Deep Dive Episode 127 – Should the Fed Create Fedcoin, Digital Dollars, and Fed Accounts?

As cryptocurrencies have proliferated in the private sector, central banks are now contemplating getting into the game. Venezuela tried unsuccessfully to popularize its currency with the digital petro. China may be more successful with its plan to digitize the yuan.

Now, some are saying the U.S. Federal Reserve should issue its own cryptocurrency, with names like “Fedcoin” and the “digital dollar.” Most proposals for this national cryptocurrency also include direct consumer deposit accounts with the Fed.

Proponents give various reasons why the Fed should issue digital currency, from protecting the dollar competition with China to relieving the poor from high bank fees. But opponents cite multiple problems such a system would have from privacy concerns with the Fed having direct access to consumer spending data, to enabling currency manipulation, to crowding out innovation from private cryptocurrencies and payment systems.

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Colton Graub:  Good afternoon and welcome to The Federalist Society’s Fourth Branch Podcast for the Regulatory Transparency Project. My name is Colton Graub. I am the Deputy Director of RTP. As always, please note that all expressions of opinion are those of the guest speakers on today’s call. 

If you would like to learn more about each of our speakers and their work, you can visit where we have their full bios. After opening remarks and discussion between our panelists, we will go to audience Q&A, so please be thinking of the questions you’d like to ask our speakers. 

This afternoon, we’re pleased to host a conversation exploring whether or not the U.S. Federal Reserve should issue national cryptocurrency, so-called Fedcoin or the digital dollar, which could include direct consumer deposit accounts with the Fed. To discuss this topic, we’re pleased to feature John Berlau, who is a Senior Fellow at the Competitive Enterprise Institute and the author of the new book George Washington, Entrepreneur. He will be moderating today’s discussion. He will be joined by Chris Giancarlo, who is Senior Counsel at Willkie Farr & Gallagher, and Norbert Michel, who is the Director at The Heritage Foundation’s Center for Data Analysis. 

I’ll now hand it off to John to take things off. John?

John Berlau:  Yes, yes. It’s so good to be here today. And Colton, thank you. And thank you, Chris and Norbert, for participating. 

Before we get into the discussion of should the Fed go to the digital dollar, or should we have a digital dollar, I think it’s important that everyone knows what we’re talking about. I always see in articles about this, including when Chris and the co-author had an op-ed in The Wall Street Journal back in December that says readers will scratch their heads and say, “Well, what do they mean when we’re talking about a digital dollar? Don’t we already have that with Apple Pay and with PayPal where you can send dollars digitally?” 

So I’d like — Chris, why don’t you go first, talk about what is meant when we talk about a digital dollar, which is, as Colton said, also is referred to as Fedcoin or sometimes just referred to as central bank digital currency, how is it different than what we have now, including with technology to facilitate the use of dollars, and why do we need it? And then, Norbert, why don’t you reply to that?

Norbert Michel:  Okay.

Chris Giancarlo:  Great, John. Thanks so much. And by the way, I’ve just ordered a copy of your book and I’m looking forward to reading it. In fact, if we had a digital dollar, I could’ve just texted you the money. But unfortunately, I’ll be using one of those payment systems that will take their part out of it. But I’m really looking forward to it. 

John Berlau:  Okay. There are other considerations. Thank you for doing that. Yeah, when you buy from a site, it pushes up the ratings on that site too, so thank you for doing that. 

Chris Giancarlo:  Say, John, in the U.S. today, there are basically two kinds of money. There’s commercial bank money, and there’s central bank money. And let me talk about what that means. So commercial bank money comes in accounts-based form, such as checking and savings accounts, credit and debit cards, Zelle, and Venmo and PayPal. And transactions in commercial bank money must validate the individual’s identity and that they have sufficiency of funds in their account to avoid, of course, the double-spend problem, sometimes called checkpointing. 

Now, central bank money comes in token form; that is, like what’s officially called Federal Reserve notes but what we call greenbacks or Benjamins. And transactions in central bank fiat money must only validate the token itself; that is, you have to hold the dollar up to the light and make sure it’s really a dollar to avoid counterfeiting. 

So let’s put these two types of money in historical context. In 1870, 150 years ago, if you were in New York and you wanted to get $1,000 from New York City to San Francisco, you could put dollars in a trunk and ship it by train or by ship around the Tierra del Fuego, around South America, all the way to San Francisco. 

Or you could use Western Union, which had come about in the 1870s, to send a Morse Code signal to instruct a series of New York and San Francisco banks, and maybe one or two in between, to verify the sender’s identity and capital sufficiency and then record a series of charges in bank assets and bank liabilities that ultimately would allow somebody in San Francisco who was the ultimate recipient to eventually obtain cash, most likely weeks if not months later.

John Berlau:  Didn’t Wells Fargo start like that with stagecoaches and things like that to transport gold and other things?

Chris Giancarlo:  Absolutely. And there were a lot of robberies along the way, but that’s exactly what they did. And the fact of the matter is, in 150 years, not much has changed. In commercial bank money, there has been steady improvement. It is faster and less expensive than the old Western Union system, but Western Union is still doing that business. And it still remains relatively slow. We know it takes days to settle domestic checks. For international money transfers, it can take weeks. 

It’s expensive. Ask anybody that tries to do cross-border remittances. The charge is anywhere from 7 to 17 percent. And it’s exclusive. One of the reasons we have such an underbanked population in the United States is because of bank access, which we see in rural areas, we see in inner city areas, and otherwise. And the FedNow program is an effort to improve both the expense of the accounts-based commercial money system, but again, you’re trying to speed up something that is inherently inefficient because of the number of intermediaries involved in that process of identity verification and account verification. 

