” Representative Andy Barr (R‑KY) “I’m hard pressed to think how a private bank would have a specific incentive to take CBDC deposits. \[…\] I can’t see \[lending and deposits\] existing in a CBDC system.” Representative Sean Casten (D‑IL) “My principal concern with the domestic use case \[of a CBDC\] is the blurring of the line between monetary and fiscal policy.” Representative Jake Auchincloss (D‑MA) “A digital U.S. currency would be one of the most dangerous developments in history. When government can simply flip a switch to block all your transactions, it controls your entire life. We need a wall of separation between money and state.” Former Representative Justin Amash (L‑MI) ![Christopher Waller testifies before the Senate Banking, Housing and Urban Affairs Committee during a hearing.](/sites/cato.org/files/styles/aside_3x/public/2023-02/Waller-Transparent-BG_1.png?itok=qWbAiQME) “As I have said before, the introduction of a U.S. CBDC would come with **a number of costs and risks,** including cyber risk and the threat of disintermediating commercial banks, both of which could harm, rather than help, the U.S. dollar’s standing internationally.” Federal Reserve Governor Christopher Waller “I can see why China would do it. If they want to monitor every one of your transactions, you could do that with a central bank digital currency. You can’t do that with Venmo. If you want to impose negative interest rates, you could do that with a central bank digital currency. You can’t do that with Venmo. And if you want to directly tax customer accounts, you could do that with a central bank digital currency. You can’t do that with Venmo. I get why China would be interested. Why would the American people be for that?” Federal Reserve Bank of Minneapolis President Neel Kashkari “Finally, there is no compelling demonstrated need for a Fed-issued digital currency. Most consumers and businesses in the U.S. already make retail payments electronically using debit and credit cards, payment applications, and the automated clearinghouse network. Moreover, people are finding easy ways to make digital payments directly to other people through a variety of mobile apps.” Federal Reserve Vice Chair for Supervision Lael Brainard “In brief, the potential benefits of a Federal Reserve CBDC are unclear. Conversely, a Federal Reserve CBDC could pose significant and concrete risks.” Former Federal Reserve Vice Chair Randal Quarles “We haven’t made a decision to issue \[a CBDC\] yet because we basically don’t see a compelling need under current circumstances.” Bank of Canada Deputy Governor Timothy Lane “CBDCs would give the government virtually complete control over the monetary system… but from an individual’s perspective, a CBDC would be a historic blow to privacy and individual liberty.” Joseph Wang, Former Federal Reserve Trader