This April Forbes column describes why central bank digital currencies (CBDCs) are a fundamental issue related to Americans’ freedom and much bigger than just politics. It argues that New York Times columnist Paul Krugman, famous for being wrong about the Internet, was wrong for claiming presidential hopeful Ron DeSantis was merely playing politics with CBDCs.

Nonetheless, Krugman has doubled down. As Crowdfund Insider explains, now he’s taken to Twitter to re-promote his original opinion piece and to liken DeSantis’s warnings about CBDCs to former presidential candidate Rick Santorum’s fight against the National Weather Service.

Contrary to Krugman’s framing, DeSantis’s claims about the risks of CBDCs have merit. As the Forbes piece demonstrated, proponents of CBDCs, even some government officials who would be in charge of implementing CBDCs, have openly discussed using CBDCs for exactly the purposes DeSantis claimed. (Nick and I have a longer list here.)

A CBDC is not “just another form of money,” as some of its supporters have claimed. A fully implemented CBDC is a complete government takeover of money and payments. As the experience in China and Nigeria have shown, the introduction of a CBDC comes with the removal of people’s freedom to choose their methods of payment.

CBDCs mark a fundamental threat to both economic and political freedom. But it should surprise no one that Krugman is wrong on this issue.

Last week at Brookings, Ben Bernanke, former Fed chair, and Olivier Blanchard, former chief economist of the International Monetary Fund, released an empirical study of the inflationary episode that followed the COVID-19 government shutdowns. According to the authors, the supply constraints caused by the pandemic shutdowns were initially a main factor, and the “easy fiscal and monetary policy” that followed made things worse.

While this conclusion shouldn’t surprise anyone, it’s their prediction for the economy’s outlook that generated some buzz.

Specifically, Bernanke and Blanchard conclude that the only way for inflation to come down is for the labor market to “cool off.” Essentially, they’re making a Phillips-curve type argument, suggesting that there will have to be substantial job loss/​wage declines (a so-called “hard landing” of the economy) before inflation comes back down to the Fed’s target.

Strangely, the Bernanke-Blanchard model results don’t really support this kind of prediction.

For instance, Figure 12 shows their “decomposition of the sources of inflation” from 2020 to the first quarter of 2023 “based on the solution of the full model and the implied impulse response functions.” The most obvious conclusion shown in the graphic is that the overwhelming majority of the inflation has been caused by everything other than labor market tightness.

Indeed, the contribution of their labor market variable to inflation is small, and the direction of that contribution is inconsistent throughout the period. From the 4th quarter of 2021 onward, for example, virtually the same size contribution from labor market tightness is associated with both increases and decreases in inflation. Aside from whether Bernanke and Blanchard have the “right” model, these results don’t clearly support their recipe for taming inflation.

To be fair, the authors note multiple times that the relationship between the unemployment rate and job opening rate (the Beveridge curve) has shifted dramatically in the economic chaos of the past few years. So, it is unlikely that their model will be valid in the coming months as the economy returns either to a pre-COVID-19 state or to an entirely different structure. Moreover, Bernanke and Blanchard offer several major caveats to their projections (on page 35), ones that go “beyond the usual statistical uncertainty surrounding the parameter estimates and the specification of the model itself.”

Given their model results, along with their extensive caveats, it would be wise to take their “hard landing” predictions with a grain of salt.

As more people have become aware of the risks of central bank digital currencies (CBDCs), more people have become confused between CBDCs provided by the government and cryptocurrencies provided by the market. It’s understandable that the two ideas may be confusing at first glance, but the reality is that CBDCs and cryptocurrencies are near opposites.

CBDC vs Crypto 101

To begin, what is a central bank digital currency, or CBDC? As the name suggests, it would be a digital currency provided by the government. It is a direct liability of the central bank. In the United States, a CBDC would be a digital form of the U.S. dollar. But make no mistake, a CBDC is not “just a different form of money.” A CBDC would fundamentally differ from existing money because it would establish a direct line between citizens and the federal government—a sort of digital tether.

Norbert Michel and I have explained at length how this fundamental change would endanger financial privacy, freedom, markets, and security. And all of which would occur with little to no unique benefit gained by the adoption of a CBDC.

On the other hand, a cryptocurrency is a digital currency provided by private actors in the market. At its core, cryptocurrency offers a way to digitally store and exchange value in a manner secured through cryptography rather than the government or third parties.

To simplify the discussion, let’s focus on Bitcoin considering it is decentralized, open, and permissionless. Put simply, you don’t need the permission of the Federal Reserve, Congress, any company, or any individual to use Bitcoin. You’re free to choose whether you’d like to use it and how you’d like to use it. And in the same sense, there’s no group or individual to freeze or seize your funds. However, this freedom goes beyond using Bitcoin for spending or saving. You’re also free to step in to help maintain the inner workings of the system (a process known as mining).

