As money moves online, many think the United States should develop its own central bank digital currency. Allowing individuals to maintain accounts with the Federal Reserve might capture the principal benefits touted by cryptocurrency proponents—instant settlement, low fees—without the risks. Countries including China, Sweden, and Saudi Arabia are already testing CBDCs, and others are in stages of development. Issuing this form of currency would help the U.S. stay competitive: a digital dollar for a digital world.
It sounds forward-thinking, even inevitable. But CBDCs have a major drawback. They offer much less financial privacy than cash, and probably less than traditional deposit accounts, too.
Privacy is a necessary feature of a free society. “If you give me six lines written by the hand of the most honest of men,” the French cleric and statesman Cardinal Richelieu said in the 17th century, “I will find something in them which will hang him.” A record of every transaction a person has made would make that task much easier. We recognize the danger of ubiquitous surveillance, as evidenced by the negative legal connotations of a “fishing expedition” and the doctrine known as the “fruit of the poisonous tree,” which makes evidence obtained from an illegal search inadmissible. Without financial privacy, anyone might be convicted of lawbreaking simply because those in power have set their minds to it.
Physical cash boasts a high degree of financial privacy. You don’t have to show an ID or open an account to use cash. You don’t have to connect via phone or internet. You can spend your cash without permission, and without anyone other than your trading partner even knowing. Just stash it in your fanny pack, and take it out when it’s time to spend.
The privacy cash supports has limits, of course. The U.S. does not issue supernotes, large denominations of say $500 or $1000, which makes it more cumbersome to use cash in large transactions. Large cash hoards have also resulted in civil asset forfeitures: an unjust, arguably unlawful, and increasingly widespread practice whereby governments take cash without criminal charges. We might imagine a world in which cash affords even more privacy, but it provides quite a bit of privacy already.
Would a CBDC offer this kind of privacy to users? We suspect not.