It’s been over six months since the Infrastructure Investment and Jobs Act was passed with its cryptocurrency reporting provisions intact. If left unamended, those provisions will require exchanges, miners, and software developers to report the name and address of each “customer” as well as any business engaged in a transaction of $10,000 or more in cryptocurrency to report the customer’s name, address, taxpayer identification number, amount paid, date, and nature of the transaction. Worse yet, it’s only six months until the reporting requirements will start to go in effect.

Much has happened in 2022 thus far, so it is understandable that the issue lost the spotlight. Soaring inflation, Canada’s mass freeze on bank accounts, Russia’s invasion of Ukraine, and the like have all been well deserving of our attention. Yet in the last week, both a pair of senators and Coin Center brought the reporting provisions back into focus.

First up, Senators Cynthia Lummis (R‑WY) and Kirsten Gillibrand (D‑NY) introduced legislation to create a regulatory framework for cryptocurrencies where much of the focus is on designating regulatory authority. In his analysis of the bill, Cato’s Jack Solowey wrote, “The question that the Lummis‐​Gillibrand bill seeks to answer is less ‘whether’ it is the SEC or the CFTC that has a role to play in crypto regulation so much as ‘when’ each agency does.” However, the bill also included language from Representatives Patrick McHenry (R‑NC) and Tim Ryan’s (D‑OH) bill that seeks to redefine the broker definition (section 6045) and repeal the reporting requirement (section 6050I) that were enacted in the Infrastructure Act. While a full repeal of both sections is the most desirable route, the balance struck in the McHenry-Ryan proposal appears to be the most politically-feasible option right now.

Second, Coin Center announced that they are officially suing the Treasury Department. Jerry Brito explained one of the driving forces behind the decision when he wrote, “Forcing citizens to collect highly intrusive information about other citizens, and report it to the government without a warrant, is unconstitutional under the Fourth Amendment.” I couldn’t agree more.

As I noted in my briefing paper on the cryptocurrency provisions in the Infrastructure Act, it was only a matter of time before the issue would be taken to the courts. Although the Supreme Court has held that the Fourth Amendment does not apply when the government seeks records held by a third party (i.e., financial institutions), section 6050I of the tax code requires individuals to report on their peers where no third party is involved. Notably, section 6050I was enacted after the Supreme Court’s decision on the third-party doctrine and has yet to be challenged—until now, that is.

Coin Center’s case leads with two major claims. The first claim argues it is a violation of the Fourth Amendment to force people to collect information about their peers­­­­­­­—essentially deputizing them as law enforcement investigators. The second claim then argues that it is a violation of the First Amendment to force politically active organizations (e.g., think tanks and charities) to create and report lists of their donors as is required under the current provisions. It will take time for the case to unfold, but both claims have major implications not just for the cryptocurrency industry, but the financial system as a whole.

Whether it is in enforcing a provision of the tax code or the Bank Secrecy Act’s (BSA) requirements, the fact remains the same that the government should have to “prove before a judge that it has reasonable suspicion warranting a search of our private papers.” It may make it harder for law enforcement to have to get a warrant to investigate someone’s financial activity, but protecting citizens from the unchecked hand of the state is the reason the Constitution exists. The government does not get to ignore the Constitution just because it’s “inconvenient.” Whether it is through the amendment or the lawsuit, it’s time for the law to change.

Although it’s unfortunate that this surveillance has survived for so long, it’s good that it’s being thrust into the spotlight now. The Supreme Court did not hold that the BSA violated citizens’ rights to financial privacy in the 1970s, but the Justices did recognize that technological change could easily mean that the BSA would violate those rights. And today’s financial world is much different, a fact acknowledged by current Supreme Court Justices Gorsuch and Sotomayor.

In 2001, the Supreme Court recognized that technology used to surveil the inside of a home from afar (e.g., thermal imaging) without a warrant was a violation of the Fourth Amendment. Likewise, in 2012, the Supreme Court held that installing a GPS tracker on a vehicle without a warrant was a violation of the Fourth Amendment. And then in 2018, the Supreme Court held that accessing cellphone location data without a warrant was a violation of the Fourth Amendment.

