Last week I participated in a Federalist Society debate on whether the Federal Reserve should create a central bank digital currency—Fedcoin—and consumer accounts at the Fed. I argued against the proposition, while the Digital Dollar Project’s J. Christopher Giancarlo was in favor.

I have two general problems with the arguments made in favor of a central bank digital currency (CBDC). 

First, the reasoning often amounts to “this is happening, so the Fed better do it.” That’s hardly a sound position, and it ignores the fact that the U.S. dollar is a preferred money irrespective of the form it takes. Its strength comes from the strength of the U.S. economy and the American legal system’s relatively strong protection of property rights. 

Second, proponents promise all sorts of benefits but offer no specifics on how the CBDC will actually produce those benefits or how they might compare to the benefits of existing private alternatives.

One glaring example is the supposed benefits a CBDC will provide to the unbanked. To argue their point, the DDP cites an FDIC survey that shows 14 million Americans are unbanked. The DDP then argues that the Fed could reach those who are unbanked by offering digital wallet services and that it could provide those services at lower cost than what it takes to host traditional bank accounts.

For starters, while the FDIC statistics show that approximately 14 million Americans are unbanked, that means that almost 95 percent of U.S. households do have a bank account. And for the remaining 5 percent, it’s not the form of the U.S. dollar that prevents access to or inclusion in the financial system. The FDIC survey itself reveals the main reasons some people do not have bank accounts, and they have nothing do with a simple lack of access.

More than half of unbanked households say that they have no account because they do not have enough money to keep in one. That’s a broader economic issue that has absolutely nothing to do with the precise form of the U.S. dollar. 

Other main reasons include previous credit problems and difficulties with meeting banks’ “know your customer” rules. The survey also shows that many of the unbanked want more financial privacy than they can get going through a bank. Providing an official tokenized version of the dollar—one that is run by the Fed—is not going to solve any of these problems. 

There is absolutely no way, for instance, that the Federal Reserve is going to run a digital currency that does not require customers to provide at least as much personal identification as banks currently require. So there would be no marginal benefit compared to existing digital forms of the dollar.

Regardless, the possibility that a CBDC will provide “lower system costs” has to be compared to the cost of either the traditional banking system or private digital currencies. With regard to both alternatives, there is no particular reason to expect the Fed to provide anything for a lower economic cost—the government has to employ physical resources just like anyone else. 

And aside from the fact that no government agency has ever been the model of economic efficiency, the fact that the Fed can get away with undercharging for use of its resources does not mean those resources do not cost just as much as if the private sector employed them.

Either way, it simply is not true that the unbanked have no options to access the financial system. The truth is, unless a government regulation prevents it, anyone with a cellular phone can access a pre-loaded card, a Venmo or PayPal account, or any number of digital wallets available via the internet. 

More problematic, though, is the DDP’s insistence that a new CBDC ensures “that consumers and businesses keep deposits at commercial banks.” The DDP white paper argues that: 

We believe it is essential that a US CBDC maintains and supports the current two-tier banking system as the overarching architecture. A two-tiered banking system preserves the current distribution architecture and its related economic and legal advantages, while inviting innovation and accessibility. 

In other words, the DDP wants to orchestrate the government takeover of a private innovation that can replace third party financial intermediaries, with the explicit intent of saving those third parties. That’s some innovation.

If people really want to provide more access to financial markets and ensure more innovation in financial services, they should support more private innovation and competition. They should work to lessen government monopoly and regulation. That’s the opposite of what a CBDC ultimately requires. (And, no, the Fed’s monopoly over money has not been as amazing as the Fed’s macroeconomists would have us believe).

Incidentally, iron-clad control over money is why many advocates of a CBDC also want to ban cash. The monetary policy improvements that CBDC proponents espouse are not possible unless people have no other alternative money, especially cash.

The coronavirus has only added the attention on banning cash for health reasons, but the pressure in Congress is rising. Yet millions of Americans—including, no doubt, many of those unbanked individuals—do still prefer to use cash. And amid many retail businesses deciding to prohibit the use of cash, two bills have now been introduced (one in the House, one in the Senate) to prohibit retailers from refusing to accept cash. 

Both bills provide an exception, so that retailers selling products over the phone, internet, or mail can still refuse to accept cash. But this exception makes it obvious where the danger lies: Some enterprising congressman is eventually going to try to force retailers to accept certain forms of payment. It is easy to envision, for example, a senator or representative offering to protect unbanked constituents by forcing Uber to accept cash. 

It would be much better to allow businesses to decide which form of payment they will accept. 

If retailers anger their customers by banning cash, they may soon have to reverse their ban. (That’s what recently happened with the salad chain Sweetgreen.) In other words, it’s fine to let people figure these things out without government mandates. 

Policymakers should try to improve money using the same competitive market forces that improve other goods and services. Singling out alternative forms of money for mandates—especially those that impeded people from using their preferred medium of exchange—is not the way to improve the U.S. dollar.