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Last March, the Biden administration encouraged the Federal Reserve to explore digital currencies, or digital dollars. Yet while the Fed said it was “looking into” a Central Bank Digital Currency (CBDC), states have already sprung into action to block the move – perhaps prematurely.
Early state CBDC bans have been criticized for being premature, especially since CBDC is only a proposal. But some of the concerns with a CBDC have merit.
The most apparent is the negative effect a CBDC could have on the financial system. As some have suggested, creating a retail CBDC accessible to everyday consumers would create a more attractive alternative to private bank deposits. The issue is not whether consumers will prefer CBDC to ordinary deposits, it’s whether such a move will impact private banks’ ability to lend, which would disrupt the overall health of the financial system.
The second concern is that a CBDC will attract consumer interest but carries a significant risk of compromising their financial privacy. Using a private bank as is the standard now, law enforcement needs a warrant to access private bank records. But a Fed-issued CBDC would seem to eliminate the expectation of privacy that ordinarily would necessitate a warrant because the transaction activity is already with the government.
There is little a state can do to prevent the federal government from issuing currency. There’s also little information available about what, if anything, should be done in state legislatures in response to a hypothetical CBDC. However, HB 164 proposed by Rep. Tyler Clancy is an appropriately measured response.
