Central Bank Digital Currency--Efficient Innovation or the End of the Private Banking System?

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Central Bank Digital Currencies (CBDC) are the subject of a global debate.  In one version, individuals and businesses would hold deposits directly with the central bank.  Critics point out that the Federal Reserve would then control how these deposits are used, allocating credit to private-sector borrowers and to government spending, arguing that CBDCs would eviscerate the private banking industry and create government surveillance of all financial transactions in the accounts. An alternate version is that CBDCs take the form of a tokenized dollars, distributed through the banking system and operating in parallel with paper currency and bank accounts.  Supporters say this could yield lower transaction costs and more rapid settlement of payments, and could strengthen the international role of the U.S. dollar.



Bert Ely, Principal, Ely & Company, Inc.

Chris Giancarlo, Senior Counsel, Willkie Digital Works LLP; Former Chairman, US Commodity Futures Trading Commission

Greg Baer, President & Chief Executive Officer, Bank Policy Institute

Moderator: Alex J. Pollock, Senior Fellow, the Mises Institute


The Government’s Arms Around Cryptocurrency: Hug or Stranglehold?


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As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.

Event Transcript

Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.



Ryan Lacey:  Hello, and welcome to The Federalist Society’s virtual event. This afternoon, May 10, 2022, we discuss "Central Bank Digital Currency -- Efficient Innovation, or the End of the Private Banking System?" My name is Ryan Lacey, and I'm Assistant Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of our experts on today's call.


      Today we are fortunate to have an excellent panel moderated by Alex Pollock, who I will introduce very briefly. Alex Pollock is a Senior Fellow at the Mises Institute. He previously served as Principal Deputy Director at the Office of Financial Research at the U.S. Treasury Department. He also served as a Distinguished Senior Fellow at the R Street Institute and a Resident Fellow at the American Enterprise Institute. His decades of banking experience include being a visiting scholar at the Federal Reserve Bank in St. Louis. Alex graduated from Williams College, the University of Chicago, and Princeton University.


After our speakers give their opening remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A feature at the bottom of your screen, and we will handle questions as we can toward the end of today's program. With that, thank you for being with us today. Alex, the floor is yours.


Alex J. Pollock:  Thank you, Ryan. And let me add my welcome to all of you who are joining in this webinar. The question of whether Central Banks, and the Federal Reserve in particular, should issue Central Bank Digital Currency, or CBDC — and, if so, in what form — is contentious, very important, and timely. And we're fortunate to have such a knowledgeable panel to consider it today.


      CBDCs would mean the public would have deposit accounts with the Federal Reserve, either directly or in some intermediated fashion. But either way, the public would hold liabilities of the Fed, instead of deposit liabilities of private banks in the CBDC form. The CBDCs represent a great irony, I think we can say, because an essential goal of cryptocurrencies and their formation was to escape Central Banks and the control of Central Banks.


But now, the Central Banks themselves are thinking about issuing their own form of cryptocurrency, that is to say, Central Bank Digital Currency. And they've taken over this digital idea, with the possible result of even greater centralized monetary power than before. I'll mention just a few key issues posed by the possibility of CBDCs, to begin.


One: what improvements in the financial system might a CBDC offer? Two: will CBDC lead to a Federal Reserve monopoly on the deposit business? Perhaps the end of private deposit banking? Three: would a Central Bank Digital Currency pay interest? Or would it have to be, by definition, a non-interest-bearing account? And if it does pay interest, how much might it pay?


      Four: will a CBDC lead to a national concentration of Federal Reserve power over credit allocation and personal information? And five: we can say that a CBDC in any form will expand the Federal Reserve balance sheet, of necessity. As the liabilities expand, what assets will accompany the expanded liabilities, and, in my view, an essential question very seldom discussed in these matters, but has to be addressed.


      Our panelists, doubtless, will think of numerous other questions and pros and cons of CBDCs. Let me introduce the panelists in the order in which they will speak. First will be Chris Giancarlo, who is Senior Counsel at Willkie Farr and Gallagher in their New York office. Chris has served as Chairman of the U.S. Commodities Futures Trading Commission. He has been Executive Vice President of GFI Group, and numerous other assignments. He's a well-known advocate for the role of blockchain technology, cryptocurrencies, and digital assets, and is known as "CryptoDad" on Twitter. Maybe that's going to become "CryptoGrandad" here soon.


      Our second speaker will be Greg Baer, who is President and Chief Executive Officer of the Bank Policy Institute. He has served as President of the Clearing House Association, Head of Regulatory Policy at JP Morgan Chase, and Assistant Secretary for Financial Institutions at the U.S. Treasury Department. Greg is also the author of a book: Life: The Odds. So, perhaps, today, Greg, we can consider if you have to compete against a Central Bank, how good are your odds?


      And our final speaker will be Bert Ely, who has been a provocative thinker and commenter on fundamental banking issues since 1981. Bert focuses on conditions in the banking industry, on monetary policy, the growing federalization of credit risk, and has been a noted skeptic of cryptocurrencies, especially of the issue of today, namely, Central Bank Digital Currencies.


      Each panelist is going to make an opening statement of ten minutes, then we'll give the panel a chance to respond to each other, or to clarify points. And then we'll move to a general discussion including audience questions, if you send them in. And we will adjourn at 2 o'clock. And, with that, we move to our panel. And, Chris, you have the floor.


Chris Giancarlo:  Thank you so much, Alex. And it's a delight to be here with Greg and with Bert. And Bert's an old friend, so delighted to do this again. It's great to be with The Federalist Society. I was a member of The Federalist Society's very first chapter at Vanderbilt Law School in the early '80s, and I've always had tremendous respect for its commitment to robust and healthy and respectful debate, taking into account all sides.


      I want to respond to your opening, and before my own remarks, by saying something provocative that I'll come to at the end. And I think the question is not who deploys digital currency, whether it's the public sector or the private sector. I think, really, the question is which of those will best protect individual privacy and economic liberty. And I would venture to say that the conclusion is not a forgone one that the private sector would necessarily do it better than the public sector.


