The anti-CBDC bill is a fake answer to real privacy problems

Graeme Sloan/Bloomberg

Just over a month ago, a last-minute political scuffle managed to get three crypto-related bills approved by the House of Representatives. One was the GENIUS Act stablecoin bill, which had already passed the Senate and so was signed into law a few days later. Another was the CLARITY Act, which aims to establish a digital asset market structure framework and will be picked up by the Senate for heated debate after the summer recess.

A third was the anti-CBDC bill, which aims to prevent the Federal Reserve from ever issuing a central bank digital currency, or CBDC. As the simplest of the three, this one has been largely overlooked. It deserves more scrutiny, however, not for its stated purpose, but for the exaggerated claims, misdirection of intent and unnecessary limitations.

H. R. 1919, known as the "Anti-CBDC Surveillance State Act," is mercifully short, at barely one page. In just a few words, it puts big barriers in the Fed's way should it ever want to issue a digital currency to replace physical cash. (Companion legislation has been introduced in the Senate and is currently pending before the banking committee.)

Specifically, it prohibits any Federal Reserve bank from offering financial products or services — digital or not — directly to individuals. It also blocks all Federal Reserve banks from issuing any form of digital money that is a direct liability of the Federal Reserve System and is widely available to the public.

The thing is, as Fed Chair Jerome Powell himself has often pointed out and on which Fed scholars agree, the U.S. central bank would not be able to go beyond its current mandate — such as directly serving the public — without congressional approval anyway. Given the need for wide buy-in for such a move from banks, businesses and consumers, who would most likely see this as Fed overreach, that congressional approval would hardly be forthcoming. 

The bill goes further than just a retail CBDC issuance prohibition, though: It also says that the Federal Reserve "may not test, study, develop, create, or implement" anything even similar to a central bank digital currency.

That's a harsh ban. It could be read as preventing the Fed's participation in international groups debating various forms of digital issuance, potentially limiting its global influence. It could also require the exit of the Federal Reserve Bank of New York from Project Agorá, a Bank for International Settlements-helmed, multi-institution initiative to explore cross-border tokenized payments.

True, Project Agorá focuses on wholesale CBDCs which have the potential to improve cross-border interbank transfers. But the bill emphasizes that the ban extends to "substantially similar" assets, which could leave room for an oppressive interpretation. And blocking all testing and studying of digital issuance from a central bank, just in case, is not exactly pro-innovation.

So, why go to the trouble of enshrining into law a prohibition of something that can't happen anyway, and that unnecessarily blocks exploration of the impact of new technologies on the global banking system?

The politicians involved insist it's to protect our privacy. The not unreasonable fear is that, if physical cash is replaced by a digital equivalent issued by the central bank, the authorities will have insight into all of our transactions, and possibly also the means with which to influence our behavior.

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This assumes that the government doesn't already know where our money goes. Almost 90% of payments today are digital, and that percentage is likely to increase as our lives continue their migration online. Some of us take care to use cash in certain circumstances, but even this is likely to become increasingly difficult as businesses prefer accounting for digital payments to the management hassle of tallying and securing physical notes and coins.

So, how much privacy would we actually lose were the Federal Reserve to issue a retail CBDC? Not nearly as much as we're led to believe. Many of us would want to hold on to the option of paying with cash, even though fewer of us would actually do so. And even if the cash option were to get legislated away, these days there are digital alternatives such as cryptocurrencies that move on public networks outside of traditional domains.

Meanwhile, a much bigger threat to financial privacy is the Bank Secrecy Act, or BSA, which allows the authorities broad access to transaction histories collected from a wide range of intermediaries, and mandates that financial institutions flag any payment deemed "suspicious," with penalties for underreporting.

Moves to curb the BSA's scope would have a material impact on our financial privacy, and while there have been a few isolated attempts, they have not progressed as far as the anti-CBDC bill. This is not surprising — authorities rarely want to give up surveillance rights once they have them. And politicians are usually reluctant to suggest they do so, in case they get blamed for any future adverse events.

What's more, the focus on privacy masks a bigger threat: the disruption of our financial structure in exchange for little benefit. The central bank would foist on merchants and individuals a product they don't need or want while essentially competing with the banks it is tasked to oversee, diverting consumer deposits into Federal Reserve-issued CBDC wallets, and suppressing bank payment fees by establishing a competing network. And a weaker commercial banking system in the world's largest economy could end up hurting confidence in the dollar.

Yet politicians are understandably loath to focus on that risk: "We want to protect banks" does not have the same ring to it as "we want to protect your privacy."

This highlights my main objection to the bill: It's theater. A retail CBDC in the U.S. is not going to happen, with or without new legislation. And blocking a retail CBDC will not restore financial privacy, yet the bill is presented as a triumph for the individual.

Nevertheless, the noise does suggest a glimmer of hope that the political support around the Anti-CBDC bill could rekindle the privacy debate, perhaps awakening new questions, triggering stronger objections and leading to reforms elsewhere.