Just Saying No to Digital Dollars Means Cementing the Surveillance Status Quo

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Earlier this week, Gov. Ron DeSantis announced legislation to amend Florida’s Uniform Commercial Code (UCC) to prohibit central bank digital currencies (CBDC) from serving as money under Florida law. Gov. DeSantis, a potential candidate for the Republican presidential nomination in 2024, is not the only political figure to propose that we “just say no” to CBDC. Congressional leaders from House Whip Tom Emmer (R-Minn.) to Sen. Ted Cruz (R-Texas), another former presidential contender, have echoed that call with legislation to restrict the Federal Reserve from deploying certain types of digital dollars without congressional authorization.

J. Christopher Giancarlo is senior counsel at Willkie Farr & Gallagher and previously served as the chairman of the U.S. Commodity Futures Trading Commission. He is the author of “CryptoDad: The Fight for the Future of Money” and co-founder of the Digital Dollar Project, a nonprofit initiative to advance a U.S. central bank digital currency.

The problem with the “just say no” approach to CBDC is that it acquiesces to the rampant and undue commercial and government surveillance of the existing analog financial system. It does so at a time when the rest of the world is building efficient, networked digital economies that may, if designed right, better protect financial privacy and economic freedom.

CBDCs: Choice of surveillance or freedom

Gov. DeSantis says: “What the central bank digital currency is all about is surveilling Americans and controlling behavior of Americans.” The governor raises a legitimate concern. He is right that the rise of certain foreign CBDCs – particularly China’s e-CNY – create a benchmark for one kind of CBDC that will provide enormous financial surveillance and social control. You might call this form of CBDC a “surveillance coin.” DeSantis is also right that money in the United States must reflect the values of a free society, including individual privacy, free enterprise and economic freedom – a “freedom coin,” so to speak.

But DeSantis and other opponents of a U.S. CBDC are wrong to assume that a digital dollar is foreordained to be a surveillance coin and not a freedom coin. That will only be the case if the American people and their political leaders allow it to be so. In digitally designed currency, characteristics such as surveillance and censorship are design choices. There is no reason why the U.S. could not design a digital dollar with very different features that adhere to the democratic values of a free society, using cutting-edge, privacy-enhancing technologies such as zero-knowledge proofs, digital credentials and homomorphic encryption.

Encoding freedom into a digital dollar

In a recent report, American Enterprise Institute scholar Jim Harper and I expand on the privacy principles published in 2021 by the Digital Dollar Project. Our report includes three key prescriptions:

• First, a U.S. freedom coin must not weaken the personal financial privacy available with today’s paper cash.

• Second, a U.S. CBDC must not become a new, easier avenue for government agencies to surveil citizens, censor lawful activities, levy fines and enact punishments/

• Third, the advent of CBDCs offers the opportunity to reassess contemporary financial surveillance activities in their entirety and rebalance them in better accord with American constitutional norms, the presumption of innocence and the rule of law.

The sad fact is that our current financial system – before we even turn to digital currency – is far more subject to government surveillance than it has become socially acceptable to admit. Right now, financial service providers build dossiers about their customers, share customer information with each other and report an enormous amount of conventional financial transactions to the government without being compelled by a subpoena.

Private sector no better privacy protector

With existing surveillance at unprecedented levels, many reckon that a U.S. CBDC would incorporate the same degree of government monitoring. Some say, therefore, that development of digital money should be left to private-sector “stablecoin” developers. Yet, there is nothing inherently superior about stablecoins and non-sovereign digital currency in protecting individual privacy compared to CBDC. In fact, the current widespread practice of financial surveillance impedes the development of a true freedom coin by both the private and public sectors.

It is entirely foreseeable that private-sector sponsors of cryptocurrencies and stablecoins or even commercial servicers of digital dollars, such as wallet providers and others, could be compelled by government to conduct covert surveillance, report on activity and disable financial transactions with disfavored groups and activities in the same way many social media platforms, most notably Twitter, have bowed to political winds.

Under government badgering, and without being bound by constitutional protections for civil liberties, digital wallet providers might bar transactions with out-of-favor industries, depending on which position’s advocates hold political power. Want to purchase ammunition or an abortion? Want to give money to a controversial cause such as Planned Parenthood or Right to Life? You had best check the stablecoins’ fluctuating terms of service and seek permission from its in-house “Office of Community Standards.”

In democratic societies, lawful transactions in digital money – sovereign or non-sovereign – must be immune from political surveillance and censorship regardless of who is in power today, four years from now and 10 years from now.

The global advent of CBDCs provides the opportunity to fully reassess contemporary financial surveillance activities. It provides the chance to reestablish financial law enforcement in truer accord with American constitutional norms, the presumption of innocence and the rule of law. In fact, the “just say no” approach to CBDC development does nothing to address the constitutionally dubious financial surveillance that is already commonplace. “Just say no” to CBDC may imply saying “yes” to today’s burgeoning financial surveillance.

Ready or not, CBDCs are coming

Whether the U.S. participates or not, the rest of the world is exploring and deploying CBDCs. According to the Atlantic Council, 114 countries, representing more than 95% of global gross domestic product, are exploring CBDCs. Actively engaged in this digital gold rush are 19 of the G-20 countries, including India, Japan, Russia and South Korea, each of which has made significant recent progress. The European Central Bank is expected to introduce a prototype for a “digital euro” by the end of 2023, becoming more widely available by 2025. The central banks of some of the freest societies on Earth – from Sweden to Japan and England – are exploring their own CBDCs.

Americans and American multinational corporations will soon contend with CBDCs worldwide, whether or not the U.S. deploys a digital dollar at home. What remains unknown is whether surveillance coins, such as China’s e-CNY, will have the world to themselves, or whether they will encounter competition from freedom coins issued by traditional democracies such as the United States. The potential risks of failing to even consider a freedom coin form of digital dollar are too great to ignore.

America’s economic competitors and economic adversaries have taken the lead in setting standards for the future of money. Their issuance of CBDCs will significantly impact the U.S. regardless of whether a handful of American states seek to prohibit their use. The assertion the U.S. should simply withdraw from global CBDC discussions is an unworthy position for the custodian of the world’s reserve currency. The prospect of letting the future of money pass by is a profound disservice to the American people and economy.

We should take our rightful place as a leader in developing standards for digital currencies and future-proof our economy for the increasingly digitally networked 21st century. These standards should reflect the U.S.’ enduring values of the rule of law, social and economic liberty, free enterprise, and personal and financial privacy.

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