Having said that, as people who know me know that I'm a great believer and advocate for free capital markets. In fact, it was our work at the CFTC in 2017 that established the world's first regulated marketplace for crypto derivatives on Bitcoin, and, eventually, Ethereum. And, in fact, that marketplace — the establishment of that marketplace — established that those two cryptos would be settled in U.S. dollars. Like most of the world's major commodities that are similarly settled in U.S. dollars, it's an underpinning of the dollar in its role in the global economy.


And, yet, in fact, it was the free market itself that began experimenting with digital money, starting in 2008 with the Satoshi white paper. And it's the public sector that's been way behind the curve in doing that. But the public sector has woken up to the challenge of the private sector's experimentation with digital money, and, in fact, is now rapidly catching up. As I think most of the listeners know, nine out of ten Central Banks in the world today are looking at Central Bank digital currency, and more than 50 percent of them are actually experimenting with it.


So let's talk about technological evolution of money, and what it means. Historically, we know that technological advantages have been one reason why money has evolved from one form to another. In fact, the dollar itself is named after a currency that, for a time, was the most technologically advanced currency, and that was the Spanish dollar. The dollar wanted to mimic the Spanish dollar's superiority over other currencies during the period of the European exploration of the Western Hemisphere. During that time, there were many currencies in use by the explorers.


But it was only the Spanish dollar, minted with New World silver that was more consistently pure, requiring less alloy, making it lighter to transport, but, more importantly, that was minted in a way that it could be broken into eight equal pieces, known as pieces of eight, that made it fractionable. So it was a technological advantage of that currency over other currencies that gave it its prominence in international commerce, so much so that the United States named its own currency after it. Technological advantages of one currency can often lead to an advantage in global trade. And we know that countries compete in global trade.


So what is this technological advancement of money that we short-handedly call crypto? Well, it's nothing less than the internet doing to finance and banking and money itself, the same thing it's done to other forms of human commerce. Arguably, the most important hardware invention of the 20th century was the semiconductor. And that allowed us to take giant mainframe computers on military installations and college campuses and reduce them down to personal computers, and manufacture and distribute tens of billions of them around the globe.


But I would argue that it was actually the software invention of protocols that allowed those computers to talk to each other that basically weave them into a giant global supercomputer that transformed the way we approach, and our relationship with, information. The first wave of the internet was an internet of information that transformed the very way we interact with each other, and with information, in a much more personal and direct way that's less dependent on proprietary rails — like Encyclopedia Britannica, for example — that owned information.


In fact, the best example of that internet of information is when I was a college student in Europe and wanted to call home. It was very expensive. Now I speak to my son, who's a grad student overseas, any time day or night, 365 days a year, at no cost at all. Why is that? Because I'm not using the proprietary phone lines of the Bell system or British Tell. I'm using the internet itself, through FaceTime.


Well, the second wave of the internet was the internet of things. As those microprocessors got smaller and smaller and installed in devices, it was a great hardware step forward, but it required a software step forward in terms of wireless technology: 5G, Bluetooth, and others that allow us to put those devices together for an internet of things.


Well, now, once again, the hardware has gotten so sophisticated that it only takes a protocol to allow that worldwide web of computers to do what banks and financial institutions have been doing, and that is validating who owns what, and who's transferring what to whom. And that's what the Satoshi Nakamoto white paper was. It was the protocol. In the same way that Bluetooth and TCP/IP changed the way information is networked, these are protocols.


Whether it's the Bitcoin blockchain, or whether it Ethereum, they're protocols that allow us to use this world wide web of billions of computers to do the validating of who owns what and the relationships we have with things of value, rather than what we've had for now several centuries, basically, bank balance sheets being the recorder and the validator of value, and the reliance, therefore, we have on those single points of failure, as opposed to a forward-leaning technological advancement in the recording, the validation, and the transfer of value.


So that is what crypto is about. The question is, who are the providers of that service? What is the role for government? And what is the role for the private sector? Well, we can take a look and see what's happening, because one country in the world has already decided that only digital money can be done by government, and that's China. China is very far advanced with their e-CNY, which is now being deployed, in exclusion, to private sector initiatives like stable coins and Bitcoins, which have now been banned. It's government-only.


And I just had the honor to serve on a Hoover committee that spent a year looking at China's digital currency, called their e-CNY, interviewing representatives of the People's Bank of China, studying it deep. And there's a number of key factors to this. Number one is it will be programmable. Number two, it will be a surveillance tool. If you criticize the regime, your money will be turned off and you won't be able to get a train out of your village. But it will also be for exports. It is going to be a major export part. There are many countries in the world that want that same surveillance tool over their citizens.


And it will be used in the Belt Road initiative. We may be staring a few years from now and seeing the deployment of that digital currency around the world. But China is not alone. There are others. The European Union is looking very seriously at a digital Euro. And that Euro, while it will be safe from commercial exploitation of data, governments will have surveillance over it. So the real question is what should be the response in a free society, including the United States?


Two years ago, I, with some colleagues, launched the Digital Dollar Project, a not-for-profit, private enterprise, based on a couple of key proposals. Number one: we believe that money is as much a social construct as it is a government construct. And if you look throughout history, government money has no value unless society accepts that value. So they must work together. We believe that a private initiative to explore sovereign digital money is very much appropriate.


So our goals are to encourage U.S. leadership in developing key protocols, and to pilot test and to develop germane data and experience with this, before any decision is made to deploy. The worst thing that could happen is Congress goes into one of its classic Memorial Day weekends, drafts some legislation, and, on Tuesday, we've got some sort of digital dollar. There must be robust experimentation with this. And that can only be done through strong pilot testing.


