The Frightening Prospect of a Digital Dollar

The story

The last decade has seen digital currencies skyrocket in popularity and value; Bitcoin, for instance, is currently worth just over $70,000. However, cryptocurrencies are largely unregulated; while it is not the “wild west” it once was, it represents huge sums of money that governments cannot access.

Some governments have responded by creating digital currencies of their own called Central Bank Digital Currencies (CBDCs). Full adoption of CBDCs could ultimately end widespread paper money and coinage. China recently introduced its own CBDC.

Eight central banks released a report spelling out reasons for creating domestic CBDCs and detailing how they would work together to ensure cross-border operation. Reasons included creating an “alternative to potential unsafe forms of private money,” aka cryptocurrencies. The banks acknowledged that such currencies could erode trust in central banking.

One justification for distrusting CBDCs is that they could amass even more power for central banking institutions. When a person holds a dollar, he or she can use it at will: to buy food, movie tickets, or firearms. However, a government could easily seize someone’s life savings of digital currency if an individual was under investigation or deemed a criminal — as so often happens with police wrongfully seizing physical currency via civil asset forfeiture laws.

The sides

Former president Donald Trump once called CBDCs “very dangerous,” saying they could be misused by government to take people’s money. He also said he would block creation of a digital dollar by the Federal Reserve. Trump was not alone among Republicans: Gov. Ron DeSantis recently signed a law which prohibits CBDC usage in Florida.

However, of late Trump is less skeptical toward private cryptocurrency, declaring the U.S. should be “a leader in the field,” adding there was “no second place,” and pledging to decrease government hostility toward cryptocurrencies.

Much of that hostility is from the Biden administration. One official compared the cryptocurrency market to the pre-Great Depression U.S. financial sector: “Hucksters. Fraudsters. Scam artists. Ponzi schemes.“ Biden himself is mum on creation of a CBDC — likely because it polls extremely poorly, with only 16 percent of Americans supporting it if government had power to unilaterally seize assets — though he did sign an executive order in 2022 paving the way for its creation.

Beyond the headlines

A lot of the conversation about CBDCs ignores the fact that the financial system boils down to trust. If Americans trust CBDCs, they will use them; if they do not, they will not. Elon Musk elucidated last year, saying, “People will use the cryptocurrencies that they think will accrue value over time, and not use the ones that don’t.”

One trust issue entails the potential politicizing of the Federal Reserve in the coming years. Democrats demand that it fight “racial inequality” — and with Federal Reserve presidents favoring reparations, Americans could be concerned with what happens to money they can’t physically control.

If the U.S. Government decides your political views or religious beliefs are a threat to democracy, the push of one button could make you unable to buy or sell. Comparisons to China’s social credit system and becoming a non-person are hard to ignore, with federal governments potentially assuming total control over people’s financial assets.

Why it matters

The introduction of a CBDC fully controlled by a largely autonomous entity like the Federal Reserve, which operates with limited democratic oversight, could significantly undermine public trust in America's financial institutions.

CBDCs not only threaten Americans’ sovereignty but also have the potential to fragment the global economy. Different regulatory approaches from China, Europe, and the U.S. could have serious geopolitical implications, with some nations accepting the currency while others, perhaps hostile, decline them altogether. Without a coordinated approach, CBDCs could lead to increased reliance on local currencies for cross-border transactions and even reduce the global influence of the U.S. dollar — a catastrophic prospect for America.