Politics aside, what’s the plan for US central bank digital currency?

While there have been many intelligent discussions about the merits and perils of central bank digital currencies, or CBDCs (imagine U.S. digital dollars that are accessible directly from the Federal Reserve instead of a bank), the debate in Washington has been distilled to something akin to a bottom-shelf vodka: cheap, without nuance, easy to slosh around, and difficult to stomach.  

Anti-CBDC legislation has been introduced that would prevent the Federal Reserve from exploring or introducing one to the American economy. Political agendas and interested parties have also clouded the debate.

Efforts are moving at a glacial pace in the U.S. Meanwhile, over 130 countries are exploring one. “BRIC” nations including Russia and China have banded together to create a blockchain-based payment system that would support global trade and investment flows and possibly even serve as a way to skirt U.S.-mandated financial sanctions.

There’s more than national security and economic dominance at stake, like the possibility of a reimagined American financial system with more competition among financial institutions — both decentralized and traditional — that would provide more choices for U.S. consumers. There’s also the realization of technological initiatives that would transform the movement of money and payments domestically and globally for the better.

While these things come with plenty of unanswered questions, progressing CBDC policy without intellectual honesty and objectivity would be a mistake. Choosing to extinguish the debate entirely may threaten America’s long-term national security and economic standing in a world that, like it or not, may move in this direction.

Opponents of CBDCs argue that a widely available, digital form of central bank money would raise the risk of financial control and surveillance by the federal government. Some draw parallels to China’s surveillance state and America’s Operation Chokepoint. This argument is valid, and there’s a precedent that such a threat does exist.

In 2022, Canadian Prime Minister Justin Trudeau’s government allowed authorities to suppress protests by a group of 12,000 truck drivers over required COVID-19 vaccine mandates in authoritarian ways, such as freezing the truckers’ private and business bank accounts, canceling their credit cards and suspending their insurance. The government amended the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, preventing the public from crowdfunding donations to the convoy lest they be prosecuted under terrorist financing laws. It also collected intelligence on the truckers and their supporters to block access to cash or cryptocurrencies.

While Canada’s banks were complicit, some suggest that giving the U.S. government direct access to citizens’ digital money would greatly increase the risk of similar overreaches. That’s not necessarily the case. In early 2024, justice prevailed as a Canadian judge held that the government’s oppressive behavior towards the trucker convoy was unreasonable and unconstitutional.

In order for CBDCs to work equitably in any democratic society, a country’s legislation, laws and justice system must protect individual freedoms, including the freedom to transact and the right to financial and individual privacy. The Canadian incident is an ideal springboard to study how a CBDC might operate in an environment that’s had time to prepare a plan to guarantee these rights, such as through the U.S. Constitution’s Fourth Amendment. The faithful execution of such laws must serve as a deterrent to authoritarian actions.

From a technological standpoint, designing digital central bank money with privacy controls that prevent government surveillance is possible. Research has already revealed that payer anonymity using a CBDC was achieved in a Swiss pilot project. This kind of technical development should continue. 

To outright ban research, development and experimentation on CBDCs without attempting to find technological solutions to legitimate privacy risks first is a lazy and incomplete response that borders on censorship.

One specific concern — balancing privacy rights and protecting Americans from our adversaries by preventing the flow of illicit funds — has always been a difficult objective and deserves further attention. As a trip to the George W. Bush presidential library in Dallas to witness 9/11 documentary footage can demonstrate, some mechanism or compliance measure to prevent terrorist financing — without surveilling Americans — is necessary. CBDC advocates would be wise to acknowledge this, show willingness to tackle the tough questions and search for a balanced solution.

America needs to elevate the debate on CBDCs while leaving politics aside. How? 

Invest in CBDC research from a technical, legal, ethical and international perspective, allow flexibility for a new vision to evolve, move beyond outdated assumptions that risks cannot be rigorously addressed, avoid relying on fearmongering platitudes designed to squelch meaningful debate and proceed with caution.

Agnes Gambill West is an affiliate senior research fellow with the Mercatus Center at George Mason University and an associate professor at Appalachian State University.