Federal Government’s Digital Dollar Seen as Threat to Personal Liberty

Critics call plans to create a digital currency an 'assault on financial privacy'

The Federal Reserve Board building on Constitution Avenue in Washington, on Mar. 27, 2019. Brendan McDermid/Reuters

As the federal government advances its plans to create a central bank digital currency (CBDC), critics are sounding the alarm about how much power a digital dollar would place in the hands of federal agencies.

The latest step toward a CBDC, called “Project Cedar” and initiated by the Federal Reserve Bank of New York completed its first phase on Nov. 4, 2022, as a “wholesale” digital dollar for cross-border payments that’s only available to banks and corporations. This effort, barely noticed amid the headlines surrounding the scandalous collapse of cryptocurrency exchange FTX, follows Project Hamilton, a retail CBDC beta test conducted in February 2022 by the Boston Fed in collaboration with the Massachusetts Institute of Technology’s Digital Currency Initiative.

The Fed lauded the success of its latest digital dollar venture, stating: “Project Cedar showed that blockchain-enabled cross-border payments can be faster, simultaneous, and safer.” But critics of the Fed’s CBDC initiatives were less enthusiastic.

“The launch of 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,” Nicholas Anthony, a policy analyst at the Cato Institute, told The Epoch Times. By contrast to the U.S. dollar in its current form—cash and bank deposits—a CBDC would be issued directly by the federal government, giving it potentially unlimited access to and control over Americans’ money.

“At its core, financial privacy is important because this information can reveal a person’s relationships, profession, religion, political leanings, locations, and so much more,” Anthony said. “And while cash offers the greatest privacy protection for Americans, banks too offer a sort of air gap that protects Americans from prying eyes. A CBDC, in contrast, would establish a direct link between individual citizens and the central bank.”

In March 2022, President Joe Biden issued an executive order to study and develop a CBDC for the purpose of financial stability and preventing crime, as well as “human rights; financial inclusion and equity; and climate change and pollution.”

“My administration places the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC,” Biden’s order stated.

The agencies tasked with developing a digital dollar include the State Department, the Treasury Department, the Defense Department, the Justice Department, the Commerce Department, the Department of Labor, the Department of Energy, the Department of Homeland Security, the Environmental Protection Agency, the Director of National Intelligence, and numerous others.

The 1970 Bank Secrecy Act to which Anthony referred forces banks to report to the Treasury Department’s Financial Crimes Enforcement Network all transactions over $10,000, and any other transactions banks considered suspicious. According to the Treasury Department, banks reported about 20 million cases of suspicious activity in 2019. CBDCs can make government access to private transactions absolute.

“We don’t know who is using a $100 bill today, we don’t know who’s using a 1,000-peso bill today,” Agustin Carstens, general manager of the Bank of International Settlements, stated in October 2020. “The key difference with a CBDC is the central bank will have absolute control of the rules and regulations that will determine the use of that central bank liability, and also we will have the technology to enforce that.”

The Progressive Vision for Americans’ Money

In a free-market economy, money functions as both a medium of exchange and a store of value, in other words, as a vehicle for making payments and for accumulating savings. However, the Biden administration has set new goals for its vision of the digital dollar. These include social justice and environmental goals, which can only be achieved if the CBDC is programmable.

A programmable CBDC could allow the government not only to track transactions but also could include features such as negative interest rates, which deduct a percentage of your money over time. This would make stimulus policies more efficient by compelling people who receive government payouts to spend rather than save. Another feature that progressives favor is the ability to limit the use of CBDC for certain products, such as gasoline or firearms.

Private companies are already taking steps in this direction. PayPal, for example, doesn’t allow its services to be used for gun purchases. Visa and Mastercard offer credit cards that measure the carbon footprint of the user’s spending each month and can give a “nudge” when certain limits are breached. And Visa, Mastercard, and American Express have set up category codes to track Americans’ gun purchases.

A CBDC can go further, however, discouraging purchases the government doesn’t like by imposing surcharges, or shutting off access to money altogether. In this way, the Fed or the Treasury Department could set government policy on fossil fuels, gun control, and social justice without ever having to get laws approved by Congress.

“That’s exactly what’s not supposed to happen with money,” Wharton Business School professor Christina Skinner told The Epoch Times. “It’s supposed to be this inalienable property right whose value is supposed to be set and maintained by market forces.”

Advocates of a CBDC argue that the United States must have a digital dollar because other countries are doing it.