If Coin Center’s case goes to the Supreme Court, there’s a real chance that the law will not only be ruled unconstitutional, but also that the case will open the door for additional long-needed changes to strengthen Americans’ constitutional protections.

In 1997, Former Federal Reserve Chairman Ben Bernanke, while still an academic, wrote a famous historical study for the Brookings Institution: “Systematic Monetary Policy and the Effects of Oil Price Shocks” with Mark Gertler and Mark Watson.

It began by documenting that “essentially all the U.S. recessions of the past thirty years have been preceded by both oil price increases and a tightening of monetary policy.” So here we are again tightening monetary policy at a time of unaffordable oil price increases.

In fact, Fed Chairman Jerome Powell argues the Fed must be more aggressive about raising the federal funds rate higher and faster precisely because Russia’s war on Ukraine has inflated global prices of oil, natural gas, grains and more.

At a March talk to the National Association of Business Economists Chairman Powell lamented, “The added near-term upward pressure from the invasion of Ukraine on inflation from energy, food, and other commodities comes at a time of already too high inflation. In normal times … monetary policy would look through a brief burst of inflation associated with commodity price shocks. However, the risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher.”

That is a relatively hazy anxiety, since expectations change when the facts change. The University of Michigan survey of inflation expected over the next 12 month moves up down with monthly changes in reported actual inflation over the past 12 months (the infamous year-to-year change). That survey of expected inflation even moves up and down with contemporary changes in the price of gasoline.

What we know we almost perfect certainty is that every time in U.S. postwar history that monetary policy has added the burden of rising interest expense to the burden of added energy expense (most recently in 2004–2008), the result has always been recession.

But some will say that recession (always promised to be mild) is the price we must pay to get inflation down, which it does briefly while the recession is underway. But recessions always result in the Fed reversing course and slashing the fed funds rates ­– from 17.6% to 9% from April to July 1980 under Volcker, and from 5 ¼ % to zero in 2007-08 under Bernanke.

The difference between 9 hard landings and 4 soft landings in Fed interest rate cycles is that the Fed always starts cutting interest rates before recessions start in soft landings, and always starts too late in hard landings.

(From the entry on “Money,” by Charles Francis Bastable, in the famous 11th edition of the Encyclopedia Britannica):

The very large number of the autonomous cities of Greece, which possessed the right of issuing money, was the cause of the competition between different currencies, each having legal tender power only within its own city. In its practical outcome this “free coinage” system proved beneficial, for it compelled the maintenance of the true standard in order to gain wider circulation. With the establishment of larger states the control over the issue of money grew more stringent. In the later Roman Empire the right of coining was reserved to the emperor exclusively. …

A long course of debasement is the characteristic aspect of the [imperial Roman] currency system. “Under the empire,” we are told, “the history of silver coinage is one of melancholy debasement. The most extensive frauds in connexion with money were perpetuated by the Romans.” The gold aureas, which in the time of Augustus was one forty-fifth of a pound, was under Constantine only one seventy-second of a pound. The alloy in the silver coins gradually rose to three-fourths of the weight. Plated coins came into extensive use. The practice of debasement was in accordance with the theories of the jurists, who seem to have regarded money as simply the creature of the state.

The hidden tax of inflation has been a little less hidden lately. From grocery stores to gas stations, people are seeing prices rise before their eyes. Yet it’s not just our wallets that are paying the price. For 50 years, inflation has helped the U.S. government increase financial surveillance under the Bank Secrecy Act by silently increasing the activities banks must report in their effort to counter financial crime.

One of the key requirements of the 1970 Bank Secrecy Act was that banks must report to the government any time a customer’s financial activity crosses any number of thresholds. For instance, banks are required to file currency transaction reports (CTRs) whenever a customer makes a cash transaction over $10,000 or multiple cash transactions in a single day that add up to $10,000.

The result of the law is that thousands of reports are filed every day against Americans for merely using their own money.

