Federal Reserve Chair Jerome Powell joined us last week for the 40th Annual Monetary Conference. Adding to Cato’s long tradition of welcoming speakers from all sides of the policy debates, Powell now joins the ranks of Monetary Conference alumni such as Ron Paul, Alan Greenspan, Anna Schwartz, Ben Bernanke, John Taylor, and countless others. The hour‐long conversation covered unemployment, the dual mandate, nominal gross domestic product (NGDP) targeting, cryptocurrencies, and even Milton Friedman’s famous quote that “Inflation is always and everywhere a monetary phenomenon.” However, I’d like to take a moment here to highlight Powell’s remarks on central bank digital currencies (CBDCs).
Halfway through the conversation, Peter Goettler pointed out that two thirds of the comment letters to the Federal Reserve (Fed) appeared to be concerned or outright opposed to the idea of a CBDC. The most common concerns were over financial privacy, financial oppression, and the risk of disintermediating the banking system. With that in mind, Goettler asked Powell how he reconciled these issues.
Powell opened his response with a disclaimer saying the Fed has not made any decisions and will not proceed on issuing a CBDC without clear support from both the executive branch and Congress. With that out of the way, however, Powell went on to say,
I won’t tell you that I read all of [the comment letters], but I read some of them and I read the summaries. [There were] a lot of very thoughtful concerns—including the ones that you raised—and there are things we are considering very seriously. In our own paper, we suggested that a CBDC… should be privacy protected, intermediated, widely transferable, and identity verified.
At this point, I became concerned. Listing “privacy protected” and “identity verified” at opposite ends of the Fed’s goals does not put the two ideas any less in conflict: the best form of data protection is no data collection. Granted, I was slightly relieved to see Powell note China as an example of going too far:
On privacy protection… we all see what’s happening with [China’s digital currency] and the issues with privacy… We would not want a world in which the government sees, in real time, every money transfer that anyone makes with a CBDC. That would not be something that would be at all attractive in the American context.
And while I do agree that China’s digital currency, as Jim Dorn has explained, should not be the model that the United States follows, the rest of Powell’s answer raised some additional concerns. He noted that the model to follow is that of balancing the privacy of citizens with the wants of law enforcement. That would be fine, but this “balance” in practice has historically been tipped in the favor of law enforcement.
On paper, balancing the privacy of citizens with the information law enforcement should have access to appears to be relatively straightforward. Turning to the Fourth Amendment of the U.S. Constitution, that balance is struck by simply requiring law enforcement and other government officials to get a warrant, based on probable cause, before gaining access to an individual’s private information. And as Emily Ekins recently showed in a new Cato Survey, 83 percent of Americans agree that the government should need a warrant to access financial records.
Historically, however, financial privacy has long been compromised due to the Bank Secrecy Act and the third‐party doctrine. Where the Bank Secrecy Act forced financial institutions to report on customers’ activity, the third‐party doctrine held that the government doesn’t need a warrant to seize information shared with financial institutions. So while Powell should be commended for not wanting to see a new era of financial surveillance begin with CBDCs, it’s undeniable that CBDCs do offer an unrivaled opportunity to increase financial surveillance by streamlining the connection between government agencies and Americans’ financial activity. With that said, much of the responsibility for making sure that does not happen rests with Congress.
Based on the current Federal Reserve Act, it is good to have a Fed chair that wants to work with Congress and the executive branch. But Fed chairs do not typically last more than 5 or 6 years. A more radical chair may not be so cautionary. Therefore, Congress should amend the Federal Reserve Act to prohibit the Fed from offering accounts, products and services, or central bank digital currencies directly to individuals. And to that end, Representative Tom Emmer (R‑MN), Senator Mike Lee (R‑UT), and Senator Ted Cruz (R‑TX) have all introduced bills specifically tailored to limit the Fed from offering a CBDC directly to the public.
Congress should also consider going further. In what largely appears to be an attempt to get around the restrictions on offering a direct line between the Fed and individuals, the Fed proposed the idea of “intermediated CBDCs.” In short, the Fed proposed having banks and other financial institutions act as an intermediary between the Fed and the public. On paper, this move would get around the legal restrictions. In practice, this move would do little to stop the risks to financial privacy and financial disintermediation as it would largely still be a retail CBDC—albeit, with extra steps. Americans already recognize this reality. As mentioned above, two thirds of the comment letters to the Fed were concerned or outright opposed to the Fed’s proposal for a CBDC. Congress should make sure those concerns are heard, and protected, by amending the Federal Reserve Act to restrict the Fed’s ability—both as written and interpreted—to issue a CBDC.