CBDCs: “Just Say No” Means Surveillance Status Quo
In the early spring of 2023, a number of prominent American politicians have proposed legislation to hinder development of a U.S. central bank digital currency or “CBDC”. They include Florida Governor Ron DeSantis, as well as Congressional House Whip Tom Emmer and former Presidential candidate Ted Cruz who have proposed legislation to restrict the Federal Reserve from deploying a retail form of CBDC without Congressional authorization.
The problem with their “just say no” approach to CBDC is that it acquiesces to the rampant and undue commercial and government surveillance of the existing analog financial system. It does so at a time when the rest of the world is building efficient, networked digital economies that may, if designed right, better protect financial privacy and economic freedom.
CBDCs: Choice of surveillance or freedom. According to Governor DeSantis, the essential purpose of CBDCs is “surveilling… and controlling behavior of Americans." He is right that the rise of certain foreign CBDCs create a benchmark for one kind of CBDC that will provide enormous financial surveillance and social control. You might call this form of CBDC a “surveillance coin.” Governor DeSantis is also right that money should reflect the values of a free society, including individual privacy, free enterprise, and economic freedom, a “freedom coin,” so to speak.
Governor DeSantis and other opponents of a US CBDC, however, are wrong to assume that CBDC can only be in the form of a surveillance coin and not a freedom coin. That will only be the case if citizens of democracies and their political leaders allow it to be so. In digital currency, characteristics like surveillance and censorship are design choices. There is no reason why democratic governments could not design CBDCs with very noble features that adhere to the democratic values of free society using cutting-edge, privacy-enhancing technologies such as zero-knowledge proofs, digital credentials and homomorphic encryption.
Encoding Freedom into a Digital Dollar. In a recent report, AEI scholar Jim Harper and I expand on the privacy principles published in 2021 by the Digital Dollar Project. Our report includes three key prescriptions:
- First, CBDC must not weaken the personal financial privacy available with today’s paper cash.
- Second, CBDC must not become a new, easier avenue for government agencies to surveil citizens, censor lawful activities, levy fines and enact punishments; and
- Third, the advent of CBDCs offers the opportunity to reassess contemporary financial surveillance activities in their entirety and rebalance them in better accord with democratic norms, the presumption of innocence and the rule of law.
The sad fact is that our current financial system – before we even turn to digital currency - is far more subject to government surveillance than it has become socially acceptable to admit. Right now, financial services providers build dossiers about their customers, share customer information with each other, and report an enormous amount of conventional financial transactions to governments without being compelled by a subpoena and due process of law.
The Private Sector is No Better Protector of Privacy. With existing financial surveillance at unprecedented levels, many reckon that CBDC would incorporate the same degree of government monitoring. Some say, therefore, that development of digital money should be left to private sector “stablecoin” developers. Yet, there is noth¬ing inherently superior about stablecoins and non-sovereign digital currency in protecting individual privacy compared to CBDC. In fact, the current widespread practice of financial surveillance impedes the development of a true freedom coin by both the private and public sectors.
It is entirely foreseeable that private-sector sponsors of cryptocurrencies and stablecoins or even commercial servicers of digital dollars, such as wal¬let providers and others, could be compelled by governments to conduct covert surveillance, report on activity and disable financial transactions with dis¬favored groups and activities. Under government badgering and without being bound by procedural protections for civil liberties, stablecoin operators might bar transactions with out-of-favor indus¬tries, depending on which position’s advocates hold political power, in the same way that many social media platforms, most notably Twitter and Facebook, have infamously bowed to political winds.
In democratic societies, lawful transac¬tions in digital money – sovereign or non-sovereign - must be immune from politi¬cal surveillance and censorship regardless of who is in power today, four years from now, and 10 years from now.
The global advent of CBDCs provides the opportunity to fully reassess contemporary financial surveillance activities. It provides the chance to reestablish financial law enforcement in truer accord with democratic constitutional norms, the presumption of innocence and the rule of law. In fact, the “just say no” approach to CBDC development does nothing to address the widespread financial surveillance that is already commonplace. “Just say no” to CBDC may appear to imply saying “yes” to today’s burgeoning financial surveillance.
Ready or not, CBDCs are Coming. Whether the US participates or not, the rest of the world is exploring and deploying CBDCs. According to the Atlantic Council, 114 countries, representing over 95 percent of global gross domestic product, are exploring CBDC. Actively engaged in this digital gold rush are 19 of the G20 countries, including India, Japan, Russia, and South Korea, each of which has made significant recent progress. The European Central Bank is expected to introduce a prototype for a “digital euro” by the end of 2023, becoming more widely available by 2025. The central banks of some of the freest societies on earth – from Sweden to Japan and England – are exploring their own CBDCs.
What is clear is that all of us will soon contend with CBDCs worldwide whether or not the US deploys one or not. What remains unknown is whether surveillance coins will have the world to themselves, or whether they will encounter competition from freedom coins issued by traditional democracies like the United States. The potential risks of failing to even consider a freedom coin form of digital dollar are too great to ignore.
Time for America to step up. America’s economic competitors and economic adversaries have taken the lead in setting standards for the future of money. Their issuance of CBDCs will significantly impact the United States regardless of whether a handful of American states seek to prohibit their use. The assertation that the United States should simply withdraw from global CBDC discussions is an unworthy position for the custodian of the world’s reserve currency.
It is time for the United States to assert leadership in developing standards for digital currencies that reflect enduring democratic values of the rule of law, social and economic liberty, free enterprise, and personal and financial privacy.
About the Author
J. Christopher Giancarlo served as the 13th chairman of the U.S. Commodity Futures Trading Commission. He is senior counsel to the international law firm Willkie Farr & Gallagher and the author of CryptoDad: The Fight for the Future of Money (Wiley, 2021). Giancarlo is cofounder and executive chairman of the Digital Dollar Project, a not-for-profit initiative to advance exploration of a US central bank digital currency.
This report represents the opinion of the author and does not necessarily reflect the views of the Digital Dollar Project or any of its members, participants, or contributors.