So what does inflation have to do with the reports? The $10,000 threshold was set 50 years ago. If it were adjusted for inflation all this time, the threshold would be nearly $75,000 today. So while it may have been politically feasible to set a “high” threshold of $10,000 in the 1970s when you could buy two brand new Corvettes for that price, the threshold should have been designed with an adjustment for inflation so it would change to reflect changes in the economy (Figure 1).

Without that adjustment, as JP Koning has described, “This means ever more invasions of privacy and higher costs of compliance.” Each year with inflation is another year that the government is granted further access to people’s financial activity.

More people are taking notice, though. The issue came up multiple times during a recent congressional hearing. Representatives Barry Loudermilk (R‑GA), Joyce Beatty (D‑OH), French Hill (R‑AR), Bryan Steil (R‑WI), and Roger Williams (R‑TX) all were right to express concern over what is at best an administrative oversight and at worst a planned expansion of financial surveillance without public notice.

Yet it is not just an issue of unjust surveillance and rising compliance costs. The artificially low threshold also forces the Financial Crimes Enforcement Network (FinCEN) to face an ever-expanding workload––something the cash-strapped agency cannot afford to engage in. “Finding a needle in the haystack is dependent on a number of things,” said Representative Steil at the hearing, “One of them being how big the haystack is. So if we can find a way to get the haystack down, I think it may actually put us in the position to more easily find the needle.”

The numbers seem to support the representative’s assessment. For instance, a 2018 Bank Policy Institute (BPI) study found only 3.85% of suspicious activity reports (SARs) and 0.44% of CTRs required some form of follow up by law enforcement (Figure 2).

After the hearing, former FinCEN Acting Director Michael Mosier pointed out that better statistics are needed. As BPI noted in the study, they used follow ups from law enforcement (e.g., requests for written summaries or other documentation) as a proxy to measure how many reports lead to investigations. So while it is one of the best available indicators, better data is needed to explain exactly how many SARs and CTRs lead to investigations, law enforcement taking action, unique criminal convictions, or additional charges on existing investigations.

With that said, other data appear to confirm that the flood of reports has not aided law enforcement significantly. In a 2016 study, Norbert Michel and David Burton found that money laundering investigations by the FBI had largely fallen between 2001 and 2011 despite the number of suspicious activity reports rising (Figure 3). This indicator is also only a proxy for measuring total investigations, but it should be enough, at the very least, to confirm that a serious review of the data is warranted––and that review should be taking place from both inside and outside of FinCEN.

FinCEN Acting Director Himamauli Das could not give any insight into FinCEN’s view on the thresholds at the hearing, but he did say he was committed to reviewing the data as required by Sections 6204 and 6205 of the National Defense Authorization Act. He said that he expects that FinCEN will issue a report later this year with their findings and recommendations. Considering it was just a few years ago that FinCEN judged inflation as having been significant enough to warrant an increase for its monetary penalties, similar adjustments should be warranted to finally stop this 50-year-long encroachment on Americans’ financial privacy.

Inflation has helped silently expand the reporting on people’s financial activity, and it’s been doing so for the last half century. If we don’t update this policy by raising the reporting threshold, or—better yet—doing away with the invasive practice entirely, the encroachment on Americans’ privacy will keep getting worse, and so will law enforcement’s ability to catch the bad guys.

In the wonky world of economic policy analysis, old fallacies seldom die. Consider the following passage in this week’s Morning Money, discussing the failure of the Fed’s flexible average inflation targeting (FAIT) framework:

But the [FAIT] policy was designed for an economy that doesn’t resemble the pandemic-era world—one in which inflation increased based on healthy economic factors, including plentiful jobs, bolstered by economic growth, that pushes up wages as well as prices.

Whatever the merits of FAIT, the idea that healthy economic growth causes inflation is as barmy as it is enduring.

It happens that my colleague, George Selgin, has been trying to put this delusion to rest for decades. In his 1997 book Less Than Zero, for instance, he explains that the more output an economy generates, the cheaper things tend to get, other things equal. In other words, if inflation is more money chasing fewer goods, healthy economic growth is more goods chasing the same amount of money.