However, here's the money point, and then I'm going to wind up where I began. It's not clear to me, and I don't think it's clear to anybody until real testing is done, that the private sector is the better guarantor of people's privacy. We have seen how governments have basically outsourced to the private sector the town square, only to allow the private sector to censor and surveille speech on that. We also go into, outsourced to them, the Fourth Amendment, the right to privacy. Government is governed by the Fourth Amendment, but the private sector is not.


And so the real question to me is if China is prevailing, and has set a benchmark for a surveillance coin, who is going to create "Liberty Coin"? And that, to me, is the real question we should be asking. Government has a head start. Government isn't subject to the Fourth Amendment. If the U.S. government were to develop a digital dollar with robust protections -- and remember, privacy is a design element. It's a design feature when you're talking about digital money.


If the proper privacy protections were there in a government-issued CBDC, as opposed to our private sector ones that are encouraged every day to surveille private economic activity, as they do in the area of speech, a U.S. digital dollar could be the world's killer app. In fact, it could be attracting aspirational people around the world for more generations to come, if we get the issue of privacy right.


And so one of the very first things that the Digital Dollar Project did was put out a set of privacy principles to encourage the U.S. government, if and when it considers deploying a digital currency, if it gets the privacy principles right. Now, of course, if it gets --


Alex J. Pollock:  --Hey, Chris. Chris, you're –


Chris Giancarlo:  --I'm winding up. I'm winding up.


Alex J. Pollock:   You're over your ten minutes now, so we need to wind up.


Chris Giancarlo:  I'm going to end on this one. If we get privacy wrong, it doesn't matter whether it's done through the private sector or the public sector. That will be a disaster for our free society. And the indications, at least from the First Amendment use of speech, are not good. Anyway, I look forward to the questions. Thank you, Alex. I apologize for going over.


Alex J. Pollock:  No, no. It's certainly interesting. Greg.


Greg Baer:  Thanks, Alex. Thanks to everybody for joining. I'll get going. I think I'll just start with some basics, because I think there are a lot of misunderstandings about CBDCs and how they work. First, you hear the term "digital dollar" a lot. We actually already have two types of digital dollars in this country. The first is your bank account, which is actually in digital dollars, not cash. That's referred to as "commercial bank money." When you send or receive money using Venmo or ACH or RTP, or take a direct deposit, that's all digital dollars in the form of commercial bank money. And that commercial bank money is your asset and the bank's liability.


      Central Bank money currently is only in the form of reserves. It's an asset of the bank and liability of the Fed. So a CBDC would be a new version of Central Bank money, where you would effectively have an account with the Fed. It would be your asset, and it would be the Fed's liability. Of course, what that means is, if you transfer a dollar from your bank account to a CBDC, that dollar would no longer be funding the bank's assets, that is, primarily, loans. Instead, it would be funding the Fed's assets, which are, primarily, historically, Treasury debt and Fannie and Freddie debt, also known as agency debt.


      Thus, every dollar moved from deposits to CBDC is a dollar funding government, not the private sector. It's amazing how many people don't understand that and think somehow it still will continue to fund loans. It will not. Now, it's easy to say that doesn't really matter, because it's pretty broadly agreed that a CBDC — to Alex's earlier question — will not pay interest, for a variety of reasons. So, at that point, if you have a digital wallet, why would you hold money in a non-interest-bearing CBDC, assuming rates rise? And why would you hold it there, instead of a bank account that paid you deposits? And that probably is true. And in that case, it would be an expensive hobby for Central Banks.


      The problem, though, is what happens in March 2020 if people around the world, corporates and individuals, decide, well, you know what, I'm really scared and worried, so just for today, just for this week, I'm going to move my bank deposits into CBDC. Well, what that does is that implodes the banking system, because all of those deposits can no longer fund loans. But those loans are long-term loans.


      So the worrisome thing about that is, well, the regulators will know that, ex ante. So they'll say, "Well, you know what, when we write our liquidity rules, we're not going to treat those deposits as stable funding and allow them to fund loans, because look what could happen. Instead, we're going to require you to fund your loans with longer-term debt." And, of course, that raises the costs of borrowing for everyone, all the time, not just in March 2020.


      One other important fact, then I'll get to some of the use cases and debates. And I think this gets to Chris's remarks, which I think is a super-important point. You don't need a CBDC to tokenize money and use distributed ledger technology to improve the clearing and settling of payments. I was actually looking just yesterday. Currently, JP Morgan, right now, is running a distributed ledger technology system for clearing and settling repo trades, using a tokenized deposit which they call JPM Coin, and a tokenized Treasury security. They're doing that on a permissioned blockchain. And other dealers are participating in that.


      The primary benefits are basically extending the hours and eliminating fails, because it's delivery versus payment. So, thus far, and this is not hypothetical, like a CBDC. They've cleared and settled over $200 billion, just on that platform. And they've managed to do that without any government help. So, for large dollar payments, cross-border payments, other payments, there is really no reason the same technology couldn't be used. And those efforts are underway in various quarters.


      I would also say, no one in that context thinks, "Oh, this can't work, because it's commercial bank money, as opposed to Central Bank money." Everyone appears to be quite comfortable transacting in commercial bank money. So then the question is why is there the push for Central Bank Digital Currencies, particularly among Central Banks? It funny, when you look at a study of Central Bank Digital Currencies, the first thing cited, usually in graph form, is how many other Central Banks are studying it. So it's definitely a FOMO-type situation for the Central Banks.


And I think the primary reason that they are studying it is fear. And it's, I think, a justifiable fear. And it's, again, something Chris got to. It's a defense against crypto, because they feel they're losing control of the money supply, of anti-money-laundering, of sanctions, of just the world. And they're, again, largely right, because, unlike the JP Morgan system, which is a permissioned, limited system, the idea of crypto is to be a permissionless, pseudonymous system where the government has a lot less control. And I think what we'll see is CBDC isn't the answer to that. And, in those cases, regulation is the answer to that.


