Power & Market

The Inevitability of Fedcoin

The Federal Reserve has dedicated an entire section on its website to provide information about its upcoming Central Bank Digital Currency (CBDC). The first sentence on the page reminds readers:

… the Federal Reserve has made no decisions on whether to pursue or implement a central bank digital currency, or CBDC, we have been exploring the potential benefits and risks of CBDCs …

Their statement should be approached with skepticism. While it is true that the Fed is still researching and refining their Fedcoin, in ways still unimaginable to the public, it would be naive to assume that the most powerful central bank in the world would dismiss the idea of issuing its own CBDC.

A link to their 40-page report titled: Money and Payments: The U.S. Dollar in the Age of Digital Transformation is also included on the website. The executive summary informs us:

The Federal Reserve, as the nation’s central bank, works to maintain the public’s confidence by fostering monetary stability, financial stability, and a safe and efficient payment system.

This statement raises a challenging point, as a deeper understanding of central banking reveals the inherent incompatibility between the boom-bust cycle and other negative externalities, against the principles of public confidence and financial stability.

Released in January of last year, the 120-day public submission period has since ended, but the comments continue to be accessible for public viewing. Spanning across nine PDF documents, ranging from 400 to 800 pages each, the sheer volume of comments raises doubts about the usefulness of this exercise. It remains unclear whether anyone at the Fed has read the comments, and even if they have it’s difficult to envision how these comments would significantly influence any outcomes.

The FAQ Section outlines several principles that guide the decision-making process:

  • provide benefits to households, businesses, and the overall economy that exceed any costs and risks;
  • yield such benefits more effectively than alternative methods;
  • complement, rather than replace, current forms of money and methods for providing financial services;
  • protect consumer privacy;
  • protect against criminal activity; and have broad support from key stakeholders.

Naturally, they will present ideas like safety and protection as justifications, but this entails surrendering our privacy protection to a central bank. However, when they invoke the need for protection against criminal activities, it becomes a precarious path indeed. Consider what happened in Canada, where truckers protesting the government were labeled as criminals and had their bank accounts frozen. It raises the question: would the US Government ever resort to such draconian measures?

As a reminder, the 40-page report outlines the following key point:

The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.

The path forward for CBDC laws is uncertain, and it remains to be seen how they will be shaped in the coming years. It is unlikely that any sitting president or Congress, regardless of party affiliation, would prevent the issuance of the Fed’s stablecoin.

However, concerns regarding privacy and ethical issues surrounding digital currencies will undoubtedly arise. Even if laws are enacted, there is the potential for other government agencies like the NSA to find ways to circumvent such legislation.

The arrival of Fedcoin is inevitable, so it raises an important question: what will be the extent of its negative consequences on our civil liberties and the financial system?

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Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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