Now, it has been improved. Central bank fiat money, on the other hand, has barely improved since it was originated in 1913 by the Federal Reserve Act. Fiat currency cannot be used in ecommerce, and the greenback remains an analog instrument in an increasingly digital world. Meanwhile, that world has moved from the internet of information to the internet of things to an internet of value, and the dollar remains analog. And that’s why something called the Digital Dollar Project that I started earlier this year has proposed modernizing central bank money in the form of central bank digital currency, or what we call the digital dollar. And we’re proposing to keep pace with this digital transformation of the modern world.

So what does that mean? And then I’ll turn back, but what does it mean? Well, first of all, it means a tokenized form of money, not accounts based. So instead of Western Union, why can’t we just text money to San Francisco without going through this series of banks? If a songwriter in San Francisco can text an MP3 music file to someone in New York, and do it in a New York minute, why can’t they also get a text back in an instant with $20 in payment? Or exactly $19.95 without having to make change? 

Why can’t we text money around the world just like we can text photos, music, or videos? And why can’t businesses do that? And why can’t we then program money to, say, pay a church or synagogue each month pursuant to a digital contract without incurring bank fees? 

I’ll talk more about programmable money in a minute. But let me just mention real quickly a few other elements of what we’re talking about to set the stage for our conversation today. So we’re talking about a digital form of money that would enjoy the full faith and credit of the federal government. It would not be a stablecoin, which reflect reserves of something that has the full faith and credit but don’t enjoy the full faith and credit itself. We’re talking about something that would be. 

It would take the fiat money that is produced today by the Federal Reserve and create a new form, an additional form, without doing away with existing cash or doing away with the accounts-based system to create an additional form, a third form, a digital form, of the greenback. It would be distributed just like paper money it today through the two-tiered bank system of the Federal Reserve and commercial bank institutions. So we’re not calling for Fed accounts. We’re not calling for direct Fed banking. This would be done through the existing bank system. 

Our proposal is not antithetical to other virtual currency efforts, whether commercial ones like Libra or decentralized like Bitcoin. We believe in letting a thousand flowers bloom. And by the way, our program is very well supported by a number of the stablecoin developers, including Libra which sits on our advisory board. Our proposal would be monetary policy neutral. We take no view on issues of money supply. Digital dollar is a policy tool, not a policy expression.

Next, privacy rights are all-important. We’ve got to get the balance right between privacy and law enforcement in light of Fourth Amendment restrictions on government infringement of rights of privacy. But remember, tokenized money is inherently more private than accounts-based money since verification is only of the token, not of the bearer.

And then lastly, and then I’ll turn it back, this is about modernization of an existing public good. It’s not about a new government authority. The decision was made over a century ago for the Federal Reserve to produce fiat money upon which the economy operates. We’re only calling for the modernization of that money, modernization of that architecture, not new authority. So with that, John, thank you for giving me the opportunity to better define what we’re talking about, and I’ll be looking forward to having this conversation.

John Berlau:  Thank you so much, Chris. Norbert, would you like to reply about do you feel we need central bank digital currency or not, and what could some of the issues be?

Norbert Michel:  Yeah, sure. First, I just — at least one thing I can’t let go, one of the things that we talked about or that I hear people talk about all the time are these inefficiencies that we’re getting rid of because it takes days for checks to settle and things like that. Well, part of that is because of the Fed. They took over the system when they shouldn’t have, and they screwed it up. I don’t think we should forget that. 

Moving on, though, more to the direct point here —

John Berlau:  — Norbert, do you want to elaborate?

Norbert Michel:  This is — well, no I don’t. No. Let me — I don’t want to lose the time. 

John Berlau:  Okay.

Norbert Michel:  There are — Chris made a good point in saying that you have a token-based and an account-based form of digital money, which, by the way, is not a public good. I want to get that in too. The fiat dollar — we’re not talking about money as a public good. We shouldn’t be saying that. That’s just not right.

Second, when we talk about the tokenized version like that’s in the white paper, that’s fine. In and of itself, that’s fine. But if we’re talking about a central bank digital currency that is not a tokenized version, that is just an account-based version, well, then, it’s basically just like any other form of digital money that we have now with the only added feature that the government is more directly involved with what goes into and what comes out of those accounts. 

So that’s where I want to start my answer because when we talk about these benefits here, we have to make that distinction, and we have to recognize what’s driving these possible benefits. Two points about the possible benefits. One, reemphasize, they’re possible benefits. We’re talking about these things in a theoretical sense. Two, they come with a huge catch. What’s the catch? Well, unless the central bank digital currency is on a highly centralized or controlled system that’s run by the government or controlled by the government, it doesn’t give us anything that the existing token-based digital money based substitutes don’t already give us. 

In other words, other than the benefits conferred by the fact that you have a government running it and providing something, then you have all the same benefits that you would have in a Bitcoin or a Litecoin or some other coin. But if we create the type of system that the white paper is discussing, that is their ultimate goal, central bank digital currency system where the central bank does have control over this thing, then we lose the core innovation of that technology, which is a decentralized system that takes the place of the third-party intermediary that’s verifying transactions. That’s the innovation behind this technology. 