So if you think about a stand-alone cryptocurrency like Bitcoin, there are legitimate concerns about tax avoidance, AML evasion, sanctions evasions. And it's a massive existential problem, which I think current events are highlighting, driven largely by the fact that you have mixers out there who will camouflage your Bitcoin. And you have overseas exchanges like Binance and FDX that do not have U.S.-level KYC, AML, etc.


But the question is, is CBDC any answer to that? And the answer is, of course not. Because a CBDC is literally the last thing in the world people like that would want to hold. The whole point is to have a permissionless, pseudonymous system. And a CBDC will not be that.


So the next group of sort of crypto assets that I think the official sector worries about is stable coins, for example, Diem, Tether. Currently, that business model is largely limited to facilitating crypto trading and avoiding capital controls, so not real-world transactions. Although there was, I think, a fair amount of panic here in Washington around Facebook when it had plans for Diem. But, again, the concern there is, I think, partly, financial stability, that is, a run, as Tether is constructed not unlike a prime money market mutual fund, and then consumer protection in the event there is a run.


But, of course, one easy answer to that is — well, not so easy, but, moderately difficult, easier than a CBDC — is to regulate them like prime money market funds, or turn them into government money funds, and say, "If you're going to issue a stable coin pegged to the dollar, well, that stable coin has to have as its background assets, Treasury securities." Of course, that would be a lot like a CBDC. But, of course, you don't need to create a CBDC to have a stable coin that's backed by Treasury securities.


The other answer, which was the President's Working Group on Financial Markets' idea, was what we should do is have banks and insured depository institutions issue stable coins. Then you don't run risk, because they're backed by the same capital liquidity, etc., and examination that backs the banking system. So you don't have to worry about running from it or running to it. That's a fairly good equilibrium. So it seems like there are answers there.


The next up is DeFi and DeFi tokens, crypto tokens, with Ethereum, I think, still having over 50 percent market share. I was going to say that this is a disaster waiting to happen, except, that disaster happened yesterday, I think with Terra and TerraUSD, which was an algorithmic token, and which broke the buck in a rather dramatic way, I think down to 67 cents, at one point. There's also, if you haven't treated yourself to Sam Bankman-Fried's Odd Lots podcast on Bloomberg, you should watch that, where he talks about -- he's the founder of FDX, and talks about yield-farming, which was one of the applications here, as a Ponzi scheme, somewhat to the surprise of the hosts.


But again, here, is a CBDC an answer to these problems? Well, no, because, unlike Bitcoin, this is actually associated with applications in businesses. And it's basically a governance token, an equity share in something. And so, offering a CBDC in exchange, as an alternative to Tether or any of these coins, doesn't really work. It's like saying, "Oh, don't have Apple stock. Take cash." Well, no. I want the Apple stock, because it comes with rights.


The other concern, on the fear front, has been the dollar as a reserve currency. Again, I think, given geopolitical events, we're learning the reason that the dollar is the reserve currency is because we have democracy and capital controls and the rule of law and a lot of other things, not because of whether it's commercial bank money or Central Bank money. And I think that the real risk here is that this has just become a large distraction to other potential things that Central Banks could be spending their time on, which are multiplying by the hour.


I will say— and I'll just say this quickly, but welcome questions — there are some offensive cases for CBDC, where people believe it would make the world better. One is financial inclusion. I think the only problem with that is that no one has come up with any use case for why someone who lacks the means, or financial literacy, or whatever, to establish a bank account, would, instead, establish a digital wallet and establish a bank account and upload that money into CBDC which wouldn't earn interest, and how that would be better for anybody.


Another is cross-border --


Alex J. Pollock:  Greg. Greg, you're on your ten-minute limit, here, so--


Greg Baer:  I'm at nine minutes and twenty seconds, Alex.


Alex J. Pollock:  [laughs]


Greg Baer:  I'm a litigator. I know my limits.


Alex J. Pollock:  Good.


Greg Baer:  And I'm taking ten seconds back.


Alex J. Pollock:  You got 'em.


Greg Baer:  The other was cross-border, where we're already seeing a revolution in that. And then, I'd just say, lastly, in terms of the prospects, although lots of Central Banks are studying this, I think recently Canada and Australia have said they're going to stop studying it, because they don't see a use case. The U.K. House of Lords threw a lot of cold water on this. In Europe, I'll take the over on when they adopt this, probably after they do Capital Markets Union and paying European deposit insurance. And, I would say, at the Fed, multiple governors have expressed concern about this, and thought maybe the private sector should be more active here. So, that will finish my ten minutes.


Alex J. Pollock:  Thank you very much. Bert, we're coming to you, and look forward to your comments, I guess, by phone, here.


Bert Ely:  Yes. Can you hear me?


Alex J. Pollock:  Yes, we can hear you.


Bert Ely:  Can you hear me?


Alex J. Pollock:  Yes.


Bert Ely:  Oh, good. And my apologies for not being able to connect by video. I want to reiterate a lot of the excellent points that Greg just made. First of all, we have to recognize that CBDC would merely be a deposit liability of the Federal Reserve System, and, therefore, of the federal government, so that CBDCs potentially are a source of funding for the federal government's deficits and accumulated debt. And that, I think, is a potential danger that they pose, in that CBDCs could possibly divert money from private-sector uses to just another source of funding, and, potentially, a particularly cheap source of funding for the federal government, there. So I think that there is -- you should be concerned about that.


      The second thing is that in order for CBDCs to be very competitive, it would seem to me that they would have to pay interest. And that may not be so significant today, in the low-interest-rate environment. But, as we know, rates are going up, and could go a lot higher. So a question that I think immediately has to come to mind, why would any individual or business want to hold CBDCs if they didn't pay interest? That's like literally holding currency in your wallet.


So I think that the issue of interest on CBDCs becomes especially important as rates rise. And that, again, raises yet another question about the structure of CBDCs, and that is, would they effectively be demand deposits at the federal reserve, which creates a run risk of its own? Or would the Fed possibly structure some of the CBDCs as time deposits, or even certificates of deposit? And that's an issue that I think would have to be addressed.


