Many believe that central bank digital currencies, or CBDCs, will wreak havoc on financial privacy and economic liberty. Given the data infrastructure underlying new digital coins, that is a legitimate concern. But it won’t stop the global deployment of CBDCs — real money issued by governments or central banks in the form of digital cash — including in countries antagonistic to personal freedom, such as China. China’s digital yuan, e-CNY, is designed to increase the government’s powers of surveillance and control — a surveillance coin.
For the United States to lead in the digital future of money, it must influence the development of global standards for CBDC that affirmatively protect democratic values like freedom of speech and the right to privacy and lay the foundation for a freedom coin model of CBDC. Doing so should cause the U.S. to reconsider its existing financial surveillance activity in light of fundamental constitutional freedoms.
When the financial engineer known by the pseudonym Satoshi Nakamoto unleashed Bitcoin onto the world, it ushered in a new era for money, an internet of value. This has been a challenge to the accustomed monopoly of governments over money creation and wholesale payments. Today, over 100 governments are exploring CBDCs that can be passed phone-to-phone the way paper bills pass hand-to-hand.
The benefits of CBDC may include programmable, instantaneous round-the-clock payments at much lower cost, and greater access to financial services, for both retail and wholesale participants. CBDCs may strengthen the ability of central banks to implement monetary policy, allowing direct infusions of money across the economy and vastly improving the administration of benefits and economy-boosting payments compared to efforts made at the outset of the COVID-19 pandemic.
But the cost side of CBDC is daunting. A CBDC must run on a digital ledger of some type, whether it is a Bitcoin-inspired distributed blockchain or not. That makes every payment a digital “communications event,” which is easily recorded and tracked. This has been a stumbling block for Bitcoin and other blockchain-based cryptocurrencies, too. The public side of a public-private key pair (known as the “wallet”) comes to serve as an identifier. Its use is readily observed, and it can be correlated to other wallets, creating records of who is transacting with whom. Who in their right mind would trust their financial information to it?
But the crypto world is working on solutions that their CBDC competitors can adopt. Many privacy-enhancing technologies are being developed to respond to the privacy weakness of the blockchain format. They keep addresses, transaction amounts and other information hidden from the public, while “zero-knowledge proofs” keep transaction data verifiable by network nodes. If transactions can be confirmed without broadcasting information about them, this makes them roughly analogous in privacy terms to transfers of paper money.
Project Hamilton, a multiyear research project of the Federal Reserve Bank of Boston and the MIT Digital Currency Initiative, has made a good start on this problem. The project’s initial technical release earlier this year includes the idea of recording that transactions have happened, rather than recording information about the transactions themselves. That is a big difference for privacy — and also for data throughput.
In a new report published by the American Enterprise Institute, we expand on privacy principles published by the digital dollar. Our report includes two clear prescriptions: First, a U.S. freedom coin must not weaken the personal financial privacy available with today’s paper cash. Second, a U.S. CBDC must not become a new, easier avenue for government agencies to surveil citizens, levy fines and enact punishments as can be expected from autocratic governments using surveillance coins.
Our current financial system is more like China’s than it has become socially acceptable to admit. Under current U.S. law, financial services providers build dossiers about their customers, share customer information with each other and report an increasing number of transactions to the government.
Many assume that a CBDC would build existing surveillance capability into the money, but we presume the opposite. The advent of CBDCs offers the opportunity to reassess contemporary financial surveillance activities in their entirety and possibly rebalance them in accordance with American constitutional norms, the presumption of innocence and the rule of law.
Money is power, and the digital future of money is upon us. Financial power arrangements worldwide will be revamped. The informal currency “zones” of the past will yield to highly integrated, digital currency networks of the future. The question is not whether the digital future of money can be forestalled, but whether these new forms of digital currency networks will make societies more open, prosperous and free instead of encouraging tech-fueled dominance and control.
The world will have CBDCs. Already 19 of the G-20 countries are in active exploration. What remains unknown is whether surveillance coins, such as China’s e-CNY, will have the world to themselves, or whether they will encounter competition from freedom coins issued by traditional democracies like the United States.
We believe that, with proper changes to financial surveillance policy, U.S.-created freedom coins can help lead the world toward a richly deserved freer and essentially moral financial future.
J. Christopher Giancarlo served as the 13th chairman of the United States Commodity Futures Trading Commission and is the chairman of the Digital Dollar Project. Jim Harper is a nonresident senior fellow at the American Enterprise Institute.