Where a CBDC is the epitome of centralized money provided by the government, Bitcoin is the best modern example of decentralized money provided by the market (Table 1).

Members of Congress have already recognized that the distinction between CBDCs and cryptocurrencies is clear. Representative Warren Davidson (R‑OH) recently noted on the news that,

A lot of times people conflate something like Bitcoin or crypto with central bank digital currency[, but] it’s the exact opposite. Bitcoin doesn’t have a central authority at its heart—there’s no one to grant you permission. … There’s no central authority able to filter it or cancel it.

Likewise, at the Bitcoin Policy Summit in Washington D.C., Senator Ted Cruz (R‑TX) said,

We see China moving forward with the intention of using a CBDC to destroy all the value of Bitcoin—to destroy anonymity [and] to destroy decentralization. Their objective is precisely the opposite of a decentralized ledger system. They want a centralized ledger that the government has complete visibility into and complete control over.

In fact, despite leading the charge for a CBDC, even the White House recently recognized that the centralized nature of a CBDC “is somewhat ironic, given that this is different from an oft-cited founding principle of crypto assets like Bitcoin, whose purported aim was to create decentralized money without any trusted central authority.” In other words, it is ironic that in a time when people are figuring out how to decentralize money and technology writ large, governments are trying to centralize money more than ever before.

The Clash Between CBDCs and Cryptocurrency

It is also important to recognize that the rise of CBDCs has largely been a retaliation to cryptocurrencies. There were discussions of CBDCs for years, but these discussions really did not amount to much until the Facebook debacle. That is, CBDCs were pretty much an afterthought in the United States until Facebook announced its intention to create its own stablecoin: Libra (later rebranded as Diem). Although Libra never came to fruition, its announcement sent policymakers, legislatures, and central banks into a panic. In fact, Google trends data clearly shows that the interest in CBDCs skyrocketed shortly after the Libra announcement in the summer of 2019 (Figure 1).

It has been nearly four years since Facebook discussed the idea of introducing a cryptocurrency, but policymakers still regularly cite the occurrence in fear of what could have happened.

The rise of cryptocurrencies, however, did not just spur a rise in interest around CBDCs among policymakers. Not content with the idea of merely competing with cryptocurrencies, policymakers have also proposed (and often succeeded) in banning cryptocurrencies in tandem with launching CBDCs. China, India, and Nigeria offer clear examples of this trend. Even in the United States, Representative Jesús “Chuy” Garcia (D‑IL)—who would later cosponsor a bill to introduce a CBDC—proposed banning tech companies from creating cryptocurrencies. Later, Daleep Singh, former economic advisor to President Joe Biden, told Congress that a CBDC would be the single best step to crowd out cryptocurrencies.

Cryptocurrencies Are Not Without Fault

Now, to be clear, cryptocurrencies have their problems. Depending on the particular cryptocurrency and its associated blockchain, there can be a steep learning curve, mild to extreme price volatility, fees, and the like. In fact, policymakers like Senators Elizabeth Warren (D‑MA) and Roger Marshall (R‑KS) have even been actively trying to weaponize cryptocurrencies as a surveillance tool—like the U.S. government has previously done with the traditional financial system. And like the traditional financial system, not all cryptocurrencies are as decentralized as Bitcoin.

The important difference to take away is that people should be free to choose if they take part in both the benefits and the risks of cryptocurrency. In stark contrast to the government’s ever tightening and ever more restrictive monopoly on money, cryptocurrencies mark a new chapter in monetary freedom. CBDCs, on the other hand, appear to be an attempt to bring that chapter to a close.

Conclusion

It is easy to get lost when navigating a sea of acronyms and terms—especially when one is navigating uncharted waters. However, cryptocurrencies and CBDCs are effectively complete opposites in their design and should not be confused. In fact, recognizing this distinction is probably why Americans are more likely to oppose CBDCs after learning what they are and can do. As Congress contemplates legislation, it is critical that its members keep the distinctions between cryptocurrencies and CBDCs clear.

Washington, D.C.– Only 16% of Americans support the U.S. government adopting a Central Bank Digital Currency or “CBDC,” according to the new Cato Institute 2023 CBDC National Survey Report. The national survey of 2,000 Americans conducted by YouGov found that twice as many Americans—34%—oppose adopting a CBDC, while 49% don’t yet have an opinion. Nevertheless, the survey finds that Americans are more concerned about a CBDC’s risks than they are enthusiastic about its benefits.

The poll was conducted as officials at the Federal Reserve, the United States’ central bank, are considering whether the U.S. should adopt a central bank digital currency. While Americans regularly use digital dollars via credit cards, debit cards, etc, those dollars are a liability of the private commercial bank that issues them, like Bank of America or Wells Fargo. Conversely, a CBDC would be a liability of the government’s Federal Reserve, rather than a private bank. Thus, a CBDC would create a direct link between citizens and the government’s central bank.

