Central bank digital currencies (CBDCs) threaten Americans’ core freedoms—a cost that far outweighs the purported benefits that proponents promise. Still, government officials, central bankers, and private consultants have flocked to CBDCs in recent years.¹ In the United States and abroad, efforts to launch CBDCs are underway in a bid to solidify government control over payments systems. As entrenched as this effort may already be, a U.S. CBDC would ultimately usurp the private sector and endanger Americans’ core freedoms.² Therefore, it should have no place in the American economy. Congress should explicitly prohibit the Federal Reserve and the Department of the Treasury from issuing a CBDC in any form.³

A CBDC is a digital national currency. In the case of the United States, a CBDC would be a digital form of the U.S. dollar. Like paper dollars, a CBDC would be a liability of the Federal Reserve. But unlike paper dollars, a CBDC would offer neither the privacy protections nor the finality that cash provides. In fact, it’s precisely this digital liability—a sort of digital tether between citizens and the central bank—that makes CBDCs different from the digital dollars millions of Americans already use.

In the private sector today, Americans regularly use multiple forms of digital dollars. They send digital payments using credit cards, debit cards, prepaid cards, and several mobile applications (e.g., Zelle, PayPal, and Cash App). In fact, it’s not just payments that have gone digital. Nearly every financial institution offers services—from savings accounts to mortgages—via mobile applications. So there should be no misunderstanding: the U.S. dollar is already widely available in digital form. Moreover, the current system works so well that few people ever take the time to worry about whether the digital dollars they are using are a liability of Visa or a liability of Bank of America.

Though consumers have little reason to think about it, when they use a prepaid card, the balance on the card is a liability of the private company that issued it (e.g., Visa and Mastercard). Similarly, when consumers deposit money into their bank accounts, the deposits in those accounts are a liability of the bank (e.g., Bank of America and Capital One). In practice, that means that the bank owes the customer the funds deposited in that account. When a consumer transfers money from a bank account, the bank is responsible for transferring the money.

In the case of a CBDC, however, the digital dollars would be a liability of the central bank itself. That is, the government—in the case of the United States, the Federal Reserve⁴—has the direct responsibility to hold, transfer, or otherwise remit those funds to the ostensible owner. This feature creates a direct link between citizens and the central bank—a radical departure from the existing American system where private financial institutions provide banking services to retail consumers.

Perhaps because this departure is so radical, some CBDC proponents promote an “intermediated CBDC,” where private financial institutions would “service” the account.⁵ In this arrangement, the balance on the account remains on the Fed’s balance sheet (i.e., a liability of the Fed). However, a private financial institution would provide all necessary retail banking services (e.g., transferring funds and handling complaints). Most of the policy implications are the same for intermediated and nonintermediated retail CBDCs.

Proponents claim that a U.S. CBDC would promote financial inclusion, spur faster payments, protect the U.S. dollar’s status as the world’s reserve currency, and make monetary (or fiscal) policy easier to implement.⁶ Yet as this paper demonstrates, all four arguments fail to stand up to scrutiny.

Many CBDC proponents claim that CBDCs would improve financial inclusion by providing a new source of financial services for America’s underbanked and unbanked populations. But much like proponents of other misguided proposals to improve financial inclusion,⁷ CBDC proponents ignore the innovations already taking place in the private sector, as well as what the unbanked want.

The Federal Deposit Insurance Corporation’s (FDIC’s) survey of the underbanked and unbanked households in America reveals that the issue of financial inclusion is more nuanced than solely being a question of “access.”⁸ Over 72 percent of the unbanked households surveyed said that they were not interested in having a bank account (see Figure 1). When asked why they feel this way, respondents most commonly said that they lack enough money to open an account, avoid the banking system to secure their privacy, and distrust banks in general (see Figure 2).⁹

Given that a CBDC would establish a direct line between consumers and the federal government—the same government responsible for the know-your-customer (KYC) regulations that require citizens to provide personal information to banks—it is unlikely that a CBDC will allay citizens’ privacy concerns, especially given that the public’s trust of the U.S. government is at historic lows (see Figure 3).¹⁰ In fact, unless a CBDC operates without the same anti–money laundering (AML) and KYC requirements as banks, many unbanked Americans would likely avoid a CBDC.

