I found myself chatting with some smart friends over the weekend. Like any good party, the conversation eventually turned to cryptocurrency. By the end, I was convinced I should write this post.
I am not and don’t want to be a crypto guy. But I am convinced there is an important policy idea that is falling through an unusually tidy political economy vortex. Everyone who cares about cryptocurrency hates it–even the people who hate cryptocurrency! But this is unfortunate: it’s a good idea. The people who hate it are being naive or self-serving in their opposition. So indulge me while I talk about why the U.S. government should issue a central bank digital currency (CBDC).
There’s a lot of writing about CBDCs. For a while, I avoided composing this post because I didn’t understand it. But I’ve now read enough to feel confident that this is one of those areas that defies comprehension because everyone is hiding the ball. I think most participants’ reasons for engaging with this debate are much more venal than they are willing to fully acknowledge. This account may be wrong, but I hope that it is at least entertainingly ungenerous.
What’s a CBDC?
A CBDC is a digital version of a currency. Crucially, it is issued by a government. Under most modern proposals, it is implemented as a cryptocurrency. Its closest analogue is the stablecoin, which is a class of cryptocurrencies that try to keep their value as close to that of a real-world currency as possible. Stablecoins don’t have a government affiliation. They are private projects, without government backing, which achieve their stability by technical schemes like creating and destroying coins algorithmically, and by holding–or at least claiming to hold–reserves of the real currency.
Instruments like this are an extremely important form of financial lubrication. Cryptocurrency needs an interface to the real world. It must be exchangeable for things of value. It’s easy to see why an ongoing exchange rate between Bitcoin and dollars makes sense. Situating that kind of transaction in the blockchain universe, rather than amongst bank APIs and tangles of wire transfers, gives them access to all the automation, smart contracts, and other affordances of the digital financial system. It helps to make the market for these assets liquid and efficient.
Stablecoins: not that stable
Stablecoins sometimes “depeg”: they lose their ability to maintain their 1:1 value correspondence. There’s money to be made when this happens, which means people try to engineer it into happening.
CBDCs don’t have this problem. Or at least ours wouldn’t. The government can make dollars. Making dollars as a CBDC would be marginally more complicated than the way the Fed makes dollars, but it’s perfectly doable.
Excepting governments that are true financial basketcases, CBDCs should always be able to offer stability advantages over corresponding stablecoins. The government’s unique ability to mint currency gives it other advantages over stablecoins, too. If the U.S. had a CBDC and encouraged its adoption, use of USD stablecoins would decrease–dramatically so, I suspect. And if the government decided they wanted to ban such pseudo-dollar offerings outright, perhaps they could do that, too.
But I don’t care about what happens to stablecoins very much. I want a CBDC because of crime.
Crypto is not going away, people love crime too much
Crypto skeptics love to say that the technology has no use case. They point at the underwhelming web3 projects, the silly digital asset schemes, the endless shitcoin rug pulls, and they smirk and say, “The only thing people use it for is speculation and crime!” Attention leads to legitimacy, which rewards the speculators. Instead, we should simply turn away.
I think this underestimates the enduring popularity of the crime use case and just how well crypto serves it. It is lawless, except for mathematically-guaranteed property rights. That is an intensely compelling proposition for the powerful.
Normally, if you have money and do something the U.S.-led international order doesn’t like, people who own very-large-font windbreakers will get a judge to sign something that lets them take your money from your bank. Or they will get an agency or Congress to tell all the banks that they will be in big trouble if they talk to you, or maybe even anyone a bit like you. If you respond by avoiding banks, turning your money into inconveniently bulky physical assets, the authorities will instead use their enormous international security apparatus to find and take it when you cross a border or stay in one place or try to buy anything interesting.
Sometimes this goes too far! I don’t like reading about credit card companies ruining the livelihoods of honest pornographers. Civil asset forfeiture is bad, even if it did give us Rebel Ridge. Many people are very upset about the incredible power the U.S. wields in this domain, which is indeed underappreciated, sometimes extrajudicial, and genuinely gobsmacking. If you think it’s bad, on the whole, I understand.
But I also disagree. I think this is a huge deal and that while there is need for accountability, justice, and reform, it’s unwise to attempt to destroy this part of our law enforcement system in a fit of libertarian pique. I think it’s pretty good that drug smugglers and rogue states and organized crime are subject to this kind of friction.
Those kinds of people love cryptocurrency, because it is genuinely immune to these effects. Remember when Jason Isaacs took that phone call in White Lotus Season 3 about his assets being frozen? Well, what if his assets were impossible to seize and could be transported, in full, on a slip of paper that fit in his wallet? I think he would have had a much more pleasant vacation.
Everyone hates this idea
Moving the interface between US dollars and cryptocurrency into the Treasury building (or Fed) could extend our government’s law enforcement capabilities further into the crypto sphere. People don’t like this idea.
Crypto skeptics don’t like it because they believe it would constitute a government endorsement of a system they consider to be corrupt and annoying, and which they have told themselves might eventually go away because it is so silly. But it’s not going to go away. It’s too good at crime for that.
Crypto enthusiasts don’t like the idea because disrupting stablecoins would upset a bunch of specific incumbent financial arrangements, and because undercutting the crime use case would harm crypto’s value more generally. But also because regulation is a genuine pain in the butt. There are a lot of people out there building dumb DAO projects who don’t want to sell anyone ransomware or fentanyl or warheads, but who do care about going to jail for failing to comply with know-your-customer requirements that they don’t understand and can’t implement.
Banks don’t like the idea because moving central banking closer to consumers often attracts proposals for public sector banking services under which the government could provide citizens with basic checking and savings account functions. This could simplify transfer payments, economic stimulus, transaction processing (maybe), and generally provide a cheap public option that competes with retail banking practices. American banks make tens of billions of dollars every year from account and transaction fees, even apart from harder-to-gauge (but potentially much bigger) effects on their net interest margin. They would prefer to keep that business.
(Privacy advocates would hate this, too. But I don’t think they’ve thought about it much yet.)
Finally, the Trump administration is using crypto for corruption to a strikingly original degree. They have little interest in taking steps to improve enforcement in this sphere, since it would not only run contrary to their schemes for personal enrichment but also antagonize a wealthy bloc of their supporters.
So there’s no constituency for this idea. Crypto haters fear government endorsement. Crypto lovers fear government control. Banks fear government competition. And, at the moment, the people running our government fear effective governance.
But it’s a good idea
If our government wanted to, they could quickly become the most important way that value stored as cryptocurrency leaves the blockchain and becomes dollars. This could be done in a manner that reduces these systems’ capacity for anonymity, tax evasion, money laundering, and immunity from lawful seizure. The old systems that enable criminals can’t be stamped out, but they could be marginalized.
And they should be. Complicating commerce related to crime is really important. The ways that we do it have to be subject to democratic control. But right now this system is ascendant for very bad reasons. I don’t hate crypto. But I do think it ought to be tamed.