When Americans learn of the potential benefits and risks of a CBDC they express stronger opinions about whether the U.S. should adopt one. Strong majorities of Americans would oppose adopting a CBDC if it meant that the government could control what people spend their money on (74%), that the government could monitor their spending (68%), that a CBDC would lead to the abolishment of all U.S. cash (68%), that a CBDC would attract cyberattacks (65%), that the government could charge a tax on those who don’t spend money during recessions (64%), or that the government could freeze the digital bank accounts of political protesters (59%). Americans were marginally opposed (52%) if a CBDC would cause some people to stop using private banks, resulting in some banks going out of business.

Americans express tepid support for a CBDC’s potential advantages. A plurality would support one if it reduced the risk of money laundering and fraud (42%) or if it meant that the government could ensure welfare payments were spent on their intended purpose (40%). Americans are about evenly supportive or opposed if a CBDC made instantaneous financial transactions possible (27% favor), made it easier for people without bank accounts to gain equitable access to the banking system (33% favor), or helped the Federal Reserve combat economic recessions (32% favor). In nearly each of these scenarios, about a quarter to a third of Americans still don’t have an opinion about a CBDC.

Both Republicans and Democrats are wary of CBDCs, but opposition is greater among Republicans. Before any benefits or costs are mentioned, a majority (53%) of Republicans oppose the government issuing a CBDC. On the other hand, a majority of Democrats (56%) are undecided and 22% oppose. Few Republicans (11%) and Democrats (22%) support adopting a CBDC. Additionally, strong majorities of both Democrats (71%) and Republicans (82%) would oppose a CBDC if the government could control what people spend their money on and when. Majorities of Democrats (61%) and Republicans (82%) would also oppose if the government could see what people buy with the digital currency.

Most Americans are more concerned about CBDC’s potential risks than enthusiastic about the benefits when considered together: 76% of Americans say the “government should not issue a central bank digital currency because it would potentially allow the government to monitor what people buy and potentially control how they spend their money.” About a quarter (24%) say that the “government should issue a central bank digital currency because it would reduce financial crime and other illegal activity and would increase access to the financial system.”

Nearly 8 in 10 Americans (78%) say they would not use a CBDC if one were offered, while 22% say they would. Some are more inclined to use a CBDC than others. Democrats (29%), Black Americans (39%), men (28%), and Americans under 35 (40%) were more likely than Republicans (16%), Hispanic (26%) or White Americans (18%), women (17%), and Americans over 55 (8%) to say they would use a CBDC.

Americans are satisfied with their own bank (89%) and trust private banks more than the government to “handle [their] money appropriately” (79%). Further, 85% of Americans would prefer to keep their money with a private bank rather than in an account operated by the Federal Reserve (15%).

The survey also found that a CBDC is about as popular as 1984-style in-home government surveillance cameras. Only 14% of Americans support the government installing surveillance cameras in every household “to reduce domestic violence, abuse, and other illegal activity.” But strikingly–a majority (53%) of Americans who support a CBDC also support the government installing in-home surveillance cameras to reduce abuse and other illegal activity. This suggests that some of the psychology behind support for a CBDC springs from an above average comfort level with trading some personal autonomy and privacy for societal order and security.

The topline questionnaire, full methodology, and report of the survey findings can be found here. If you would like to speak to Dr. Ekins on the poll’s results, please contact pr@​cato.​org or 202–789-5200.

Late last year, the Federal Reserve caught attention for its central bank digital currency (CBDC) pilot projects. Going beyond traditional research, the Federal Reserve contracted with the private sector to build potential CBDCs for the United States. As American Banker’s John Adams reported at the time, “Even as debate in the U.S. rages over the utility of a digital dollar, work continues on the nuts and bolts of a potential American CBDC.”

Therefore, with concerns about the risks of CBDCs high and the potential for such CBDC development to go awry, Representative Alex X. Mooney (R‑WV) introduced a bill to rein in the Federal Reserve’s discretion.

The Digital Dollar Pilot Prevention Act, or DDP Prevention Act, would establish that the Federal Reserve would need explicit congressional authority to set up a CBDC pilot on its own or through a private sector contractor. The bill covers both the Federal Reserve board which would ultimately lead the charge on issuing a CBDC as well as the regional Federal Reserve banks that have thus far been conducting CBDC pilots. With that in mind, Representative Mooney’s bill would help to stop a CBDC pilot from being quietly transitioned to the masses.