To the extent that consumers remain unbanked because they do not have enough money, CBDC proponents have been too quick to ignore recent cost-reducing innovations within the private sector.¹¹ For instance, as online and mobile banking options have proliferated—largely eliminating concerns of inconvenient hours and locations—unbanked households in the United States have steadily decreased, falling from 8.2 percent in 2011 to 4.5 percent in 2021 (see Figure 4).¹² By the time a CBDC is released (which is estimated to take upward of 5 to 10 years), that number might be even lower.¹³ Regardless, the goal of financial inclusion should not be to force people to have bank accounts. Rather than restricting access to the market to protect legacy financial institutions, policymakers should establish a legal framework that fosters more competition, diversification of risks, and consumer choice in the financial sector.

Many CBDC proponents likewise claim that a CBDC could offer faster payments options. Improving settlement speeds of the payments system in the United States is indeed a noble effort,¹⁴ and other countries have done more to implement real-time payments systems (see Figure 5).¹⁵ Still, a CBDC would fail to provide a unique, or even additional, benefit compared with the existing developments in the private sector.

In 2017, a consortium of private banks finally put the United States on the map with the launch of the Real-Time Payments (RTP) Network, offering instant settlements for payments across the country.¹⁶ However, the RTP Network has yet to reach its full potential, largely because the Fed interrupted the RTP Network’s progress with the sudden announcement that it too would launch an instant settlement network (known as FedNow) in 2023.¹⁷ Now that stablecoins—cryptocurrencies with their value pegged to government currencies, short-term securities, or some type of commodity—offer another private-sector solution to payment delays by making transactions possible 24 hours a day, it appears some are keen on repeating history by having the Fed interrupt this progress with the launch of a CBDC.¹⁸

With these advances in mind, it should be evident why some government officials have been wary of CBDCs. For instance, Reserve Bank of Australia governor Philip Lowe said, “To date, though, we have not seen a strong public policy case to move [toward a CBDC], especially given Australia’s efficient, fast and convenient electronic payments system.”¹⁹ Even in the United States, Federal Reserve governor Michelle Bowman said, “My expectation is that FedNow addresses the issues that some have raised about the need for a CBDC.”²⁰ In other words, a CBDC offers no unique settlement advantage to existing alternatives (even imperfect ones like FedNow), many of which already offer instant or nearly instant settlement speeds.

Proponents also claim that preserving the dollar’s status as the world’s reserve currency is a potential benefit of a CBDC, but this claim also falls short. The dollar’s renowned status is owed to the strength of the American economy and its legal protections for private citizens relative to most other countries, not the specific technology enabling electronic transfers.²¹ Congress should focus on improving those underlying reasons—not on the latest craze in central banking—if it seeks to strengthen the role of the dollar. For instance, creating stronger financial privacy protections, removing government roadblocks to faster payments speeds, and requiring better transparency in monetary governance would likely benefit the dollar’s international status. None of these steps involve issuing a CBDC.²²

“Going digital” may be an improvement for some foreign currencies, but those currencies still have many other problems that prevent them from being used on an international scale. Moreover, one of the reasons that cryptocurrencies have become so popular is that they have become an important alternative for citizens in many foreign countries whose payments systems are weak and unreliable compared with the U.S. system. The U.S. dollar is in no danger of losing its status simply because the Fed does not have a CBDC, especially if the countries launching CBDCs offer few of the economic and legal protections integral to the U.S. system.

For example, China’s CBDC (the e‑CNY) is unlikely to attract global demand considering the Chinese government’s long history of violating property rights, financial privacy, and other human rights.²³ Likewise, Nigeria’s CBDC (the eNaira) is unlikely to attract global demand given Nigeria’s volatile inflation and tumultuous history.²⁴ And finally, the Bahamas’s CBDC (the Sand Dollar) is unlikely to attract global demand because the Bahamian dollar doesn’t have a wide enough network and the country’s economy is not strong enough for it to become an international reserve currency. So where each country faces unique challenges to gaining world reserve status, a CBDC solves nothing.

