Digital Dollar Could Pose ‘Significant Risks’ to Americans’ Freedom, Fed Official Warns

Federal Reserve Governor Michelle Bowman attends an event in Washington, on Oct. 4, 2019. (Eric Baradat/AFP/Getty Images)

Central bank digital currencies (CBDC) might pose “significant risks, challenges, and tradeoffs,” Federal Reserve Board member Michelle Bowman warned in a recent speech.

It has been about a year since President Joe Biden signed an executive order that directed the federal government to examine the technological infrastructure and capacity for establishing a CBDC.

Since then, the Fed has published multiple papers, and officials have remarked on the concept behind CBDCs. Fed Chair Jerome Powell noted that the United States is still a long way from creating a digital dollar.

But Bowman is warning that a CBDC could be a “risk” and “impediment” to Americans’ “freedom.”

“In thinking about the implications of CBDC and privacy, we must also consider the central role that money plays in our daily lives, and the risk that a CBDC would provide not only a window into, but potentially an impediment to, the freedom Americans enjoy in choosing how money and resources are used and invested,” Bowman said in prepared remarks at a Georgetown University event on April 18.

A CBDC might also result in a type of control that leads to the “politicization of the payments system and, at its heart, how money is used.” If that happened, the central bank’s independence might be undermined.

As the various parties assess incorporating CBDCs into the financial system, Bowman believes “unintended consequences” could spring from digitizing the dollar. One of these could be threats to the financial system, because this could lead to “even more rapid bank runs.”

“These are exactly the types of issues that policymakers must confront,” she said. “It would be irresponsible to undermine the traditional banking system by introducing a CBDC without appropriate guardrails to mitigate these potential impacts on the banking sector and the financial system.”

Is FedNow a Precursor to CBDCs?

The institution’s digital payments system, FedNow, will be launched in July. It aims to address many of the challenges that CBDC promoters discuss by establishing “a leading-edge payments system that is resilient, adaptive, and accessible.” This includes speeding up and lowering the cost of transactions.

Some have suggested that this is the beginning of a CBDC. However, the central bank recently confirmed that FedNow “is not related to a digital currency.”

U.S. dollar banknote is seen in this illustration taken July 17, 2022. (Reuters/Dado Ruvic)

“The FedNow Service is neither a form of currency nor a step toward eliminating any form of payment, including cash. The FedNow Service is an instant payments service provided by the Federal Reserve, launching in July 2023,” the Fed wrote in a tweet.

Bowman argued that the FedNow might make CBDCs redundant, asking what they could achieve “over and above what instant platforms alone can accomplish.”

Pushback

Many lawmakers in Washington and think tanks have expressed the same concerns as Bowman.

In March, Sen. Ted Cruz (R-Texas) introduced legislation prohibiting the Fed from creating a CBDC, stating that it “could be used as a financial surveillance tool by the federal government.”

House Majority Whip Tom Emmer (R-Minn.) also submitted the CBDC Anti-Surveillance State Act in February to stop “unelected bureaucrats” from issuing a CBDC that would potentially “strip Americans of their right to financial privacy.”

Even at the state level, there have been efforts to halt instituting CBDCs.

Republican Florida Gov. Ron DeSantis announced legislation to shield residents from the current administration’s “weaponization of the financial sector.”

“The Biden administration’s efforts to inject a centralized bank digital currency is about surveillance and control,” he said in a statement.

The Cato Institute recently published an in-depth report explaining that the U.S. government should not issue a CBDC “when the costs are so high and the benefits are so low.”

“The threat to freedom that a CBDC might pose is closely related to its threat to privacy,” policy analysts Nicholas Anthony and Norbert Michel wrote. “With so much data in hand and consumers so closely connected to the central bank, a CBDC would provide countless opportunities for the government to control citizens’ financial transactions.”

It’s estimated that about 100 countries are developing a CBDC.