So what we would end up with, really, is nothing more than an account-based form of digital currency run by the government, the digital representation of your money somewhere and you have a central authority that blesses it and confirms transactions and guarantees safety in some sort of way. Well, that’s not an innovation. That’s something that we already have but with more government control over it. 

Consumer’s marginal benefit between that type of system and the type of digital accounts that we have right now is incredibly small, if it’s not zero. On the other hand, the consumer’s marginal cost from that type of system is probably quite large because it does require consumers to give over to the federal government a type of control over their money that they don’t have to relinquish with other types. 

And to just go through the example of the benefits that are in the white paper, and I’ll just go with one. The paper says that a central bank digital currency could play a crucial function in serving as the safest form of money, and therefore it offers value above and beyond what we already have. And when you look to the why, what you hear is things like, “Well, it would be backed by the full faith and credit of the U.S. government.” 

Well, that sounds impressive, but that really doesn’t mean anything at all in this context. The federal reserve notes that you have in your wallet, the paper ones, those are also backed by the full faith and credit of the Unites States government. If you lose one, it doesn’t mean that the government replaces it. The digital representation of your federal reserve notes that are in your checking account are also backed by the full faith and credit of the U.S. government, but it means absolutely nothing. All it does is give the federal government the exclusive right to print more of them, and that’s it. 

If you lose your money in your checking account, the fact that it’s backed by the full faith and credit of the U.S. government doesn’t give you another one. If your bank goes bankrupt, same thing. If you have FDIC insurance, you will get your money back, but that is a separate mechanism and it has nothing to do with the digital form of the money. 

This critique applies pretty much to all the benefits that I see in the white paper. Without government providing something extra, then you don’t have anything extra. And that something extra comes with strings because it’s a central control over that system where the Fed can ultimately move money into and out of your account. So that’s the problem. 

And then if you want to get into more of the possible benefits, you go further and further down that road. If you want to look at something like a possible benefit in implementing monetary policy, whether you’re neutral or not, well, that’s fine. But to do that, you have to abolish all other alternatives. Otherwise, you don’t have the control that you would have if you have the only one in town. So it’s really not the case that this sort of thing would allow a thousand flowers to bloom because virtually all those benefits come only if the federal government has strong central control over the actual mechanism. That’s my opening line, John. 

John Berlau:  Okay. Thank you both. I’m going to ask a couple of questions and also bring sort of on where policy currently — U.S. and the world currently stand. And then you both will also get the opportunity to reply to each other in answering my questions, so you can take that time for that as well. 

Central bank digital currency follows innovations in the private sector, of course, with Bitcoin, Tether, other things, and now Facebook’s developed Libra, is getting into the act, so it was influenced by that. By the way, Chris has been a big champion when he was at the CFCT of private sector cryptocurrency, was called “CryptoDad” by the crypto community and has continued to work on some of those policy issues as well. 

I wanted to — countries are debating it now. We’ve even had a couple of attempts or planned attempts. Venezuela tried with the Petro, which is no longer in use and had some problems, some problems with trust issues, but it wasn’t the savior of the economy, couldn’t compensate for some of the other issues. 

China — in fact, one of the motivations that we, the U.S., has to set up a digital currency or a digital dollar, is that China is setting a digital yuan of its currency. But one of the other concerns about China doing this and the potential for harm a digital currency might have with privacy is that observers are saying China will try to mold this in the — to use for like the social credit system in terms of who can get money or who can be withheld for credit or other things. 

And there are some — right now, our federal reserve is, as Chris had said, they started a payment processing system, FedNow. I’ve written about that at and how it’s so far, just in my opinion, mostly been disruptive to what the private banks privately have been doing with things like Zelle and the clearinghouse and other types of payment systems as well as the private cryptocurrency type payment systems. That’s the FedNow. But the Fed is reviewing whether to do a digital currency. They’re having the Federal Reserve Bank of Boston with help from MIT and San Francisco study that. 

One of the things about digital currency plans — not necessarily Chris’s plan; he can talk about that — that have also seemed to be features and have raised concerns is both the setup and what it could be used for. Some have proposed having consumers have direct deposit accounts at the bank in order to keep a record of a digital currency. And Governor Lael Brainard, who was an Obama appointee, governor of the Fed, had — she said she hasn’t supported it publicly one way or the other but has brought up some concerns. She said in a speech back in November, “A system in which individual payment information would be recorded by a government entity would mark a dramatic shift.” 

A related question is whether the Federal Reserve has the authority to issue currency in digital form and, if necessary, establish digital wallets for the public. So whether it’s the government establishing a wallet or accounts at the Fed or a custodial wallet, it would potentially know and have information about the transaction we are making with such digital dollars or Fedcoin. And then that raises questions as, well, what if other law enforcement agencies, the IRS, the FBI, want to get access to that? 

There have also been proposals. Progressives have proposed using a digital dollar for universal basic income, for modern monetary theory, other things including negative interest rates. There are also proposals that go along with proposals for central bank digital currency to put taxes on fees of using paper cash or paper currency. 

So I wanted both to address these. And Chris, you can talk about — this may be an opportunity to distinguish your plan from some of the others as well as to reply to what Norbert said. So would you like to go ahead, Chris?

Chris Giancarlo:  Sure. So a couple of things. We coined the phrase “the digital dollar” in January when we launched the Digital Dollar Project. We coined it because it had an alliterative feel to it. We thought it would help catch on and create a mental picture of a tokenized form of the U.S. dollar. That phrase was borrowed by some proposals that were introduced in Congress as part of the Phase 3 of the COVID relief legislation to introduce the idea of directed accounts and digital dollar wallets. 