Federal Reserve Board Governor Lael Brainard testifies before a Senate Banking Committee hearing on her nomination to be vice chair of the Federal Reserve, on Capitol Hill in Washington, on Jan. 13, 2022. Elizabeth Frantz/Reuters

Fed Vice Chair Lael Brainard stated in May 2022: “The People’s Bank of China has been piloting the digital yuan, and several other foreign central banks are issuing or considering issuing their own digital currencies. A U.S. CBDC may be one potential way to ensure that people around the world who use the dollar can continue to rely on the strength and safety of the U.S. currency to transact and conduct business in the digital financial system.”

The Atlantic Council, a nonprofit “group of foreign policy change makers,” reported that “as of December 2022, all G7 economies have now moved into the development stage of a CBDC. The New York Federal Reserve’s wholesale CBDC experiment, Project Cedar, has shifted the U.S. from research into development.”

Governments around the world are increasingly concerned that the rise of cryptocurrencies is undermining their ability to control the financial system. Noting that “in November 2021, non‑state-issued digital assets reached a combined market capitalization of $3 trillion, up from approximately $14 billion in early November 2016,” the Biden executive order states that the United States must issue a digital currency to maintain its role as the world’s reserve currency, as well as to fight financial crime and make banking services available to underserved communities. But the benefit to citizens remains unclear.

Project Cedar has been justified as an effort to make cross-border payments easier and faster, Skinner said.

“If this sounds vague, it’s because it is vague. You can’t really pin anyone down and have them explain to you how the CBDC is going to make cross-border payments easier.

“Central bank reserves that banks hold are already digital,” she said. “It’s difficult to really understand from a legal and technical standpoint what the difference is between a wholesale CBDC—this thing that only the banking sector can have—and the kinds of central bank reserves they already have; and certain members of the Federal Reserve Board have made this point over and over again.”

This has led some to suspect alternative motives.

“A wholesale CBDC is likely to be a stepping stone toward a retail CBDC,” Anthony said. “In the worst case, it offers a sort of beta test for the Federal Reserve to test how effectively a CBDC might work without involving the entire country during the first round.”

Can Biden Create CBDC Without Congressional Consent?

Biden’s executive order stated that Attorney General Merrick Garland must report within 180 days as to whether the administration needs congressional approval to create a digital dollar. That deadline has come and gone without a report from the Justice Department, and Congress hasn’t granted authorization to the administration to create a digital dollar. However, the administration has been moving forward with beta-testing CBDCs anyway.

“They have not launched a CBDC, but they have conducted extensive theoretical and experimental research with banks, payments networks, and even tech companies,” Anthony said.

Skinner says creating a digital dollar without congressional approval “flies in the face of most things we think about separation of powers.” The U.S. Constitution explicitly states that only Congress has the power to “coin money and regulate the value thereof.”

“The constitution was constructed to keep monetary and fiscal power away from the president because of the tyrannical danger that comes from princes who have power over the money and the purse,” she told The Epoch Times.

U.S. Rep.-elect Rep. Tom Emmer (R-Minn.) talks to reporters as he leaves his office at the U.S. Capitol Building in Washington, on Jan. 5, 2023. Nathan Howard/Getty Images

In January 2022, Rep. Tom Emmer (R-Minn.) introduced a bill to ban the Fed from establishing a retail CBDC.

“Not only would this CBDC model centralize Americans’ financial information, leaving it vulnerable to attack,” Emmer stated, “but it could be used as a surveillance tool that Americans should never tolerate from their own government.”

Because of its risks and downsides, a CBDC could be a difficult sell to U.S. citizens as long as cash and bank deposits were still available as an alternative. One option for a CBDC to gain widespread acceptance would be to “crowd out” existing dollars by offering a higher interest rate on a CBDC compared to bank deposits, similar to how crypto exchanges such as the now-bankrupt FTX were able to attract cash in exchange for digital currencies.

One point that critics make about a U.S. CBDC is that only the government seems to want it; there doesn’t appear to be significant consumer demand for a government-issued digital dollar.

A September 2022 poll of 2,200 bank customers found that 86 percent of Americans were “satisfied” or “very satisfied” with the bank services they receive. The survey reported that “nine in 10 (88 percent) consumers agree they have multiple options when selecting products and services such as bank accounts, loans, and credit cards, and 85 percent said they have a wide array of choices when deciding where to bank.”

The claim that a CBDC would achieve “equity” by making banking services available to the underserved also appears dubious. According to a report from the Federal Deposit Insurance Corp., more than 95 percent of all American households have checking or savings accounts.

Among those who don’t, the top three reasons cited were: “Don’t have enough money to meet minimum balance requirements,” “Don’t trust banks,” and “Avoiding a bank gives more privacy.” It’s unclear how a CBDC would resolve any of those issues.

“For the American people, there are no benefits to be gained,” Anthony said. “A CBDC would solely be to the benefit of the federal government by increasing its surveillance and control over the financial system.”