What’s more, Selgin shows that the sort of deflation healthy growth causes can itself be perfectly healthy: unlike deflation caused by a lack of demand, it doesn’t mean that anyone has to earn less. It just means that the money they earn buys more stuff. (For additional explanation, see here, here, here, here, and here.)

If it sometimes makes sense for central banks to “see through” inflation because events like COVID and the war in Ukraine reduce economic output, it makes just as much sense to see through occasional below-average inflation, if not outright deflation, in good times.

These points aren’t just academic. The mistaken view constantly pushes the debate over optimal monetary policy in the wrong direction, leaving all sides without a clear path toward better policy.

Let’s hope it won’t take another 20-plus years to get members of Congress to admit that price stability should not be the Fed’s mandate. Given our fiat money system, it would be far better to require the Fed to target stable total nominal spending, thus allowing the price level to fluctuate as appropriate, based on the broader economic circumstances.

We’d still need many other financial reforms to get the most out of economic freedom, but this shift would likely make those easier to implement.

Although I’ve devoted many essays here to exploding myths about historical private currencies, there’s one I’ve yet to directly challenge. That’s the belief that such currencies only thrive in the absence of official alternatives. Otherwise, the argument goes, people would drop private currencies like so many hot rocks. Since this opinion assumes that private currencies are inevitably inferior to official ones, I hereby christen it the “ersatz” theory of private currency. Note that “currency” means circulating or (in today’s digital context) peer-to-peer exchange media: nobody denies that other sorts of private money, such as commercial bank deposits and traveler’s checks, can coexist with official alternatives.

Implicit appeals to the ersatz theory of private currency are as common as muck. Take, for example, this statement by the ECB’s Yves Mersch:

Only an independent central bank with a strong mandate can provide the institutional backing necessary to issue reliable forms of money and rigorously preserve public trust in them. So private currencies have little or no prospect of establishing themselves as viable alternatives to centrally issued money that is accepted as legal tender.

Since governments alone can declare a currency “legal tender,” it’s seldom possible for private currencies to “establish themselves” as such, no matter how good or popular they are. El Salvador’s decision to declare Bitcoin legal tender was a rare exception. But I take Mersch to mean that, legal tender or not, private currencies simply can’t hope to compete successfully against centrally issued money.

Paul Krugman explicitly appeals to the ersatz theory in observing, in a recent New York Times column, that although “private currencies did indeed circulate and function as mediums of exchange” during the United States “free banking” era, this was so “because there were no better alternatives: greenbacks—dollar notes issued by the U.S. Treasury—didn’t yet exist.” Krugman goes on to say that, because “greenbacks and government-insured bank deposits do exist” today, “stablecoins play almost no role in ordinary business transactions.”

Like Mersch and most others who subscribe to the ersatz theory of private currency, either explicitly or implicitly, Krugman doesn’t seem to consider another possibility, to wit: that private currencies seldom survive, not because the public prefers centrally-supplied, official currencies, but because governments routinely slant currency playing fields in official currencies’ favor, often by banning private alternatives outright. Let’s call this the “coercive” theory of official currencies. If the ersatz theory is correct, the historical record should show that private currencies died out on their own once official alternatives were available. If, instead, the coercive theory is correct, governments would have had to take further steps to seal private currencies’ fate.

Banking on the State

Before we look into how private currencies die, we should first consider the circumstances that tend to give birth to them. According to the ersatz theory, the key requirement is the lack of official, hence presumably superior, alternatives, as when a central government simply hasn’t gotten around to issuing its own currency. Yet it’s easy to show that private currencies often got going, not because there were no official alternatives, but because official money sucked.