And that’s the underpinning for that reference you made of Governor Brainard’s speech in which she expressed some skepticism on some of those. I’m not going to take a view on those proposals other than to say that I think Governor Brainard’s concern about the Federal Reserve getting into the retail banking industry are legitimate concerns that need thoughtfulness.

In terms of the use of central bank digital currency, for all of these policy initiatives you mentioned, it’s a tool. And it’s a tool, as any tool is, that can be used for good; it can be used for bad. It can be used to advance a society’s interest; it can be used to undermine a society’s interest. I’m one who believes in technological innovation, and I hope that society and the leaders that society chooses will use those innovations to enhance society, to enhance liberty, to enhance privacy. All of those are programmable elements into the currency itself. If China uses its digital yuan to spy on its people, and if its people tolerate that, then that’s what happens in society. 

I’m not one who’s going to say the Unites States should hold back on technological innovation because we don’t trust our government to use that innovation. If that’s the case, then we’ve got bigger problems. We can’t hold back technology. In the early days of air transportation, there was a lot more crashes than there are today. But we didn’t say, “Let’s ban air transportation because of the dangers inherent in it.” We said, “Let’s make it better.” 

As we think about a digital dollar, we make very clear in our white paper that choices like privacy are critically important to program in from the start that reflect our values, our values that are expressed in the Fourth Amendment, that are expressed in case law and other areas. We traditionally in the United States have taken a dim view of government surveillance. 

We need to make sure — and by the way, our European friends are much more comfortable with that. Their privacy protections only extend to commercial exploitation of data, not government exploitation, whereas for whatever cultural reasons in the United States, we are more comfortable with Facebook mining our data, but we’d be up in arms if the government was. And so we need to make sure that as this innovation advances that we make sure that those societal values are programmed in.

I’ll just mention one more thing before turning back. We’re in a world of competing economies, and currencies are part of the competition. Currencies have always competed in the market, both sovereign and non-sovereign. And as we go further in the world, they’ll continue to compete, sovereign, non-sovereign, and competing government sovereigns. The dollar will compete against a digital R&D in the global world. And its technological capability will be one of the elements it competes on. 

During the European exploration of North America in the 16th and 17th centuries, there were both commercial scrip being used, and there were sovereign coins. But the one sovereign coin that was most desired was the dollar, but not the American dollar; the Spanish dollar. And the reason why the Spanish dollar was the one that was most in use is because it had technological superiority against the others. It was minted with New World silver, which was lighter and used less alloy; therefore, it was more consistently pure. But it was also minted in such a way that it could be broken into eight equal pieces, known as Pieces of Eight, which made it fractionable. The technological superiority of the dollar at that point in time was one of the reasons why Spain enjoyed such economic superiority for so long. 

We have to think about modernizing the dollar in a world of competing currencies, and that’s what we’re talking about here. And at the same time, we need to make sure that the policy concerns of our society are imprinted in it from the start. And if we’re afraid of government abuse then, quite frankly, we’ve got bigger problems than just whether it’s about modernizing our currency.

John Berlau:  Thanks, Chris. Norbert, would you like to reply?

Norbert Michel:  Yeah. This just goes way beyond basic technology. And I have a problem with the whole technology aspect of this anyway. If you look at the white paper that the Digital Dollar Project has out, it does a great job of making things sound like they’re pro technology. They say that the new system can be a driver of innovation for the broader financial system in a fundamental way. And that sounds great. 

But they also say that it’s essential to maintain and support the current two-tier banking system as the overarching architecture. Well, that’s the opposite of innovation. That’s not innovation. The very essence of this technology is that it removes the absolute necessity of the same third-party intermediaries that you have now. It allows other companies to come in and provide custody. It allows other companies to come in and provide payment services. 

What  the paper is doing is saying, look, there’s this wonderful private sector innovation and we need to make sure that we keep it for the dollar. But what we really need to do is protect the existing system that we have and contain this so that we’re the ones who have it and that the central bank still has it and that commercial banks have it, and that were not doing business, financial business, in a completely different way that were not really sure of what that could be. We’re going to have this new payment rail, and we don’t really know what it is, but we need to make sure that the existing companies have it. 

That’s not innovation. That’s anti-competitive. And you don’t get the benefits that are talked about in the white paper without having the government take it over. You don’t get privacy in any form of currency that the government doesn’t allow. You’re not going to have a new digital currency, central bank digital currency, that doesn’t have any AML rules, that doesn’t have any Bank Secrecy Act adherence. 

And the Digital Dollar Project paper is very clear that they support the existing rules. So you’re not going to have any sort of — you’re not going to have as much privacy as you have in cash. And you’re not going to have any of those benefits unless you have control over the digital currency. 

So then you go right back to where we started, where I started, which is what you’re really talking about is a government monopoly on this new digital dollar thing, this new currency. And to get the most benefit out of that, they have to have a complete monopoly. And there’s no historical evidence that I can think of where a government monopoly provider of something promotes competition and innovation. It does the opposite. It crushes it. We’re not talking about the same thing, even. 

And if you just look, you have all kinds of digital wallets that are already out there. You have all kinds of digital token-based money substitutes that are already out there. What we’re talking about with essential bank digital currency has no marginal advantage over that stuff at all unless you have something special provided by the government. And to say things like, “Well, they can do it at low cost. They can provide safety at low cost,” that doesn’t mean that there’s not costs, and it doesn’t even mean that there’s a low cost. It just means that they’re not going to charge people for it directly. 