      And I think it has been mentioned in some of the writings on this topic that while CBDCs would be in an account at the Federal Reserve, presumably, existing banks and credit unions would be tasked to effectively serve as agents for the Fed in accepting deposits into the Fed accounts, that is, businesses and individuals wouldn't deal directly with the Fed. But, again, that raises the question of if individuals and businesses are going to buy and make and accept payments in CBDCs, but have to do it through a bank, how does that provide any particular advantage over insured bank deposits?


      But the more troubling aspect of this is that CBDCs would be competing against banks and credit unions for deposits, which is why I think that, potentially, there would be a possibility of interest rate competition if CBDCs, in fact, did pay interest. But a bigger question is once all those deposits are placed at the Fed, in the form of CBDCs, what would the Fed do with that money? How would it be invested? One possibility, as I've already mentioned, is that they, effectively, would buy Treasury debt.


But, to the extent that those funds were fed back into the private sector, how would that happen? And to what extent would the Fed then become a tool for credit allocation within the economy? And to what extent would that be politicized any more than credit allocation is criticized today?


      But I think the more basic concern is that CBDCs could really reduce the role of private sector banks, particularly as allocators of credit. And I don't think that we would want a situation in the United States where we had government any more involved in credit allocation than they already are. And, in terms of how this might affect the banking industry, I would be concerned that there might be a particularly adverse impact on community banks and small credit unions, particularly if they had to compete in obtaining funds from the Fed in order to fund their own loans and investments.


      And so this is an aspect of the CBDC concept that I don't think has been thought through especially well, and that is what the relationship would be between the Fed and the banking industry. And there's also an interesting question, too. And that is what would be the role of federal deposit insurance? Would we even need federal deposit insurance anymore if people were either holding CBDCs or could easily flee to CBDCs in a time of stress? And I believe Greg mentioned something about that.


      What I think is one of the most significant concerns, and that is the ability of the Fed — and, therefore, the federal government, since the Fed is a federal agency — to monitor financial transactions. CBDCs could, in effect, be a major step forward in implementing the surveillance state, because the Fed would have, in its computers, all transaction data involving CBDCs, in terms of who payments were made to. And this could open a door to the federal government, to the Fed becoming quite prescriptive, in terms of what people could spend CBDCs on, and, more importantly, what they couldn't spend them on.


      And the other question comes up. And that is, to what extent would that Fed data be available to the courts, in case litigation might arise as to how a particular CBDC was received or spent? And the banking industry, of course, and banks are subject to having to provide data when there's an appropriate subpoena. But I think that banks are very diligent, in terms of trying to protect their depositors' and customers' records, particularly with regard to financial transactions. I would be skeptical if the Fed would be as keen about trying to protect the privacy of financial transactions.


      So I think these are just some of the issues that arise with regard to CBDCs. But I think the most basic question of all, for which I have not heard a good answer, with regard to the United States, is why do we need it? I have yet to hear or read what I consider to be a good use case for CBDCs. So I would hope that as we go down the road with this, that, eventually, and sooner rather than later, the Fed concludes that the United States does not need a Central Bank Digital Currency. I look forward to further discussions and questions.


Alex J. Pollock:  Thank you all for excellent presentations. Let's go back to the panel again, in the same order, Chris, Greg, and Bert, a couple of minutes, three minutes, at the most, to respond to anything anybody else said, or add additional comments of your own. So, Chris.


Chris Giancarlo:  Thanks, Alex. I was reflecting to somebody today; I have been around the block a few times. I'm in my early sixties. I've been in public life since the 1980s. And, in the 1990s, I was a very active lawyer in New York and London, representing a lot of dot-com companies. And I remember when the market took a tumble in 2000, and Pets.com disappeared, and others. The refrain was, "Well, that's it. This is over. This was just a flash in the pan." Well, not at all. Out of the ashes of that crisis rose some companies that have completely changed the way we share information, the way we interact with each other, the way we shop online, the way we interact today on Zoom, for example.


      To think that technology and digital ledgers and blockchain technology and an internet of value is not going to march on and answer some of these very questions that we're posing today, I think it's just asking too much to say, "Well, we need to know what this is going to solve." Well, we didn't know what it was going to solve by sending a man to the moon. We went anyway. We didn't know what problems it was going to solve by creating the internet, because time doesn't necessarily give us those answers before technology marches on. And that's why we at the Digital Dollar Project think we really need to explore some of these questions.


      Some of the assumptions that have put forward here, for example, that somehow people will take money out of banks in a run, well, in fact, maybe it may be the opposite. The simplicity of moving digital money from a wallet on one's mobile device to a bank account on one's mobile device may make them not run down to the street corner to take out their cash if they think a bank's in trouble. The notion that it won't help financial inclusion -- there's no evidence one way or the other. The only way we can answer these questions is by doing some real testing. It may be the opposite. In fact, the simplicity of putting money into a bank account to move from a digital wallet may mean more people come into the financial system.


      The biggest barrier to financial inclusion is our current confusion between the methodology of AML/KYC, which requires credentialled identity to access the financial system, and the goals of AML/KYC, which are laudable, is part of the problem. If we take a more modern approach to AML/KYC, which is, let people into the financial system, and then monitoring their activities, as opposed to their identities, an activity space using big data analysis and modern tools, the same tools that eBay and Facebook use every day to track our activities, would allow us to have much greater financial inclusion.


      So there's so much assumptions about what this means. And I just want to end with this last point, to Bert's point about protecting privacy. I'm not convinced that the private sector is a better guardian of people's financial activity than is the public sector. These are all design choices. And so, what we really need to do as a free society is make it very clear, loud and clear, that if the federal government embarks upon Central Bank Digital Currency, it must be guided by the Fourth Amendment, and our privacy must be protected.