The Federal Reserve recently tempered some of its public statements on CBDCs, but one doesn’t need to look far to see where other statements have given reason to be concerned. For example, former vice-chair Lael Brainard testified before Congress in 2022 that developing a CBDC may take five years. While serving this warning, Brainard attempted to make the case that the United States should create a CBDC now because it might be needed in the future:

It’s really the future states of the financial system that we should be thinking about as we think about the costs and benefits [of a CBDC.] … What is really important is that it takes a long time if, for instance, Congress decides that it is very important for the Federal Reserve to issue a [CBDC]. It could take five years to put in place the requisite security features [and] design features.

While this type of argument is less than compelling, it could help explain why the Federal Reserve has been developing potential CBDCs through pilot programs. If the Federal Reserve sees its authority to issue a CBDC as questionable, then developing one unofficially might be the next best thing in its eyes. Unofficial development through pilots, for instance, could mean that a CBDC would be ready to go if Congress gives the green light. However, it would also mean that a CBDC would be ready and could be launched alongside a flurry of other programs once a crisis occurs.

While research is important, there’s a fine line between lab experiments and operating a venture capitalist incubator for tech startups and financial institutions to get their CBDC models off the ground. More so, there’s a fine line between conducting internal research and conducting pilots where the broader public is used for experiments.

With all these factors in mind, it is easy to see why Representative Mooney is concerned about the Federal Reserve’s actions on CBDCs.

Late last year, the Nigerian government caused a cash shortage for the country’s 200 million citizens that led to protests, riots, and unrest. Since then, the Central Bank of Nigeria proudly announced that the adoption of the eNaira—Nigeria’s central bank digital currency (CBDC)—has increased twelvefold from 0.5 percent to 6 percent of the population.

Godwin Emefiele, the governor of the Central Bank of Nigeria, said, “The eNaira has emerged as the electronic payment channel of choice for financial inclusion and executing social interventions.”

Whether an adoption rate of 6 percent is a success can be debated, but there should be no misunderstanding that the eNaira was not adopted by choice. At best, it gained adoption due to desperation in the wake of the cash shortage that the government created.

Governor Emefiele has been clear that, “The destination, as far as I am concerned, is to achieve a 100% cashless economy in Nigeria.” But make no mistake, while a cashless economy may be the choice that the Nigerian government has made, it is not a choice that Nigerian citizens have been free to make.

Recent Gallup polls have found that public confidence in Fed chair, Jerome Powell, is at an all-time low, with only 36% of respondents indicating a “great deal” or “fair amount” of confidence that the Fed chair would right the economy. This low point follows waves of criticism from ex- and potential Presidents along with current President Joe Biden placing the Fed at the forefront of combating the post-Covid inflationary spike. Combined with a 2022 survey that shows 74% of U.S. voters believe the Fed has “a lot of control” or “some control” over inflation, it is clear why the Fed has found itself in the center of the political crossfire from all directions. Most people believe the Fed controls inflation, so they’re upset with the Fed.

But does the Fed have as much control as everyone seems to think? It could be the case that other factors, largely out of the Fed’s control, have more influence on inflation than the Fed. These include demand factors such as increased fiscal stimulus or supply factors that raise input prices or supply chain issues that cause shortages. Or, perhaps, the Fed would have to drastically tighten credit markets, thus harming the broader economy, in order to exert the control it does have over inflation. Admittedly, this issue is not easy to address. A basic regression analysis, for example, would be insufficient because it is difficult to control for the cross-dependence of macro indicators on each other and because many economic outcomes occur simultaneously. For these reasons, a standard macroeconomic tool to address such policy questions is the Vector Auto Regression (VAR).

While even a VAR analysis has its limitations, as our new Cato working paper demonstrates, the Fed has not exercised significant control over inflation. Specifically, the paper uses a VAR framework to study changes to the Fed’s preferred measure of prices, the Personal Consumption Expenditure (PCE) index (and its components), for various periods from 1960 to 2019.

The paper shows that in response to unanticipated tightening to the policy rate, a so-called positive “monetary policy shock,” inflation often increases. This change, of course, is in the opposite direction the Fed is trying to achieve. Put differently, in response to the Fed’s tightening, inflation rarely falls and when it does, it falls minimally.

The paper also shows that supply factors – not monetary policy – dominate the overall changes (variability) in inflation. Supply factors account for over 70% of inflation variability in all scenarios, often accounting for more than 80%. Monetary policy, on the other hand, usually contributes between 5% and 10% to inflation variability. In fact, at long-term horizons (5 years after the initial rate hike), even demand-side factors become more important than monetary policy. These findings are robust to sample selection, model specification, and when incorporating financial sector effects.

While the Fed was undoubtedly slow in responding to inflation after the COVID crisis, it is important for policymakers to consider both the supply-side and demand-side causes at play during and after the COVID crisis. Simply put, the evidence suggests these factors far outweigh what the Fed can normally do to control inflation. Anti-inflationary policies necessitate a wholistic approach and cannot merely rely on timely changes to the Fed’s policy rate.