‘Privacy Is a Top Concern’: Fed Governor Warns About CBDC Risks

Federal Reserve Governor Michelle Bowman gives her first public remarks as a Fed policymaker at an American Bankers Association conference in San Diego on Feb. 11, 2019. (Ann Saphir/Reuters)

The use of Central Bank Digital Currencies (CBDC) poses considerable risks to the privacy of Americans, potentially even limiting how citizens can use their own money, Federal Reserve Governor Michelle W. Bowman warned during a recent speech.

“In my view, safeguarding privacy is a top concern and is also often identified as a top concern of consumers and other stakeholders,” Bowman said in her April 18 speech at the Psaros Center for Financial Markets and Policy, part of Georgetown University’s McDonough School of Business in Washington.

“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,” said Bowman.

“So, a central consideration must be how a potential U.S. CBDC could incorporate privacy considerations into its design, and what technology and policy options could support a robust privacy framework.”

Bowman wants CBDCs to have enough protections to safeguard the privacy of customers and businesses while also being transparent enough to deter criminal activity. The consumer data privacy protections embedded in present day payment systems must be “extended” to future systems, she said.

Bowman also raised doubts about claims that a CBDC could somehow improve financial inclusion. More than 95 percent of American households have at least one member with a bank account, she said.

Out of the remaining 4.5 percent who are unbanked, almost three-quarters have no interest in having a bank account. Moreover, a third cited a lack of trust in banks as the reason why they do not hold bank accounts.

“I think it is unlikely that this group would find the government somehow more trustworthy than highly regulated banks. Unbanked households are also less likely to own mobile phones or have access to the internet, which would present barriers to CBDC adoption,” Bowman said.

Speedy Payments, Threat to Banking System

There have been arguments that CBDCs could improve the speed of payments. However, Bowman believes there are other alternatives that could achieve the same result.

“Improving the speed of payments, particularly retail payments, can be accomplished without the introduction of a CBDC. In the United States, beginning later this year, the Federal Reserve’s FedNow Service will enable banks in the United States to offer their customers the ability to send and receive payments in real-time,” she stated.

Bowman also pointed to “significant risks” in adopting a CBDC that “cannibalizes rather than complements” the U.S. banking system. An improperly designed CBDC could disrupt the entire banking system and eventually present “broader financial stability risks.”

To explain her point, Bowman gave the example of a CBDC that pays interest rates at comparable or better rates than commercial bank deposits and other low-risk assets.

“It seems likely that such a CBDC would reduce the funds available to lend and increase the cost of capital across the economy. Likewise, we need to consider the effect on bank stability, and the potential of even more rapid bank runs, in a world where there are fewer constraints on the volume and velocity of payments,” she warned.

“When it comes to some of the broader design and policy issues, particularly those around consumer privacy and impacts on the banking system, it is difficult to imagine a world where the tradeoffs between benefits and unintended consequences could justify a direct access CBDC for uses beyond interbank and wholesale transactions.”

Government Surveillance

Robert F. Kennedy Jr., who recently threw his hat into the 2024 presidential race in the Democrat primary, had also warned about the government controlling people via CBDCs.

“While cash transactions are anonymous, a #CBDC will allow the government to surveil all our private financial affairs. The central bank will have the power to enforce dollar limits on our transactions restricting where you can send money, where you can spend it, and when money expires,” he said in an April 5 tweet. “A CBDC tied to digital ID and social credit score will allow the government to freeze your assets or limit your spending to approved vendors if you fail to comply with arbitrary diktats, i.e. vaccine mandates.”

Kennedy predicts that the Fed will initially limit the use of CBDC to interbank transactions alone. However, there is an “obvious danger” that this will only be the first step in banning and seizing bitcoin, he said, while pointing to the U.S. Treasury nationalizing the private gold stock back in 1933.

Banning Fed From Issuing CBDC

On March 21, Republican Sen. Ted Cruz introduced legislation to ban the Federal Reserve from launching a “direct-to-consumer” CBDC, raising concerns that it could be used as a “financial surveillance tool” by the federal government.

It is “more important than ever to ensure the United States’ digital currency policy protects financial privacy, maintains the dollar’s dominance, and cultivates innovation,” he said.

CBDCs that fail to adhere to these principles risk turning the central bank into a retail bank that can “collect personally identifiable information on users, and track their transactions indefinitely.”

The office of Florida Gov. Ron DeSantis has already said that the state will “never recognize centralized digital currency.” Florida lawmakers have proposed legislation that would ban CBDCs from being used in the state.

“Biden Bureaucrats are working to further weaponize the financial sector through a Central Bank Digital Currency,” DeSantis’ press secretary Bryan Griffin said in an April 11 tweet.