This whole thing about the unbanked and the underbanked, like, we’re going maybe — I’m trying to answer all the things that you had there, John. You had a lot. But if you look at the FDIC survey of the underbanked or the unbanked, half the people say that they don’t have a bank account — well, let me back up. It’s something like 95 percent of all Americans actually have a bank account. 

So in the first place, we’re only talking about 5 percent of Americans who don’t have a bank account. When we talk about that 5 percent, we’re only — only about half of them say, “Well, I don’t have a bank account because I don’t have any money to put in the bank account.” And when you look at the other half, a large portion of them say that they used to have a bank account, but they’ve had credit problems or that they’ve had problems adhering to the AML rules and the anti-money laundering and know your customer rules. 

Well, again, if we’re talking about providing those people with money, that’s not simply the form of digital currency. That’s something completely different. So I think we have to be really careful and specific about exactly what it is that we’re talking about here. If we’re talking about international transactions and transfers, that’s fine too. But legitimate reserve currency transactions are already done digitally. You have to show exactly what the marginal benefit is from having this tokenized system versus the digital system that you have now. And I don’t see it, I haven’t heard it, and I haven’t read it in the paper. 

And if we’re going to just go a little bit further than that, and we have to say, all right, what is the actual benefit here versus the private digital currencies that are being created versus, say, the stablecoin things that you’re talking about like Libra and that sort of stuff? Well, it’s obvious what happened here, and that’s that this innovation took place in the private sector. And that’s proof already that it can happen in the private sector. So there’s all these innovations that are taking place are taking place without the government putting its foot on it. And if you’re going to get the type of benefits that they’re talking about in the white paper, well, then you have to have the government stamp it out and take it over. 

Chris Giancarlo:  I’m sure a lot of the same criticisms were made when the U.S. government created NASA and started the Gemini mission and the Mercury mission and, ultimately, the Apollo mission. “Why are we doing this? There’s just a bunch of moon rocks up there. Why is the government spending all this money? Isn’t it going to crowd out private innovation? How’s it going to spur the economy?” 

And in fact, the exact opposite happened; huge economic response to that, huge innovation response to that. It brought in the private sector to develop so much of the technology that was used. It was a spur to advancements, and it was a spur to U.S. technological dominance in the global marketplace over the next several decades. 

Norbert Michel:  I don’t see how that’s a good analogy at all. First of all, it’s entirely false. It’s not as though we didn’t have any of those people doing those things and all of a sudden, we had NASA and now we have computers and electronics. That’s just not right. And it’s not a good analogy because we’re not even talking about something that’s close to the same thing. What we’re talking about is having or not having a government monopoly provider of money. And to get the benefits —

Chris Giancarlo:  — There’s no monopoly here.

Norbert Michel:  There is absolutely a monopoly. 

John Berlau:  Why don’t we go to —

Chris Giancarlo:  — We say over and over again in the paper that we don’t call for suppression. 

Norbert Michel:  Oh, no. I agree, I agree.

Chris Giancarlo:  In fact, probably, there’s people that have done more for the development of coin than I’ve done and continue to do in my public world —

Norbert Michel:  — The paper — you’re right.

Chris Giancarlo:  — and to say that we’re creating monopoly is completely off base. 

Norbert Michel:  No, it’s not off base. And I agree, the paper does say that. But what my point is is that you do not get the possible benefits that you’re talking about without it being a monopoly. That’s my point. 

You don’t have — you can’t say that it’s the safest form of currency if the government’s not standing behind it. And if the government’s standing behind it, then it does have a monopoly on that currency. You can’t say that you’re going to have monetary policy benefits, whether it’s neutral or otherwise, unless the government is taking over. And that one’s actually worse because you have to get rid of alternatives as well. 

Talking about things like it could enhance confidence, it could enhance efficiency, and it could be one of the best ones that are out there for wholesale transaction and all these things, I mean, that’s — again, unless the government can block transactions, unless the government can move money from one account to the other, unless it can literally have the authority to take over those things, then you don’t get any of those benefits. 

So by definition, even though you can say you don’t want a monopoly, and even though you can say you want competition, what I’m saying is you don’t get those benefits without preventing the kind of competition that would provide the sort of safety that you would get in the regular market. 

Chris Giancarlo:  It doesn’t have a monopoly today over fiat currency, so would you undo that monopoly as well? Are we going to go back 100 years in time to a different world? Is that where you’re driving?

Norbert Michel:  Well, I’m not saying that we have to do that, no. But I’m saying that — I am saying, absolutely, that you don’t have to do that. I am absolutely saying that you can have something like Libra, or you can have something like Bitcoin or Litecoin. You don’t need a government monopoly. You don’t need the government to compete with it. And if the government does its job, and the Fed doesn’t destroy the currency and doesn’t provide rampant inflation or something like that, then it’s probably not going to take hold to any rival amount of the national currency.

John Berlau:  Thank you. This has been a lively debate, and I’m sure our audience has some questions. I’d like everyone to — and by the way, in my book, George Washington, Entrepreneur — thank you both for the historical overview — I talk about not only Spanish dollars, but sort of the Bitcoins and crypto of its day that developed like tobacco, how tobacco warehouse receipts were actually functioned as a currency throughout the colonies. So again, another plug for my book, George Washington, Entrepreneur

But if you each could state in a minute your case and the case of why we need this or why we don’t, a digital dollar in addition to private currencies. I’ll give you each a minute, and then we’ll go to questions. Norbert, why don’t you go first, and Chris, you can have the last word. 

