- - Thursday, February 10, 2022

Stablecoins may be a recent invention, but already it’s a type of cryptocurrency that empowers people worldwide and increases global prosperity, making it possible for people to maintain their purchasing power in the face of inflationary central bankers and autocratic dictators imposing capital controls. Unlike most cryptocurrencies that are inherently volatile, stablecoins peg to existing monetary measures like fiat currency or gold. 

But stablecoins may not survive the coming regulatory onslaught that includes onerous monitoring and government substitutes like central bank digital currencies (CBDCs). Their demise would be a big mistake. 

Proponents of a government digital currency say it will foster inclusivity in the nation’s financial system, aid entrepreneurs, prop up the dollar internationally, and smooth cross-border transactions. If only it were that simple. Devil-in-the-details design choices, governmental priorities, and prevailing consumer attitudes towards big institutions will erase supposed benefits.



The most prominent supposed CBDC benefit is financial inclusion, providing the unbanked access to central bank money. Currently, around 5 percent of the U.S. population lacks a bank account, and more “underbanked” people use expensive options like money orders. Unfortunately, a CBDC alone would help little. CBDC accounts would be “intermediated”—administered through the existing fee-charging financial system. So that wouldn’t reach a large percentage of people who forgo bank accounts for reasons like lack of minimum balance requirements, mistrust of banks, and high or unpredictable fees. 

What about fixing the current, archaic cross-border payment system? This also has little merit. That would require “significant international coordination,” diplomatic code for “unlikely.” Yet even accomplishing this Herculean task would only provide limited benefits because, as the Bank Policy Institute states, the real culprit for the terrible cross-border payment system is the governmental insistence on granular and invasive rules associated with Anti-Money Laundering/Combatting Financing of Terrorism (AML/CFT) reporting. 

A CBDC wouldn’t help entrepreneurs or maintain the dollar’s global status, either. Dollar-pegged stablecoins with their functionality and flexibility already fill these roles quite nicely. They were even popular in authoritarian China before the latest crackdown, along with the rest of East Asia and socialist-torn countries like Venezuela. A U.S. CBDC requiring tedious international agreements will never achieve this global utility. 

Meanwhile, the risks brought by a CBDC would be significant. 

CBDCs would be liabilities of the Fed, not commercial banks. This means banks could administer CBDC accounts but not lend them out like ordinary deposits. Thus as conversion to CBDChappens, money banks have available to loan (currently at $10 trillion) raising rates on what’s left. This would affect the economy in good times. Times of economic stress would invariably result in the further issue of digital runs—panicked conversions into CBDC from other money for its perceived safety. Sure, the Fed could temporarily limit access to CBDC, but that would invite political outrage and pressure to reverse. And if foreigners convert currency in large numbers, international tensions will follow. 

Problems would not end there. CBDCs would require enlarged Federal Reserve balance sheets with possibly riskier assets, distorting credit markets and monetary policy. It could force the Fed into contentious political issues if CBDC purchases include unpopular products like firearms or donations to disdained political groups or causes. 

None of this is necessary. 

But the biggest downside would be privacy infringement. The ability to surveil is the ability to control. China makes no secrets its CBDC will help enforce party discipline. A recent Federal Reserve paper avers “consumer privacy is critical,” yet immediately follows with the need for AML/CFT monitoring. Appropriate protections would supposedly ensure limited bureaucratic access. But as commentator Murtaza Hussain recently stated some people originally complained encrypted email would only advance criminal interests. Using the same rationale the government would demand access to every CBDC-conducted transaction. No one should trust government privacy pronouncements after repeated leaks of sensitive information and oppressive behavior toward everyone from blue-collar Tea Party activists to the President?  

Central bank digital currencies provide little value for mature financial systems like the U.S. where banks, payment providers, and stablecoin issuers already provide consumer options. In short, CBDCs solve no problem stablecoins don’t already address but they invite intervention and abuse on an unprecedented scale. The Fed roundaboutly admits this. The CBDC conversation should stop there. 

Instead of entering the digital currency race, the government should encourage private innovation already afoot via stablecoins (digital assets pegged mostly but not exclusively to the U.S. dollar).

  • Paul H. Jossey is an adjunct fellow at the Competitive Enterprise Institute, author of A new report,‘Central Bank Digital Currencies Threaten Global Stability and Financial Privacy,” and founder of www.thecrowdfundinglawyers.com.

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