Consider the earliest known paper money—the “Flying cash” of Tang Dynasty China (618 to 907 AD). It was developed by merchants as a substitute for official Chinese copper coins which, besides being incredibly bulky, were often unavailable in adequate quantities. In Europe as well, though much later, it was the shoddy state of official coins that gave rise to private paper substitutes. As William Stanley Jevons (chap. XVI) explains,

The origin of the European system of bank-notes is to be found in the deposit banks established in Italy from four to seven centuries ago. In those days the circulating medium consisted of a mixture of coins of many denominations, variously clipped or depreciated. In receiving money, the merchant had to weigh and estimate the fineness of each coin, and much trouble, loss of time, and risk of fraud thus arose. It became, therefore, the custom in the mercantile republics of Italy to deposit such money in a bank, where its value was accurately estimated, once for all, and placed to the credit of the depositor.

I can well imagine Krugman, or someone who thinks like him, saying, “Ah, but there was no official paper money people might resort to in these instances.” There wasn’t; but this is missing the larger point, which is that there might never have been had private innovators not come up with and tested the idea. In the past, like today, it was such innovators who came up with new and often superior exchange media. Governments then tended to muscle in, eventually snuffing out their would-be private rivals. Nor was the result always an improvement. Take what happened in China. At the start of the Chin-dynasty, emperor Hsiao-tsung (1163–90) gave China its first nationally-regulated paper money, suppressing private substitutes. Before you could say Jack Robinson, China experienced “the first nation-wide inflation of paper money in world history.”

Green with Envy

Now let’s consider a case in which private currencies had to compete with relatively close, official substitutes. As Krugman, in endorsing the ersatz theory, instances notes issued by state banks during the U.S. “free banking” era (1837–1865), one might suppose that, if any private currencies ever went “gentle into that good night” as soon official alternatives became available, those issued by state banks must have done so as soon as the U.S. Treasury entered the currency business.

Let us see. The first “greenbacks,” officially called “demand notes” because the U.S. Treasury was supposed to redeem them in specie on demand, were made available in August 1861. By December, the Treasury had reneged on its promise (sound familiar?), effectively placing the nation on a greenback standard, where it remained until 1879. In all $60 million in demand notes were authorized. In February 1861, these were supplemented by $150 million in new legal-tender greenbacks, $400 million of which would ultimately be authorized. By the end of 1861, there were more greenbacks than state banknotes in circulation. Since greenbacks, besides being legal tender, were free of default risk, if only because the Treasury had already broken its solemn promise to redeem its paper in specie, the public must surely have preferred them to state banks’ riskier products.

Yet, instead of shrinking, the quantity of state banknotes kept growing. From $184 million in December 1861, it had risen to $239 million on the first of January, 1863. Whatever else greenbacks were doing, they weren’t driving state banks out of the currency business.

National Banknotes

But greenbacks weren’t the only central-government-sponsored currency state bankers had to contend with. In February 1863, President Lincoln signed the National Currency Act, authorizing national banks. The notes of these federally-chartered banks had to be more than fully secured by U.S. Treasury securities. The foremost aim of the new law, and of that last stipulation in particular, was to help fund the Union war effort: the greater the number of national banks, the greater the market for government bonds. But the law’s authors were especially keen on seeing state banks convert to national charters so that the nation could at last say good riddance to those pesky state-authorized banknotes. Because most banks back then depended for their survival on being able to keep notes in circulation, that’s just what would have happened had the public really preferred national currency.

Alas for the Union’s plan, it turned out that the public was rather fond of those old state banknotes—so fond, in fact, that few state banks opted to convert to the new, national charters. In 1860, there were 1,650 state banks, almost all of which issued their own notes. By the end of 1863, only nine, almost all formerly part of the State Bank of Ohio system, had switched to national charters. A year later, fewer than 200 had done so. As I’ve explained at length elsewhere, this wasn’t a result of any identifiable market failure. Nor can it be attributed to less-stringent state bank regulations: were national banknotes truly preferred, most state banks, and those in rural areas especially, would have had no choice but to either switch to national charters or go out of business, because their profits depended on their circulation. Although many state banks did close in 1863, according to Matt Jaremski (p. 384), they did so, not because the new national currency was preferred to their own, but because of losses they suffered as a result of the outbreak of the Civil War. The simple truth is that state banks, and the notes they issued, survived the 1863 Act because the public was happy to go on using their currency. Indeed, between 1863 and 1864, 25 new state banks opened.