And if they do that, they will create the greatest digital currency of the future. And if they get that wrong, then actually it's going to fail, and more people will move to Bitcoin and other sources than they will to a digital dollar. So getting the issue of privacy right, testing, doing pilot projects that test out some of these assumptions so that, as time and technology marches on, the United States is in the vanguard of development and not simply saying, "Just say no. We're not going to do this. We're not going to move forward." The world may get way ahead of us if we do that.


Alex J. Pollock:  Okay, Chris. Thank you. You make me think of a great essay by Friedrich Hayek, "Competition as a Discovery Procedure." Hayek says you have to run the competition in the market to find out what's going on. You can't know it in advance. Greg, further comments.


Greg Baer:  Sure, just a couple. First, I don't think anybody is saying that distributed ledger technology is going to go away. The question is what's the government's role in distributed ledger technology? When the dot-coms blew up, I don't think anybody thought technology was going to go away. But nobody said, "Well, we need to have government.com," and have the government start a dot-com.


      On the stress point, and the potential for runs, maybe I'm naïve, but, I would think if you have a phone, and you're a corporate treasurer or an individual and under stress, you can, with a click of your phone, move out of a bank liability into a liability that's guaranteed by the full faith and credit of the United States. That would be a pretty tempting proposition, if the world was blowing up. In fact, I can't imagine not doing that.


      On the privacy point, I think it's an interesting one. The Fed has made clear — I think all the Central Banks have made clear — that they are not talking about a tokenized anonymous version of TCBDC. They are all talking about, and the Fed is quite explicit, it is only talking about an intermediated model. Because, of course, the Fed doesn't want to do account administration, AML/KYC, sanction screening, etc.


So if there is a U.S. CBDC, and I doubt it, you're going to have your CBDC in your PNC or JP Morgan wallet, or maybe your PayPal wallet. But whoever has that wallet will see it, just the way they see your bank transactions. So, no more privacy, no less privacy. I don't know if the government is also going to see those transactions, which would be less privacy. But it would involve the private sector seeing your transactions in an intermediated model. There's simply no going around that.


To Bert's point on the interest — which is an interesting one, and one I will confess I do not understand — I published, in the chat, a note from our chief economist, who is the former Deputy Director of Monetary Affairs at the Fed, assessing the monetary policy impact of a CBDC. I'll only give you the bottom line, which is I don't think any Central Bankers really believe that it can pay interest. It's extremely technical, and the article will go through that.


There's also the practical point that if it pays interest, that's actually the taxpayers paying interest, which would probably not be terribly popular. But I would advise anybody who's really interested in that to read the note. Currently, the one great attraction is it would allow the government easily to pay negative interest rates, but, again, I don't think our government's really interested in doing that. But it's a really interesting discussion, if anybody's interested in it.


Alex J. Pollock:  Thanks, Greg. Of course, the Fed used to say it wouldn't pay interest rate on its reserves, and then they decided they wanted to.


Greg Baer:  --or had to.


Alex J. Pollock:  You mentioned the hearing in the House of Lords, where one of the lords asked the head of the Bank of England, "Would you be interested in this information?" He said, "No, I wouldn't." And the lord replied, "But maybe some future governor of the Bank of England would."


Greg Baer:  That's funny.


Alex J. Pollock:  I thought that was a great point. Bert. Comments?


Bert Ely:  Okay. Thank you, Alex. Just a few concluding comments. First of all, I have yet to understand, really, why Central Bank Digital Currencies would increase financial inclusion. It's not that difficult for people to have a banking relationship these days. And I don't know why Central Bank Digital Currencies would make it any easier to do it.


      With regard to the privacy issue, it seems to me that the best protection that people can have from government intrusions and government knowing what they're up to is that the government doesn't get the information in the first place. Once it's captured, either in government computers or can be accessed by the government, then the threat to privacy exists. And so that's why I think that, to me, is another argument against having Central Bank Digital Currency. Because, if it's there, the transactions will be recorded in some fashion, and, therefore, accessible.


      I think that Central Bank Digital Currencies, picking up on a point that Greg made, really could increase the potential for run risk, particularly if it just takes a few clicks on your computer to shift funds out of a commercial bank into a Central Bank Digital Currency that was there. At least some people would run if they were concerned about the economy. And that would have tremendous overnight disintermediation challenges that I think the Fed would be very hard-pressed to try and neutralize.


      And, finally, with regard to interest, I've done some thinking about this, and I think that, in fact, interest could be paid on the Central Bank Digital Currencies, because, if interest wasn't paid, particularly in a high-interest-rate environment, such as we may be entering, the question is why would anyone want to hold a Central Bank Digital Currency for any length of time? So again, thank you for the opportunity to participate.


Alex J. Pollock:  Thanks, Bert. Stay on. We're now going to come to questions from the audience. We have a lot of questions which have been sent in. Thank you. We, unfortunately, cannot possibly get to all of them. But I'm going to start at the top, and we'll see how we do. Question one from the audience is, "What conclusions can we draw from the Chinese Central Bank Digital Currency, and what do we think about that?" Chris, you mentioned this in your remarks. So maybe you would start off there.


Chris Giancarlo:  Maybe it supports Bert's argument that some governments do want to surveille data, because it's quite clear that the Chinese Central Bank Digital Currency will be a handy export product. You'll be able to get CBDC in a box, curtesy of the People's Bank of China, if you're one of the many regimes around the world that actually want to have a currency that will allow you to surveille your citizens. Now, again, that's a design choice.


We, fortunately, thanks to our founders, have been given the Fourth Amendment right to privacy. And, so, how we design, should we design, should we deploy a Central Bank Digital Currency, how it's designed, and if it were to be designed, so that government could not gather that information. And I would remind you that we've outsourced the First Amendment to big tech companies, and it hasn't actually worked out so well for privacy. And so the question is not will a U.S. government surveille it, it's what does a free society demand from a U.S. government in designing a Central Bank Digital Currency?