Finally, proponents also argue that a CBDC could improve the implementation of monetary and fiscal policy. Ostensibly, CBDCs would offer the opportunity to fine-tune the economy at the individual level, open the door for charging negative interest rates, and remove credit and liquidity risks from the market. All three claims are misguided.

The suggestion that a CBDC could allow policymakers and regulators to fine-tune the economy is as sanguine as it is concerning. Whether it was the 1970s or the 2010s, it is no secret that the Fed has long struggled to reach its policy targets. In fact, given the Fed’s poor track record of managing the price level and business cycles, it is more than plausible that the Fed has worsened overall stability.²⁵ Nonetheless, some argue that by tracking the financial activity of individual Americans, the Fed could finally steer the economy in a positive direction.

For instance, some CBDC proponents argue that the use of negative interest rates is the tool that’s been missing from the Fed’s arsenal. Although CBDCs may be new, negative interest rate proposals are not. Proponents have long called for banning cash to implement negative interest rates, and using CBDCs to conduct such a policy would likely require a ban on all alternatives just the same (e.g., cash, cryptocurrencies, foreign currencies, and the like).²⁶

Finally, many proponents argue that CBDCs can attract more customers than the private sector because they provide an option with zero credit risk and zero liquidity risk, but this distinction is misleading. The technology behind a CBDC provides no such benefit. These zero-risk features are wholly due to government guarantees that, of course, could be added to any private-sector electronic payment options.²⁷ Put differently, if Congress wants to ensure that certain payments are conducted with zero liquidity or credit risk, it can do so without a CBDC.

Although a CBDC would not offer any unique benefits to Americans compared with existing technologies, it would pose serious risks. In fact, Americans have already noticed that CBDCs pose a substantial threat to financial privacy, financial freedom, and the very foundation of the banking system. And it’s these very risks that were cited across over two-thirds of the 2,052 comment letters written to the Fed opposing its plan for a CBDC (see Figure 6).²⁸

Americans have a right to privacy that is protected by the U.S. Constitution, but the right to financial privacy has been chipped away for decades.²⁹ Laws designed to counter terrorism, deter money laundering, and collect taxes largely provide the government with the ability to conduct unchecked surveillance over financial information.³⁰ Nonetheless, a CBDC could spell doom for what little protection remains because it would give the federal government complete visibility into every financial transaction by establishing a direct link between the government and each citizen’s financial activity.³¹

Currently, a buffer exists between the government and the public’s financial activity because that activity is spread across all the different commercial banks and payments services that Americans use. The government may not be required to get a warrant to access much of the financial information housed at these different businesses, but tracking down and working with these businesses adds a buffer—albeit a marginal one. If the government were to provide a CBDC, however, that buffer would cease to exist. All financial data would be only a keystroke away. Put simply, a CBDC would most likely be the single largest assault to financial privacy since the creation of the Bank Secrecy Act and the establishment of the third-party doctrine.³²

The threat to freedom that a CBDC might pose is closely related to its threat to privacy. 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.³³ Such control could be preemptive (prohibiting and limiting purchases), behavioral (spurring and curbing purchases), or punitive (freezing and seizing funds).

The programming capabilities of a CBDC could mean that people would be prohibited from buying certain goods or limited in how much they might purchase. For example, advocates have quipped that parents could program their children’s lunch money with the condition that it can’t be spent on sweets.³⁴ It’s important to consider the extended possibilities of such an option. Like parents trying to control their children, policymakers could try to curb drinking by limiting nightly alcohol purchases or prohibiting purchases for people with alcohol-related offenses. In the case of the government-mandated lockdowns during the COVID-19 pandemic, a CBDC could have been programmed to only exchange with “essential” businesses or alert the authorities when citizens incurred travel expenses. The possibilities for the programmability of a CBDC are nearly endless. And in all of them, even the best of intentions are just a few steps away from leading to serious abuses of power.

