As the U.S. Central Bank considers the development of a Central Bank Digital Currency (CBDC), policymakers must examine the potential negative economic impact and privacy implications that a centralized digital currency would entail.  While the Federal Reserve touts CBDCs as a means to improve payment efficiency and better facilitate monetary policy, CBDCs could have a negative impact on financial stability and banking at both the micro and macroeconomic levels. 

The first concern facing policymakers is CBDCs' potential to destabilize the traditional banking system.  CBDCs could eventually require — and upon establishment of their infrastructure, facilitate — conversion of deposits in commercial banks into the Central Bank's digital currency.  By allowing bank members to transfer their funds from commercial banks and private financial institutions directly to the federally controlled central bank, CBDCs would leave these smaller institutions vulnerable to sudden and rapid closure in the event of a bank scare (such as the ones that followed the Signature Bank and Silicon Valley Bank closures earlier this year).  The Federal Reserve of St. Louis stated in a 2013 workshop for economic education that bank failures cause bank runs, and bank runs cause contraction of the money supply, which in turn causes a decline in spending, investing, and GDP.  Centralizing digital currency could exponentially exacerbate these problems.

According to an article from the Cato Institute this month, when compared to existing alternatives, CBDCs do not offer any new or unique benefits to Americans.  They do, however, pose a threat to financial privacy, financial freedom, and the foundation of our banking system.  A literature review from the Federal Reserve in 2021 acknowledged that CBDCs would likely undermine current forms of bank lending and funding.  This impact on commercial banks could impede our nation's credit flow and subsequently hinder economic growth.

Apart from its potential for economic disruption, CBDC carries ominous implications for personal freedom and financial privacy.  A digital currency issued and managed by the central bank would require the collection and storage of personal financial data, potentially including individuals' spending and transaction history, which could dangerously compromise user privacy.  A 2023 article from the Cato Institute recognizes these risks, stating that "a CBDC would be the largest assault to financial privacy since the creation of the bank secrecy act."  Additionally, Harvard Business Review cited Congressman Tom Emmer in their report on CBDCs, saying that central banks issuing CBDCs would increase their control over money and gain insights to spending while depriving CBDC users of their privacy. 

While CBDCs might decrease payment time and increase financial efficiency, they would compromise our economic stability and individual privacy in the process.  These risks far outweigh any potential benefits, especially since the main advantages to CBDC can already be provided by existing digital currency.  Proponents of CBDCs claim that they will facilitate faster payment speeds, security of payments, and wider financial inclusion through low-cost and widely accessible payment systems.  Current solutions such as Bitcoin (BTC) and Ethereum (ETH) already offer those solutions without compromising user privacy.  Government monitoring and federal financial control are the only key differences between existing digital currency and potential CBDCs.

Policymakers are split over the issue.  In March 2023, Sen. Ted Cruz introduced legislation to prevent the Fed from creating a CBDC.  In February 2023, Rep. Tom Emmer introduced the CBDC Anti-Surveillance State Act to prevent the Fed from issuing a CBDC that would subsequently centralize financial information and strip individuals of their financial privacy.  Individuals who oppose a Central Bank–controlled currency should contact their elected representatives and request they oppose any CBDCs.

Given the efficiency and capabilities already available to digital banking and digital currencies, CBDCs offer few new benefits.  The last thing we need is trumped up reasons to give the federal government more power and insight into our lives and financial affairs. 

Parker McCumber is an entrepreneur and business leader who is currently pursuing a Doctorate of Business Administration with emphasis in organizational leadership.  Parker is also a contributor for Young Voices specializing in economic policy and international affairs.

Image: Santeri Viinamäki.