Norbert Michel:  Yes. What I was saying was the private sector is taking care of these things. It is developing these things, and the government should let that happen and stay away. It doesn’t bring us back 100 years to anything bad. That’s not where this is going at all. These are private innovations that could move us forward if the government doesn’t prevent it.

John Berlau:  Okay. And Chris, what do you have to say?

Chris Giancarlo:  One of the strengths of the United States’ economy is that most of the world’s key commodities are priced in dollars, whether it be wheat or soy beans or energy products or key foreign exchange contracts, interest rates, all priced in dollars. And that’s one of the reasons why the world holds dollars in order to for the dollar to be the unit account of those things. 

All of those important things of value are going to be decentralized, are going to be programable. And if the dollar is going to remain the unit of account for all of those things, then it needs to modernize alongside of those items as well. We’re going into a digital future, and to continue to build our economy on an analog currency is going to be detrimental to the United States and its competition in the global marketplace. 

John Berlau:  Okay, thank you both. The question of the underbanked — before we go to questions, the question of the underbanked was brought up. I just wanted to point out that there are many factors in that, including the Dodd-Frank regulation, the Durbin amendment which caps what retailers pay to process debit cards. So some of those costs have been shifted to consumers. 

My colleagues and I at have just showed a dramatic effect of getting rid of things like free checking accounts are causing fees to increase as they were shifted to consumers. So that’s one of the things we should keep an eye on, just on government regulatory policy in general as far as the underbanked. And we do that, and we are all interested in that. 

So anyway, let’s go to questions, please. And thank you both for a lively conversation, and to the audience, has some great questions to contribute. 

Colton Graub:  All right, we’ll now go to audience questions. We’ll go to the first one now.

Molly:  Hi. My name is Molly. I am a consumer. My question is for Mr. Giancarlo. Do you see the Fed and the Treasury issuing two different types of digital coins, U.S. dollar tokens, possibly one for domestic use and one for international?

Chris Giancarlo:  Thanks, Molly. No, I don’t. I do believe it’s inevitable that the U.S. government will issue a central bank digital currency. Every major central bank, every major economy in the world is actively exploring this. A few of those proposals are proposing different ones, at least in terms of the major Western free market economies are proposing a distinct domestic use or international use digital currencies. And none of the conversations I’ve had on the official side in the United States have talked about different ones. And one of the concerns would be arbitrage between the two. So I would not expect that the United States would go down the path of exploring a separate domestic or cross-border one. 

John Berlau:  Norbert, do you have any thoughts on that?

Norbert Michel:  I would think he’s right. And I think it’s because there will be one, and there will be one government monopoly on it, which is what I’ve been saying. 

And look, this is — we’re getting way ahead of ourselves. Yes, everybody’s doing it. Yes, everybody’s talking about it. And it all sped up once Facebook came out and people realized, oh my gosh, you have somebody with a giant customer base, a digital customer base. You could actually pull this off. This isn’t just Bitcoin. And they’re scrambling because they’re worried about losing control. That’s all this amounts to. 

And when we talk about having a sanctioned digital currency or a central bank digital currency, or whatever you want to call it, that’s controlled and run by the federal government, you’re talking about removing options from people. You’re talking about removing them in the literal sense, and you’re talking about taking funds potentially out of the private sector, out of the private banking sector. 

Yes, there are ways around that. Yes, there are ways to mitigate that. But even if you talk about having the funds in custody at a commercial bank, you’re still effectively talking about a central bank, a central government, running your bank account. That is very different. And that is not just simply innovation. It’s not just simply technology. This is very different. 

John Berlau:  Okay, let’s go to another question.

Brian Knight:  Hi. This is Brian Knight at the Mercatus Center. My question is primarily for Mr. Giancarlo. There’s a lot of concern, and reasonably so, about privacy in the context of a federal digital dollar. So, I guess, how much do you think this can be mitigated through, say, statutory means? And to what extent do you believe that there is a delta between the effective privacy of financial records in this scenario versus in the traditional financial system, given the enhanced access that the government has to financial records?

Chris Giancarlo:  Thanks, Brian. Because I believe this is going to happen, it’s just a question of how long it takes, it’s critically important that civil society be involved at the outset in discussions like this to make sure that our societal values, whether around privacy or any other element of this, be incorporated in at the design phase. 

Now, let’s take fiat right now, cash money right now. We all consider it to be anonymous, but the fact of the matter is that’s a policy choice, and the policy choice is up to $10,000. Above that, there is reporting of it by bank institutions. So it’s not an absolute area of privacy. It’s a somewhat compromised area of privacy. As the U.S. goes down the road of designing this, it’s essential that society demand that appropriate safeguards be built in. 

Now, I think we start with two advantages compared to, say, a digital R&D or other currencies. We have the Fourth Amendment. The Fourth Amendment puts restrictions on the government’s invasion of privacy. We need to make sure the jurisprudence is built around that and reflected in a digital dollar. Secondly, a token is inherently more private than an accounts-based system because you’re only verifying the token. 

Now, all the restrictions around wallets, around banks, about disclosure of personal information needs to be developed, and the United States, we’ve got a ways to go overall in the area of identity and privacy. A lot of good work has been in this area by Jim Harper and others showing that we really have been kind of asleep at the switch in thinking about privacy. We hand over our drivers’ licenses for virtually every type of identification process, often giving far more information than is necessary. We as a society have to really build and get more sophisticated in our thinking about privacy and our rights to privacy as a society. 

