Over the past five years, the term “central bank digital currency” or “CBDC” has gone from a niche academic musing to an economic reality. According to the Human Rights Foundation’s CBDC Tracker, over 1.5 billion people currently live in countries where CBDCs have been rolled out. Yet, the public has largely been left out of this conversation. Many people still have no idea what a CBDC is—let alone whether their government is pursuing one.1 It is for this reason that I am grateful for the opportunity to testify here today.
The State of CBDCs
So first, what is a CBDC? In short, a CBDC is a digital national currency that is a direct liability of a country’s central bank. Typically, discussions of CBDCs revolve around the retail model, where a CBDC is designed for consumers, but there are also other models designed for financial institutions to use behind the scenes.2 At first glance, this description might sound uncontroversial considering most of us make payments digitally every day. What is different with a CBDC, however, is that the government would ultimately be the one processing those transactions.
So rather than have transactions spread across banks, credit unions, credit card issuers, and the like, financial transactions would all be centralized in the hands of the federal government. For this reason, the creation of a U.S. CBDC would pose a fundamental threat to financial privacy—likely the greatest since the enactment of the Bank Secrecy Act and the establishment of the third-party doctrine.3 Further, with so much information in hand, a CBDC would enable the government to restrict financial freedom in countless ways.4
Unfortunately, the observations in practice have given us little to be hopeful about. If I were to summarize the international experience thus far, it would boil down to two categories: a restriction on the lives of citizens and a waste of taxpayer resources.
In Nigeria, the government caused a cash shortage in hopes of spurring adoption when only 0.5 percent of the population was using its CBDC.5 In The Bahamas, the government will soon force commercial banks to distribute its CBDC.6 And most recently in Thailand, the government launched a quasi-CBDC through a digital wallet that restricts payments to government-approved goods at government-approved stores within the district listed on each person’s ID card.7 In this last case, even supporters of CBDCs have acknowledged, “The Thai experiment will teach us a lot about what the future [of central bank digital currency] holds and serves as a warning about how technology might push us towards a dystopian world.”8
These restrictions are also taking place in subtler ways. As documented in the Human Rights Foundation’s CBDC Tracker, officials in The Bahamas, the Eastern Caribbean Currency Union, Jamaica, Lebanon, Nigeria, Peru, Rwanda, and the Solomon Islands have all said their goal is to go cashless and that CBDCs are a way to get there.9
Yet, there is also the question of whether CBDCs are an appropriate use of taxpayer resources. The international experience suggests no. From Jamaica to China, governments that have launched CBDCs are struggling to get anyone to use them on a day-to-day basis.10 These governments have tried to spur use through giveaways, discounts, and loyalty programs. Yet the public generally recognizes that their needs are being met by existing options like mobile banking, payment apps, and cash.
So, in the best case, CBDCs are a waste of taxpayer resources. They do not offer any unique benefits that are not already provided by the market, so people are hesitant to make the switch. In the worst case, however, CBDCs could threaten financial privacy, freedom, and markets—issues that have already begun to surface, even though CBDCs are a relatively recent development.
A Clash of State and Federal Policies
With these concerns in mind, what role is there for state officials? It’s a difficult question. Members of Congress have the authority at the federal level to establish legislative guidelines that prevent the Federal Reserve and the Department of the Treasury from moving ahead without explicit authorizing legislation.11 Unfortunately, however, options are limited at the state level.
With the time I have left, I’d like to walk through the three legislative approaches state officials have taken or considered thus far: namely, prohibition, classification, and participation.
The first option is to prohibit the use of CBDCs entirely. Given the concerns on the table, it’s understandable why this option might appear appealing. However, it poses significant concerns in and of itself. First, imagine if a constituent went to, for example, The Bahamas on vacation and came home with some of the Bahamian CBDC left over. How would enforcement work? Would the state establish a surveillance network to monitor travel? Would this citizen be searched upon returning to the state? Unfortunately, this path can quickly devolve into its own assault on financial privacy and freedom.
The second option lies in what many states have done over the past few years: namely, classify CBDCs within state statute so they are excluded from the definition of money in the Uniform Commercial Code, or UCC.12 Unfortunately, this option also has extended consequences. A person or business may still use a CBDC under this approach. It’s only that they are not afforded the legal protections one might typically expect under the UCC.13 So, again, it is citizens that stand to lose the most.
A third option—one that has appeared even more recently—is to explicitly prohibit state agencies from using a CBDC or participating in CBDC programs.14 Where the first option is too hot and the second option is (perhaps) too cold, this third option might be just right. It does not restrict the freedoms of individual citizens, but it does limit the hands of government.
Unfortunately, however, all three of these options appear vulnerable to the supremacy clause. In fact, Florida Governor Ron DeSantis acknowledged that his bill would likely be overridden if Congress chose to move forward with a CBDC—something legal scholars have agreed with when questioned about the bill.15
With that said, the Tenth Amendment Center has argued that the supremacy clause is not so black and white in practice.16 The same argument came up when states initially began to legalize cannabis. And the experience with the ongoing delay of Real ID implementation shows that states are, if nothing else, in a position to establish roadblocks that slow down the process.
With that in mind, there’s a fourth option on the table that should also be considered. One thing all three legislative approaches have in common is that they send a message. They show that states are watching, and they will not silently fall into line.17 However, legislation is not the only way to send a message. State officials are in a unique position to bridge the gap between citizens and the government at large. Raising awareness and making sure concerns are being heard by members of Congress is crucial. That can be done through townhalls, op-eds, letters, and even meetings such as this one. These avenues should not be underestimated.
Conclusion
In closing, the committee is correct to keep an eye on the rise of CBDCs and what options are on the table. I thank Vice Chair Ammon and members of the committee for the opportunity to speak on this issue, and I welcome any questions you may have.