Aside from the basic programmability that a CBDC would offer for social and political control, one of its most common features is the ability to pay both positive and negative interest rates to curb and spur purchases. That is, the government provider of a CBDC could easily put money directly into a citizen’s account and, just as easily, take money out. Ultimately, implementing such negative interest rate penalties depends on there being no alternative payment methods for consumers, which is one reason that governments introducing CBDCs have been banning cryptocurrencies. But it’s not just third-party competitors that would need to be removed—central bankers cannot implement negative rates with CBDCs if people can still switch to cash (paper currency). In fact, eliminating cash (and other monetary alternatives) is precisely what many CBDC proponents call for.³⁵

More broadly, governments have long recognized that freezing someone’s financial resources is one of the most effective ways to lock an individual out of society.³⁶ For example, Operation Chokepoint was a U.S. government initiative where officials pressured financial institutions to deny services to politically disfavored businesses (e.g., pawnshops, check cashers, and cannabis dispensaries). As one official described it, the operation was designed to stop these businesses by “choking them off from the very air they need to survive.”³⁷ Internationally, the Canadian government made headlines in 2022 when it invoked the Emergencies Act to freeze the bank accounts of protestors.³⁸ In fact, this weaponization of the financial system is such a common problem that many people have turned to cryptocurrencies as a solution to overzealous governments that target the financial accounts of protestors and whistleblowers.³⁹ A CBDC would stand in direct contrast to this new alternative.⁴⁰

There is also a risk that a CBDC could undermine the very foundation of financial markets. Federal Reserve vice chair Lael Brainard explained in a speech:

Federal Reserve researchers have since attempted to calm this fear by arguing that a CBDC could offer helpful competition to the banks. One paper, for instance, provides a model in which “a deposit-like CBDC with a proper interest rate would encourage banks to pay higher interest to keep their customers” and, therefore, “would not necessarily crowd out private banking.” Although the “not necessarily” caveat is likely to prove unconvincing to most private banks, the caveat at the end of the paper demonstrates that the authors’ conclusion is more than precarious. The conclusion states, “However … [if] the CBDC rate is too high, disintermediation occurs.”⁴² In other words, if a CBDC is to be made more attractive than private-sector alternatives, then people will leave traditional banks.⁴³ The banking industry is due for a healthy dose of competition, but it is difficult (if not impossible) to compete with the government because private firms have to charge enough to cover their costs and earn a profit, whereas the government provider of the same service does not have to do so.⁴⁴

It is, therefore, hardly surprising that major banking and credit union associations are publicly opposed to CBDCs.⁴⁵ Similarly, there is no doubt that CBDCs also undermine the efficacy of private cryptocurrencies (including stablecoins), a new source of competition to the legacy payments system.⁴⁶

Globally, nations’ actions have demonstrated that they want a CBDC specifically to hold on to their monopoly over national currencies. For instance, China banned cryptocurrencies just as its CBDC was launched; India announced its plans for a CBDC while simultaneously calling for a ban on cryptocurrency; and Nigeria prohibited banks from cryptocurrency transactions just as it launched its CBDC. In the United States, Rep. Jesús “Chuy” Garcia (D‑IL)—who would later cosponsor a bill to introduce a CBDC—announced the Keep Big Tech Out of Finance Act in an attempt to prohibit large technology companies from offering financial services (e.g., cryptocurrencies).⁴⁷ Such bans may not be inherent in the design of a CBDC, but there is no denying that CBDCs are being used across the world to combat the existence of cryptocurrencies.