But rights to privacy are separate from the issue of a digital currency. It’s fundamental that we address it. It’s fundamental that we get it right as society and as technology moves forward. But the thing about technology is it’s moving forward. It’s like a wind. You can hide from the wind, you can stand and get knocked down by the wind, or you can hitch your sail to the wind and ride it. And I think the United States historically has taken technology and moved forward by it, not tried to stand against it and deny its forward progress.

John Berlau:  Thanks, Chris. Norbert, did you want to reply? If there were statutory safeguards, would that mitigate some of your concerns about central bank digital currency?

Norbert Michel:  Well, no, because just like you have statutory safeguards right now in place for the Bank Secrecy Act. There’s a $10,000 limit, but it’s not really the limit. There are structuring regulations that were written outside of the statute. There are SARs, CRTs, all these different reports that you have different thresholds for different types of financial companies. So there’s really not even just one limit. And there’s really not any particular limit. If a bank thinks that you’re doing something, they have to report you. 

And look, to imagine a world where we go to a sanctioned digital token dollar and we step backward in terms of the AML protections that we have and the know your customer protections that are in place — and maybe I shouldn’t use the word protection, but rules. I honestly have a hard time even getting my head around that. We haven’t even done a serious cost-benefit analysis of all these rules that we have, but we have millions and millions of reports. 

And if anybody inside the administration or inside of Congress, and many people even inside the banking industry, nobody has any interest at all in moving those things back, none. So to argue that we’re going to have privacy protections that are greater than the ones that we have now when we have a sanctioned digital currency literally run by a federal agency and to think that you have nothing to fear and you’re going to have just as much privacy as you have now or even more, I think that’s just a fantasy. 

John Berlau:  Okay, next question.

Chris Giancarlo:  But if we don’t engage, it will never happen.

Norbert Michel:  Well, we’ve been engaged. And I personally have been engaged on AML for almost 10 years, and nothing’s happened. So I’m with you, but I don’t see how it’s going to happen.

John Berlau:  Okay. Next question, please. 

George Selgin:  Well, thanks. This is George Selgin from the Cato Institute. Thank you both, Chris and Norbert, for your comments.

Chris Giancarlo:  Hello, George.

Norbert Michel:  Hi, George. 

George Selgin:  My question is mainly for Chris, but I’d be happy to hear Norbert’s point of view. Chris, when you opened your discussion, you talked about slow payments. And you particularly mentioned the example of checks. And what troubles me about that is that here we have the Fed exploring this high tech venture, but the main thing that keeps checks as well as many other payments as slow as they are today is the fact that the Fed keeps banker’s hours for its own settlement systems, which it monopolizes interbank settlements. 

That’s the National Settlement Service and Fedwire. They’re closed weekends. They’re closed holidays. They’re even taking forever just to open an extra half hour. This is something they’ve been urged to do for years so there can be three ACH payments windows. So if we want to speed up payments, the biggest bang for the buck would be something relatively low tech. Why doesn’t the Fed to that? 

Furthermore, pursuing this, Chris, just — it’s part of the same point, then I’ll stop. By improving ACH, there would be vast improvements in opportunities for rapid digital payments by Venmo and other arrangements, private arrangements, that depend on settlement on ACH, including debit cards. So that would do more to speed up payments and more quickly. Why isn’t the Fed doing that, at least in addition but perhaps instead of all this fancy digital money stuff?

Chris Giancarlo:  Thanks, George. Look, I’m not a Fed watcher. I’m not a former Fed person. I’m not a Fed defender. FedNow is really a FedYesterday because it’s catching up to what others in Europe and elsewhere have already done. It should have been done 10 years ago. And these inefficiencies that are built into the system, the question needs to be directed to the Fed. 

But I think because there hasn’t been more innovation coming out of the Fed over the last decade or more, then it’s critically important that if they are, as I know they are, experimenting with central bank digital currency, as every major central bank is, that a community of concerned Americans be engaged in guiding that process. So I’ve got great respect for all of the concerns raised by Norbert, but I just don’t think it is realistic to say therefore let’s stop it in its tracks and somehow improve the accounts-based system because this is going to happen. 

And since it’s going to happen, like the internet happened, because it’s going to happen, it’s critically important that the Fed be informed by the concerns of the citizenry as to their privacy, as to these other elements, which we could spend a lot of time talking about. So look, I’m very concerned about the slow pace of innovation at the Fed. I’m very concerned that we don’t get these concerns built into the design of a digital dollar and it goes forward not reflecting our societal values but maybe reflecting bank values or other values that are not as attentive to these societal issues that are of great importance.

John Berlau:  Okay. Norbert, would you like to reply?

Norbert Michel:  I don’t know what to say. I look at things very differently. I just see what the Fed has done to the check cashing system and clearing system, and I see what they did to the RTP folks. And I see them at every turn blocking innovation and stopping innovation. And I don’t see innovation coming out of a government and going into the private sector more than I see it going the other way. 

And I’m not trying to pick on anybody here, but, Chris, your white paper specifically says we need to protect the existing system. That’s not moving technology forward. Moving technology forward —

Chris Giancarlo:  — It doesn’t say protect. It says —

Norbert Michel:  — It literally says it.

Chris Giancarlo:  No, it doesn’t.

Norbert Michel:  It literally says we need to maintain —

Chris Giancarlo:  — It says digital dollars would be distributed to the existing system, but that doesn’t mean that it’s a closed ecosystem. It anticipates that there will be new financial intermediaries coming in so you can go from a two-tier to a three-tier to a four-tier and plus-tier system through the innovation that will come. But what it doesn’t propose is knocking the existing banking system out of the box on day one. 

