Americans who want to transfer money online have options. They can go with services like Venmo and PayPal, make transfers from their personal bank, or do a transaction with stablecoins issued by cryptocurrency companies.
All those options have something in common that may not always occur to consumers: The transfers are offered by exclusively by private companies. That means users’ accounts aren’t stuffed with physical dollars, but rather with promises made by private companies to make the recipient whole.
Unlike with cash money, the system creates a middleman for every dollar spent — and an opportunity for them to make a profit off the digital equivalent of something so simple as handing someone else a bill.
There is a future where every monetary transaction between people involves private interests.
There’s no way to send money digitally without involving a company that has an angle. With cash on the way out — the last penny was just minted, for instance — there is a possible future where every single monetary transaction between people involves private interests.
The little-noted distinction raises a question: Why can’t the actual backer of the dollar — the U.S. government — create a way to send money itself? Academics have been exploring this question for years, asking why the federal government can’t back its own digital currency to facilitate transfers between people.
A system with a central bank digital currency, as it’s known, could operate as a public good, advocates say, with potentially zero or minimal transaction fees — just by letting the government take a small step from backing physical currency to backing its digital equivalent.
In the U.S., those researchers never got past an exploratory phase, but that did not stop a central bank digital currency from becoming a boogeyman for right-wing activists.
The Republican House majority whip, Rep. Tom Emmer, warned that the Chinese Communist Party uses a digital currency to spy on its citizens. Online memes dubbed them a “mark of the beast.” Donald Trump promised to ban them last year, and followed through with an executive order in January.
Now, Republicans are trying to make sure that no matter who is president, private companies will forever hold the monopoly on Americans sending money to each other online.
The bill would even prevent research on government-issued digital currencies.
They’re pushing a formal, codified ban that would squash government competition to private payments before it ever gets started. The House included a central bank digital currency ban in its version of a defense budget bill, which will be hashed out with the Senate in the coming weeks. The bill would even prevent research on government-issued digital currencies.
The debate raises major questions about privacy, public goods, the dollar’s dominant position of the global economy, and technological innovation. That debate’s resolution, one prominent researcher told The Intercept, will determine the future of money.
“Right now, the only way to digitally transact through people is through a private sector intermediary — whether that’s a bank or a fintech company or a credit card company,” said Neha Narula, the director of the digital currency initiative at the MIT Media Lab who from 2020 to 2022 worked with the Federal Reserve Bank of Boston to explore the idea. “It is not really clear that that structure continues to work without something like cash, users having the ability to exit to cash.”
Central Bank Digital Currency
To understand the potential upsides, it is possible to look to the handful of other countries where central bank digital currencies have already been adopted. In the Bahamas, citizens can use smartphone apps or plastic cards to make fee-free purchases and transfers with the digital Bahamian dollar.
The adoption of digital currency in the Bahamas has been low, in part because so many private alternatives already exist. A similar pattern has emerged in China, which launched a digital currency in 2020.
In the long term, China hopes to use digital currency to leapfrog past the U.S. dollar’s role as the preeminent mode of international exchange. American boosters of central bank digital currencies, such as former President Joe Biden, say it is important that the U.S. not get left behind. China’s preeminence in the field is a red flag for the likes of Emmer, however, the Republican in House leadership.
“The digital yuan, Major, is a financial surveillance tool,” he told CBS News’ Major Garrett in an interview earlier this year. “The Chinese Communist Party is literally building social scores on its citizens based on their purchases. This is not an American value.”
“It is hard to imagine in 50 or 100 years we are going to be using pieces of paper.”
Narula, the researcher, acknowledged that the use cases for digital dollars may be elusive for now. Still, she believes that it is important to keep studying central bank digital currencies, given the inevitable trend toward more digital transactions.
She said, “It is hard to imagine in 50 or 100 years we are going to be using pieces of paper.”
Privacy Problems
Narula is adamant that a central bank digital currency could be built with privacy protection at its core. After all, there are already cryptocurrencies such as Bitcoin that allow their users to remain mostly anonymous.
Digital currency critics, by contrast, paint them as Orwellian tools of government oversight. One skeptic argued that privacy protections would be too vulnerable to the whims of an administration.
“It is technically possible to achieve privacy, but it’s not politically possible to achieve privacy. And that’s a very important point to stress here,” said Nicholas Anthony, an analyst with the libertarian-leaning Cato Institute. “Once a crisis occurs, it would be so easy to have privacy protections ripped away.”
Anthony said those on the left should be just as concerned as those on the right about the potential for abuse.
“Our financial transactions reveal so much about us,” he said. “Anyone in power can really use it to their advantage. So it’s really unfortunate, in my eyes, that it has become a ‘Republican’ or ‘conservative’ issue.”
Private offerings come with a host of privacy concerns as well, Anthony acknowledged. He argued that the market will incentivize privacy protections, along the lines of Apple’s marketing on the topic. Others aren’t so sure and think the issue may be operating as a smokescreen for private companies.
“You hear a lot of high-minded rhetoric about CBDCs being a threat to people or privacy, but at the end of the day, this is really about what roles the public and private sector play in finance,” said Mark Hays, an advocate with the left-leaning groups Americans for Financial Reform and Demand Progress.
By banning even government research on central bank digital currencies, MIT Media Lab’s Narula warned, the legislation also risks endangering further progress on privacy protections.
“There’s certain experience that only people in government have when it comes to administrating our monetary system,” she said. “So to cut them off from participating in this research means that we are not going to get to the best outcomes, because we don’t have the best minds working on it.”
Private Alternatives
If a ban comes to pass, the field of digital payments will be left wide open for private industry. That could present a profitable market opportunity for financial services companies and cryptocurrency startups.
The stablecoin industry already has a market capitalization of over $300 billion, and it is poised to explode in the wake of recent legislation supported by Trump, himself a stablecoin entrepreneur.
In fact, cryptocurrency companies have been some of the most vociferous opponents of central bank digital currencies after initially exploring partnerships with the U.S. government on them. Critics point out that government-issued digital dollars could compete with stablecoins, which earn profit for their private issuers from the interest on U.S. bonds and other securities backing consumer accounts.
Hays said that he recognized the privacy concerns that come with government-issued digital currencies.
“My dollar that I lay down at the bodega, chances are that’s not going to be on any database. But with the CBDC, in a certain way of thinking about it, it now would be,” he said.
“Your HUD grant would be brought to you by Circle or Tether.”
Still, he worries that private interests are moving to take control of financial infrastructure that should belong to the public. The Department of Housing and Urban Development is already exploring the use of blockchain to monitor the billions of dollars in grants it pays out every year, he noted.
“Your HUD grant would be brought to you by Circle or Tether,” said Hays, referring to two cryptocurrency companies. “How far they get is anybody’s guess, but the fact that they are floating it gives you a signal of their intentions. They would like to see a world where that fundamental architecture — which we would argue needs to be democratically controlled — is another way of putting more of that system under private control, including crypto.”