Another concern with a CBDC regards the central storage of financial information. Brainard, for example, has warned that “putting a central bank currency in digital form could make it a very attractive target for cyberattacks by giving threat actors a prominent platform on which to focus their efforts.”⁴⁸

Recent history has shown that the federal government is not immune to hacks or data breaches.⁴⁹ The private sector is not immune either, but it does have the distinct advantage of being more decentralized than the federal government. Whereas an IRS breach puts all 333 million Americans at risk, a breach at a private financial institution would affect only a fraction of citizens—leaving customers at other banks free from harm.⁵⁰

Likewise, cryptocurrencies (e.g., Bitcoin) are often celebrated for the security of their decentralized systems. A hacker may attempt to “break in” to one computer in the system, but such actions do little to affect the countless other computers across the world that work around the clock to verify the system. A central bank will likely have a more robust security system for its hub than that of the average, individual Bitcoin miner. But the greater difficulty is accompanied by a much greater reward. That reality was made clear when reports revealed that the Federal Reserve had more than 50 cyber breaches between 2011 and 2015.⁵¹ In fact, the Federal Reserve fell victim to hackers when $101 million was stolen in a cyberattack on the Bank of Bangladesh.⁵²

To prevent the risks to financial privacy, financial freedom, free markets, and cybersecurity that a CBDC would pose, Congress should explicitly prohibit the Federal Reserve and Treasury from issuing a CBDC in any form. To do so, Congress could amend the Federal Reserve Act as follows:⁵³

1. Definitions—
   1. A central bank digital currency is defined as a digital liability of the U.S. government issued or minted by the Federal Reserve or Department of the Treasury.
2. Section 13 of the Federal Reserve Act is amended by adding after the 14th undesignated paragraph (12 U.S.C. 347d) the following:
   1. The Board of Governors of the Federal Reserve System, Federal Reserve banks, or any designated agents may not offer products or services directly to an individual, maintain an account on behalf of an individual, mint a central bank digital currency, issue a central bank digital currency directly to an individual, or issue a central bank digital currency to an individual through an intermediary or other designated agent.
   2. No Federal reserve bank may hold central bank digital currency minted or issued by the United States Government as assets or liabilities on their balance sheets or use digital currencies minted or issued by the United States Government as part of fulfilling the requirements under section 2A.

To prohibit the Treasury from issuing a CBDC, Congress should limit the Treasury’s authority to expand existing offerings (e.g., Treasury Direct). For example, the Treasury has already expanded its authority to issue savings bonds to design the myRA (my Retirement Account) program.⁵⁴ Congress should amend 31 U.S.C. Section 3105 to prohibit the Treasury from offering or maintaining accounts on behalf of individuals. Likewise, Congress should more explicitly limit the capabilities and payments through the Treasury’s Direct Express cards with respect to CBDCs.⁵⁵

To clarify the application of legal tender laws as far as a CBDC might be concerned,⁵⁶ Congress could use the following language to amend 31 U.S.C. Section 5103:

3. United States coins and currency (including defined as Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts. Legal tender status does not require private businesses, persons, or organizations to accept United States coins and currency as payments for goods and services.

To prevent the Federal Reserve from further encroaching on the private sector, Congress should also amend the Depository Institutions Deregulation and Monetary Control Act of 1980 to strengthen the explicit requirement for the Federal Reserve to recover its costs when exploring new initiatives.⁵⁷ To do so, Congress could strike 12 U.S.C. Section 248a(c)(3) and replace it with the following language:

4. Over the long run a period of no more than five years, fees shall be established on the basis of all direct and indirect costs actually incurred in providing the Federal Reserve services priced, including interest on items credited prior to actual collection, overhead, and an allocation of imputed costs which takes into account the taxes that would have been paid and the return on capital that would have been provided had the services been furnished by a private business firm, except that the pricing principles shall give due regard to competitive factors and the provision of an adequate level of such services nationwide.

Finally, Congress should also require that the Fed’s compliance with the Depository Institutions Deregulation and Monetary Control Act’s cost recovery provisions be subject to regular audits by third parties.⁵⁸

CBDCs have the potential to radically transform the American financial system, and all signs point to that transformation being a detriment to the American people. A U.S. CBDC poses substantial risks to financial privacy, financial freedom, free markets, and cybersecurity. Yet the purported benefits fail to stand up to scrutiny. There is no reason for the U.S. government to issue a CBDC when the costs are so high and the benefits are so low.

Anthony, Nicholas, and Norbert Michel. “Central Bank Digital Currency: Assessing the Risks and Dispelling the Myths,” Policy Analysis no. 941, Cato Institute, Washington, DC, April 4, 2023.