As I began my opening, I think it's not a forgone conclusion that a digital dollar would be a surveillance tool. But it's up to us to make sure it isn't, and that's why design and testing. But what we can learn from the Chinese Digital Currency is it's very much a surveillance tool. And I expect it to show up on friendly dictatorships around the world in the next ten years or so.


Alex J. Pollock:  And, as you pointed out, based on the surveillance, it's also a tool for interfering with your ability to transact.


Chris Giancarlo:  Yeah. It's surveillance and control. It's surveillance and control.


Alex J. Pollock:  You can't send that money. No, you can't send that money.


Chris Giancarlo:  But my point is, it's not just government digital money that can do surveillance and control. The private sector can do that as well. The choice, to me, is not between sovereign and non-sovereign. It's a choice between liberty and privacy, or surveillance and censorship.


Alex J. Pollock:  Any other comments on the Chinese -- yeah, Greg.


Greg Baer:  I agree with all that. I guess I would make the super-obvious point that for jurisdictions, countries that want to use a Central Bank Digital Currency for that purpose, a U.S. CBDC isn't going to be any attraction to them, obviously. And that's a good thing too.


Chris Giancarlo:  Exactly.


Greg Baer:  And it gets to the larger point that -- and Chris, I know you're not making this point, but I have heard, and I think even Chairman Powell was asked this at a FOMC press conference, "Do we need a CBDC to protect the status of the dollar as the world's hegemonic reserve currency?" And I think he answered, quite rightly -- I can't remember the examples he used. I'll give seven. The reason we're that is that we have a stable government, we have the rule of law, we don't oppose capital controls, we do swap-lines when people need dollars around the world, we have a good military, etc.


So if you're worried about the dollar's status, I don't think a Chinese Central Bank Currency with surveillance powers is really going to convince any country in the civilized world that isn't under China's thumb to convert. I think, again, we're better off investing our Central Bank time into curbing inflation, our executive branch time into getting deficits under control. And that's the kind of thing that's going to keep the dollar going.


Bert Ely:  Can I just respond?


Chris Giancarlo:  Go ahead, Bert, and then I do want to respond to two things.


Bert Ely:  Well, I just wanted to say that I agree with what Greg is saying. But the key thing about privacy is the best protection for privacy is for the government not to -- or the Central Bank, to collect the data in the first place. Once that data has been collected, once there are electronic records of transactions that have taken place, then that data is potentially accessible. And so I think the only way we're going to really protect privacy is not to have a Central Bank Digital Currency in the first place.


Alex J. Pollock:  Okay, Chris, you have one more comment, and then we're going to go –


Chris Giancarlo:  The problem is not having an entity that's governed by a constitutional right to privacy, prevailing money, means that, unless there's statutory protection, you could have the government doing the same thing to big tech stable coin operators that they do to big tech social media platforms, and, basically, impose upon them the things that government couldn't do itself by censoring speech, which is what happens today. So you could envision a world, in fact, where the safest place, in terms of privacy, may be a government subject to the Fourth Amendment, as opposed to a big tech company that will do things government tells it to do, as it does today with censoring speech online.


Greg Baer:  I guess the only thing I'd say is that I think the banking industry has a pretty good reputation for safeguarding consumer privacy. Part of that's reputational. Part of that is law. And then –


Chris Giancarlo:  But that means you'd have to restrict activity to banks, which is one of the big objections to the President's Working Group proposal of bank-like regulation of stable coin operators.


Greg Baer:  Yeah. But, again, if you're only going to do this in an intermediated model, a bank or a PayPal is going to have the information anyway. There's no workaround, unless you're really going to have to build a customer service department and an AML screening unit. And I don't think they have any appetite for that.


Alex J. Pollock:  Apparently, China does.


Greg Baer:  Yes.


Alex J. Pollock:  Let's come to a second question here, since we have a lot of audience interest. This is, "Are there any inferences, either positive or negative, for U.S. public debt or government debt that would arise from the CBDC questions?" Any implications there?


Bert Ely:  Well, Alex, this is something I have given some thought to. And that is, if you have these huge balances that the Fed has collected and that are on the Fed's balance sheet as a liability, the question then is, where do they get invested? And, while, hopefully, at least some of those funds would be recycled back into the private sector, that would become a very tempting source for financing the federal deficit. And that could end up being very detrimental to the economy, if, in effect, monies that would normally be fed back into the private sector instead were seen as a cheap source of funding for the federal debt.


Greg Baer:  I guess I'd just say — assuming I'm right on the interest rate and they won't pay an interest rate — I don't think it would have a big impact, simply because I think it's just going to end up being a hobby if they do this, because, again, people will keep their money in bank deposits earning interest instead of a Central Bank Digital Currency earning no interest, again, unless there's a stress event. And I think that's the fundamental gaping problem with this. But, otherwise, yeah, I don't see where you'd have the kind of volumes that really influence the debt.


Bert Ely:  Greg, I would agree with you on that. If interest is not paid on a Central Bank Digital Currency, then what's the point of holding it?


Greg Baer:  Yeah.


Bert Ely:  It's a plaything, as you said.


Alex J. Pollock:  I'll just come back to what I said in the beginning. I think the question of whether these things are interest-bearing or not, including Bert's point, is there's no reason you couldn't have time-deposits or term instruments of various kinds issued by the Central Bank. And that's a huge question as to the implications. And then, if they were interest-bearing, if you're not a profit-oriented organization, namely the Central Bank, how much can you pay?


Then Greg brought up the point which has been argued. It's a good way to impose negative interest rates onto people, if the government or the Central Bank has --


Greg Baer:  -- And I think an even larger point is — if you think about assets and liabilities — if they take onto their balance sheet, by paying interest, massive amounts of liabilities, they need assets.


Alex J. Pollock:  Absolutely.


Greg Baer:  And there's only so many Treasury securities you can buy.


Alex J. Pollock:  Absolutely.


Greg Baer:  Fannie and Freddie are securities.


