The Problems With a Federal Reserve “Digital Dollar”

As demand for cryptocurrency like bitcoin skyrockets, the Federal Reserve announced the idea of a digital dollar, which would be an electronic fund under control of the government and presented as a sort of competitor to other cryptocurrency. But a central online dollar would work nothing like bitcoin, and it could accelerate interest with other cryptocurrency due to inflation and privacy concerns. Such a system could mirror similar efforts in China, where convenience gets traded for civil liberties.

Treasury Secretary Janet Yellen has warned the public against the use of cryptocurrency, calling it dangerous and suggesting it needs regulation. But it is unlikely that a central online dollar, backed by fiat money, would satiate the demand for digital assets. Most people will move to purchase cryptocurrency to hedge against inflation as the dollar declines in value, due in part to more dollar printing by the government. Consider that $10 in 1980 had about the same buying power as $30 in 2020.

The Federal Reserve insists that a digital dollar would give more financial options to underserved communities. Under plans touted by the likes of Senator Sherrod Brown, the government would give all citizens a digital account into which the government could distribute instant welfare and stimulus payments. If the central bank were allowed to flood this system with even more national money through a digital dollar, consumer prices would likely increase while cryptocurrency like bitcoin, which has a finite supply, would likely become even more popular than now.

A digital dollar could also result in the government having access to each financial transaction by its users. The Federal Reserve published a report that admitted “the close linkage between money and data contrasts with physical bank notes, which do not carry with them transaction data that can be connected to a specific person.” The personal wallets created by the government with blockchain abilities that can store each transaction sounds like a vision out of some libertarian fever dreams.

China now plans for a digital yuan. Its system will make the identities and transaction data secret to users and local banks but fully readable by the government. China also has a social credit system that judges citizens on real and perceived actions toward the government. Such national control over the accounts and actions of citizens is a version of a potential digital dollar on steroids. It is a prospect we must work to avoid.

The social credit system with China tracks the lives of citizens for instant rewards or benefits. Playing lots of video games or jaywalking results in a penalty, while spending time with family increases your score. People on the “list of dishonest persons subject to enforcement” by the judiciary in China are barred from owning property, taking out loans, or buying plane tickets. There is no due process or court cases here. In the era of national consolidation and cancel culture, not many people want the bureaucrats to determine their ability to utilize money in their wallets.

Autocratic countries do not sponsor digital currency technology for the public interest, but rather to build new ways to control their populations. Good intentions may drive the current initiative in the United States, but the issue comes down to the one that should be asked before any major government venture. Are you comfortable with your wealth sitting at the mercy of several unelected officials back in Washington?

A digital dollar risks acting as a veto on commerce the government does not prefer. Companies could have fines deducted from their accounts for missing mandated government training or for unrelated violations. Entire accounts worth millions could be frozen in civil asset forfeiture. A system that only allows users to spend money backed by the government would be the opposite of currency as legal tender. Even scarier is the specter of rules. Could someone spend on a project which is under social scrutiny? Would users be prohibited from buying traditional silver?

A supercharged Federal Reserve with the abilities to create trillions out of thin air without physical cash, along with the power to determine if every transaction is legal, would be a communist fantasy. Gerald Ford once said that a government big enough to give you everything you want is also big enough to take it all away. Whatever is done in the near future will grow by executive orders and precedent for a system that would hinder individual liberties for the name of national control. By the time citizens understand the power they have lost, it will be too late to take it back.

Kristin Tate is a libertarian author and an analyst for Young Americans for Liberty. She is a Robert Novak journalism fellow at the Fund for American Studies. Her newest book is “The Liberal Invasion of Red State America.”