This conclusion will undoubtedly seem incredible to those who recall horror stories about antebellum U.S. currency. But while some of those stories are true, they refer only to a relatively small proportion of antebellum banknotes. They also refer mainly to the early years of the so-called “free banking” era. Although the outbreak of the Civil War caused another cluster of Midwestern “free” banks to fail, owing to the depreciation of Western and Southern bonds they were obliged to hold as backing for their notes (ibid., p. 382), elsewhere state bank currencies, though still far from perfect, had improved considerably. Despite the tremendous handicap of barriers to branch banking, banknote discounts had come down to very modest levels; and some banknotes, including those issued by the banks in the Northeast, circulated at par almost everywhere.

Carrots and Sticks

Disappointed by state bankers’ response to the National Currency Act, the government tried again, passing a revised version—the National Bank Act—in June, 1964. The new version tried to make national banknotes more appealing by requiring every national bank to receive all national banknotes at par. (It was ultimately this requirement, rather than the notes’ implicit Treasury guarantee, that ruled-out discounts.) It also tried to make national charters more appealing to state bankers by relaxing national bank capital and reserve requirements, and by allowing converted state banks to incorporate their original names into their new ones. Thus the “Merchants and Mechanics Bank” of Troy, New York, could become the “Merchants and Mechanics National Bank” of that same city, instead of having to be “the Third National Bank of Troy New York” as the earlier law had required. That state banks wanted to keep their old names suggests that they feared losing valuable brand-name capital, which they wouldn’t have done had the words “national bank” alone made up for the loss.

The revised law did lead to more state bank conversions (see the figure reproduced from Jaremski’s article below), with another 245 state banks converting in 1864 alone. But these conversions were mostly of larger state banks in bigger towns and cities, and major financial centers especially, where banks could survive on deposit-taking alone. Rural state banks, in contrast, still stuck to their old charters, so that they could still issue their own notes, for which there was still a robust demand. In all, over one-thousand state banks survived into 1865.

The continued survival of so many state banks of issue, despite what were by then substantial numbers of national banks notes from which might circulate anywhere, ought to have suggested to government officials that state banks and their currencies were meeting needs national banks could not. Instead it persuaded them to start playing hardball with obstinate state bankers. And hardball is what they played by including a prohibitive 10 percent tax on state banknotes in the March, 1865 Revenue Act.

A Hollow Victory

The OCC says that, in taxing the notes of state banks, the federal government was “signaling its determination that national banks would triumph and the state banks would fade away.” But that “fade away” is so much sugar-coating: deprived of their ability to issue currency, state banks dropped like flies. Although they were granted a stay of execution by a law delaying the implementation of the tax until August 1866, by the end of the decade only 250 state banks were left. Nor was their demise a reflection of the public’s belated discovery of their notes’ inferiority. According to Jaremski (p. 386), who has studied the matter closely, the 10 percent tax “seems to have been the only piece of legislation capable of closing state banks” (my emphasis).

And just what sort of “triumph” was this? It was surely not one for currency users, who had long had the option of refusing state bank notes, but were now deprived of the option of having them. Nor was it a triumph for the communities that lost their former state banks: being unable to muster up the capital needed to establish national banks, many ended up being deprived of banks altogether. The Midwest and the South were especially hard hit, with the latter suffering not only because it had been impoverished by the war, but because the total circulation of national banknotes was limited until 1875, and almost all had been spoken for by the time the Civil War ended. Many, myself among them, believe that the lack of banks was an important cause of the South’s persistent post-bellum underdevelopment.

“But at least the new currency was more reliable!” In some respects, perhaps. And as an alternative to state banknotes, which it was until that damned tax was passed, it could only have been beneficial. But in other respects, the nationalized paper currency system was deeply flawed. Consequently, by making national banknotes and greenbacks the United States’ only legal paper monies, the government unwittingly helped set the stage for the recurring “currency panics” of the last decades of the 19th century and the first decade of the 20th. Those panics were consequences of the “inelastic” supply of official paper currency—of an absolute limit on greenbacks and the bond-backing requirement for national banknotes. Had state banks not been forced out of the currency business, their notes might have met demands for currency that national banks couldn’t meet, and we might have been spared yet another federal government “triumph” in the field of currency.