Norbert Michel:  No. It literally says that we need to maintain that existing architecture. It literally says that. I don’t have the page number, but I pulled the quote. Again, the essence of this technology is that it replaces those third parties. And everything that I see in here is trying to protect the existing third parties that we have, even the Federal Reserve, which we don’t need to do. 

You’re right in that this thing is happening, and it’s happening, and that we have all kinds of people creating digital currencies. And if they don’t work, they don’t work. That’s one thing. But talking about creating one where people have retail bank — essentially, however you want to cut it, ending up with retail bank accounts at the Federal Reserve is entirely different. 

John Berlau:  Okay, I think we have time for one more question.

Colton Graub:  All right, we’ll go to the next question now.

Josh Jackson:  Hello. This is Josh Jackson, and I’ve been — this has been an interesting conversation from two different perspectives. I think one thing that I’ve noticed is that economists, and even Paul Romer in 2018, talked about the economic growth and how it is driven by the co-evolution of two things, technology and rules. And without the government helping propel that, then the rate of growth is going to be slowed down. 

And so I think — and I’m curious your ideas because China and Russia have been putting a lot of money into intellectual property and patents to drive these sort of processes and digital currency. And you can kind of see this boom where we’re spending a lot of money maintaining things like the penny and increasing our deficit based on these old rules. 

So I’m trying to wrap my understanding around I see the economic growth occurring with the digital currency of creating other things like smarter vehicles and smarter cities and companies coming in and developing those cities from a different perspective. Not necessarily building a new cryptocurrency or having 50 different cryptocurrencies, but more in terms of other businesses coming in and exponentially growing our market and reducing our deficit. 

John Berlau:  Questioner, what is — good question. What is your affiliation, or do you have an affiliation with a certain group?

Josh Jackson:  Sure. I’m Executive Director of the Artificial Intelligence and Automation industry.

John Berlau:  Okay. Cool, cool. All right. Well, Norbert, do you want to take that first, and then, Chris, you can have the last word on that?

Norbert Michel:  I’d be happy to, but I’m not really sure what the question is.

John Berlau:  Is there a question that could sum up some of your points, sir?

Norbert Michel:  I hear what he’s concerned about, but I don’t know what — I’m not sure what the question is. 

John Berlau:  Chris, why don’t we —

Chris Giancarlo:  — I’m happy to respond because I think that the questioner put it very, very well. I’ll tell you what brought me to where I am on this, and that is in five years in the federal government, I looked out and I saw our bridges and our tunnels and our airports, our mass transportation systems, all of which were state of the art in the mid-20th century, had been allowed to deteriorate, decay, and in many cases, become obsolete. 

The same is true about so much of our financial market infrastructure. Once state of the art has been allowed — our systems for settlement, for security settlement, for clearing, are antiquated. And nothing, to me, speaks more than that than an analog dollar. If a Martian were to arrive tomorrow on Earth, would you build an accounts-based system with all of its inefficiency, or would you just start from scratch with a digital token using digital technology? I think it would be the latter. 

And that’s certainly what China is doing. What China is looking to do is opt out of the Western bank — frankly, the American bank dominated monetary system and be able to do direct payments on their Belt and Road Initiative in all of their client states and avoid U.S. activities in that area. They are going to go to the new technology, and as the questioner said. 

Meanwhile, we keep patching and patching old technology. We’ve got a regulatory structure that can’t even recognize the novelty of stablecoins and virtual currencies and identify who’s got what element of regulation. Why? Because the regulatory structure was built for an analog world, not for a digital world. We don’t modernize. We just keep patching and patching and patching.

Norbert Michel:  That’s right. And you know that as well as anyone, Chris. The securities law that we have in this country is still based on what we did in 1933. 

Chris Giancarlo:  Absolutely. 

Norbert Michel:  That’s a separate issue from having a central bank digital currency. Let’s go and fix that, though. Look, the private sector did come up with technology. It is coming up with technology that fixes the settlement problem in the securities markets. We don’t need a central bank digital currency to do that. The blockchain technology to do that is already out there, and companies are already doing it. 

These are separate issues, just like it’s a separate issue to talk about an airport that’s falling down. That has nothing to do with the central bank digital currency. And frankly, it has nothing to do with China. If people are going to use the U.S. dollar as a unit of account, it’s not going to matter whether we’re going digital bank accounts, digital currencies, Bitcoin that’s denominated in dollar, Libra that’s denominated in dollar. It makes no difference whatsoever. None. What we’re talking about is something very different.

John Berlau:  Okay. I think we’re about out of time, but I wanted to thank both my participants, Chris and Norbert, for this lively discussion, and thank members of the audience for their great questions. It’s a topic that will be under discussion and debate, and as far as just innovation, and who should be driving it, and what is the government’s role. So anyway, I thank you all, and I hope you enjoyed it. And hopefully, The Federalist Society will review this for other teleforums related to this topic. So thank you all so much.

John Berlau

Senior Fellow and Director of Finance Policy

Competitive Enterprise Institute

J. Christopher Giancarlo

Senior Counsel

Willkie Farr & Gallagher LLP

Norbert Michel

Vice President and Director, Center for Monetary and Financial Alternatives

Cato Institute

Financial Services & Corporate Governance

The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the speaker(s). To join the debate, please email us at [email protected].

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