Alex J. Pollock:  And you buy up all the mortgages. And then what?


Greg Baer:  Right. So it eventually means they're going to have to get into funding the real economy. I hate the word "real" economy. I don't know that the unreal economy is. But the non-government parts of the economy.


Alex J. Pollock:  Yes. I think that's a good point. And we have a question — Bert, you may want to take this one up — from the audience, that says, "How about the fact that local banks make local credit decisions. Would CBDC mean, instead, you'd have centralized Washington decisions for commercial loans?"


Bert Ely:  Well, I think that that's a very legitimate concern. And that gets to the question of what would CBDCs do for community banks that are serving – how would they be able to access all these monies that would be piling up on the Fed balance sheet as a liability? And so that is something that I don't think has been given sufficient consideration as to how the local community bank, funding itself largely with the deposits it gathers locally, be able to compete against the Fed, if the Fed became a significant issuer of Central Bank Digital Currency?


There's not only a credit allocation issue, in terms of how the Fed would influence credit allocation across the entire economy, but, more specifically, would it effectively pull credit availability away from smaller communities in the rural areas of America?


Alex J. Pollock:  Any other thoughts on that? I have another question here, perhaps of interest. It says, "Here's a practical question concerning digital currencies. I live in Florida. And losing power for days at a time is not unheard of during the hurricane season. How would a shift in digital currencies affect a person's abilities to get supplies or do transactions when the electricity is off?" Any thoughts on that logical question?


Greg Baer:  I think it's somewhat related, and I meant to mention this. There is actually a revolution going on in payments right now. Starting in 2017, the clearinghouse where I used to be started a real-time payment system. And those payments clear in seconds, not in days like the ACH system. And it's interesting. I recently wrote a note asking why the Treasury Department hasn't decided to use RTP to make disaster payments, or even regular government payments, tax refunds, whatever. The Treasury has a no-bid contract with the Federal Reserve on using its ACH network only.


But I think the potential for real-time payments, well, real-time payments are a reality. I think over 60 percent of U.S. DDAs are currently eligible for real-time payments. And the question is just when do people want to start making them? They may not make sense for everything. If you're doing a batch payroll at the end of the month, you really need that to be real-time, if you can schedule it in advance. But there are going to be all kinds of new ways to get payments to folks, long before anybody ever comes up with a Central Bank Digital Currency.


Bert Ely:  And to pick up on Greg's point, the more that that innovation takes place in the private sector, within the banking system, that further reduces the need for having a Central Bank Digital Currency.


Alex J. Pollock:  I still think we're in trouble when the electricity is off, in more ways than that.


Bert Ely:  That's what's called backup generators.


Alex J. Pollock:  And we do have real-time settlement if you're paying in dollar bills, Greg.


Greg Baer:  It true. DDP.


Alex J. Pollock:  We have an interesting question here. It says, "It sounds like to incentivize adoption of CBDCs, the Central Bank and government would have to employ many of the same tools the union used to force the adoption of greenbacks in the American Civil War: exclusive legal tender status, special privileges for banks that facilitated the transaction, taxation payable only in the new currency. Does the panel agree or disagree with this analogy, the greenbacks in the Civil War?"


Greg Baer:  I think the other panelists would be better at the Civil War history, particularly Bert. But I think that I just sort of bristle at the notion to incentive people to use CBDC. If there were good use cases, to Bert's point, you wouldn't have to incentivize the use of CBDC. But, particularly in the financial inclusion world, we hear a lot about how it's going to make the poor wealthy. And yet, no one can come up with a use case.


And I've spent a lot of time on this. And, again, the notion that this is going to make credit cheaper or allow the unbanked to somehow magically have an account at the Fed, given why they don't have accounts at banks -- again, if you need to incentive people to have a CBDC, there's no reason to have CBDC.


Alex J. Pollock:  We used to have accounts at the Post Office, which were accounts with the government.


Greg Baer:  I don't know if you saw it, but they actually ran, I think last year, a pilot program for postal banking. And they ended up, I think, after one quarter they had six people signed up. We did a little funny note called the dirty half-dozen in postal banking. So, yeah. Sorry, couldn't resist.


Bert Ely:  I think we have --


Alex J. Pollock:  We have less than a minute for a final shot. So go ahead, Bert.


Bert Ely:  Well, again, I think the fundamental problem here is you have a proposal that's looking to solve a problem that, in fact, does not exist. At least it will not solve the problem that has been posed. And so, again, I think this is, ultimately, for all the research and study that will be done on the Central Bank Digital Currencies, I find it hard to believe that the Fed will actually go through and create something along that line.


Alex J. Pollock:  Fifteen seconds, final shot. If not -- go ahead.


Chris Giancarlo:  I was just going to simply say that I think the benefit of this debate is that the future is going to be complicated and very exciting. And what I would say to the audience is in a free society, we all need to get involved in this debate, because the risks all the way around, and, ultimately, the risks to our economic liberty and privacy that are our First Amendment freedoms, but expressed in a capitalist society through our financial transactions. And so I think it's a call to arms. Money is changing right before our eyes. And I think we all need to be engaged in what is that going to look like in the future, whether it's going to enhance our liberty or degrade it, ultimately is the question we face.


Alex J. Pollock:  Thank you. Greg, final 15 seconds.


Greg Baer:  I guess my last 15 seconds are "I'm on mute."


Alex J. Pollock:  We know that you're not usually mute. Thank you to the panel for really excellent presentations and discussions. I think this was a terrific exploration of a highly interesting set of issues. And, with that, back to you, Ryan.


Ryan Lacey:  Of course, it was an amazing panel. And on behalf of The Federalist Society, I would like to thank our experts for the benefit of their valuable time and expertise today. And I would like to thank our audience for joining us and participating, especially with all those great questions. We welcome listener feedback at [email protected]. And, as always, keep an eye on our website and your emails for announcements about upcoming webinars. Thank you for joining us today. And we are adjourned.




Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.