The Rest of the Story

I’ve singled out the story of U.S. “national” currency because Krugman refers to it. But it is only one historical instance of many that I might offer contradicting the ersatz theory of private currency, while affirming the coercive alternative. In fact, so far as I’m aware, private paper currencies, including notes issued by ordinary commercial banks without the benefit of official guarantees, have never been driven to extinction by the mere presence of official alternatives. Instead, they’ve always been forced out of existence, by prohibitive taxes, impossibly onerous regulations, or (most often) outright prohibition. This was so in England and Wales. It was so in France and in Italy. It was so in Sweden and Switzerland and Canada and…but it would be tedious to list all the cases I’m aware of. Instead, I challenge my readers to inform me of an exception, that is, a case where some official currency out-competed private rivals, fair and square.

Of course, even if no such exception exists, it may still be true that private digital currency can’t compete successfully, on a level playing field, against centrally-supplied alternatives. But we’ll never know unless governments allow such competition to take place. Perhaps Paul Krugman will welcome such competition. But I doubt it. He may say that private currencies tend to die out naturally. But what he means is that, since they’re bound to die anyway, the government might as well kill them.

[Cross-posted from Alt‑M.org]

Although governments around the world seem to see central bank digital currencies (CBDCs) as the next step forward in the future of money, the American public appears to see CBDCs as a step backward. Of the 1,517 comment letters released by the Federal Reserve (Fed) thus far, 72 percent of the commenters called for the Fed to abandon its plans or expressed a negative opinion toward CBDCs (Figure 1).

A little housekeeping with the data reveals it may actually be 76% of commenters that oppose the idea of a CBDC (Figure 2). For instance, 46 of the comments were entirely blank and likely submitted in error. Also, there were 42 comments that appeared to be attempts by people in the private sector seeking government contracts. Removing both groups improves the view of what the general public is thinking.

A majority of the commenters were specifically concerned about the risk to financial privacy, the risk of financial oppression, and the risk of destabilizing the financial system.

In fact, over 300 commenters responded with “It can’t” or “It won’t” when the Fed asked––with its efforts to monitor for criminal activity in mind––whether privacy can be offered without anonymity. And many then expressed their concern that a CBDC would erase any semblance of what is left of financial privacy in the United States. Here are a few notable responses:

It can’t [offer privacy without anonymity], and you won’t anyway. This is the absolute reason why this is a bad idea. The “but illicit activities” excuse is too alluring, and you will end up using it en masse to review every little transaction of every American citizen. – Commenter #134

You cannot have both [privacy and surveillance]… It would be better to deal with the cause of the illicit financial activity as opposed to… attacking its financial medium of exchange because that happens to be same medium used in… 99% [of] legitimate uses. – Commenter #282

This is the catch… you can’t. Law enforcement should use other methods rather than tracking the flow of dollars explicitly. – Commenter #1117

There’s not a reasonable way to [offer privacy] with centralization. Using money as a weapon in a legal war over financial activity simply pushes users out of [the financial system]. – Commenter #554

Privacy without anonymity is an oxymoron. [A] CBDC will be used to cut off people from the financial system who the government doesn’t like, but who serve valuable roles in society at large. – Commenter #406

It’s not the Federal Reserve’s responsibility or directive to police individual actions. Invasive tracking controls will only keep people from adopting [it.] – Commenter #480

Out of all the concerns, the American Civil Liberty Union (ACLU) may have taken the most concise stance when it wrote, “Anonymity is not negotiable when it comes to digital cash.”

Although the Fed seems to have judged that just two paragraphs were enough to address financial privacy concerns in its CBDC discussion paper, the American people have much more to say. More is likely to be gained from a more detailed review of the comments, but Congress should take note that CBDCs are no longer the niche issue that they once were just a few years ago. In fact, Congress should require the Fed to directly address, among other things, the public’s concerns regarding what a CBDC means for financial privacy.