Is 'government crypto' a good idea? : The Indicator from Planet Money (2024)

SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

PADDY HIRSCH, HOST:

This is THE INDICATOR FROM PLANET MONEY. I'm Paddy Hirsch.

ADRIAN MA, HOST:

And I'm Adrian Ma. To the average person, cryptocurrency can look a little scary, a little volatile and complicated, even criminal, dare I say?

HIRSCH: Dare you say.

MA: I do dare say. But to governments and to central banks around the world, the technology behind crypto is beginning to look pretty compelling.

HIRSCH: And when used as a medium of exchange, crypto networks have proven to be generally quicker and cheaper than legacy payment systems and potentially more secure. And they're becoming increasingly popular.

MA: Which is why, a couple of years ago, central banks around the world began running tests on this radical idea that maybe they should have their own version of cryptocurrencies, so-called central bank digital currencies or CBDCs, for short.

HIRSCH: CBDCs. They're generating frisson of excitement in some quarters. But in others, they're sounding alarms. Here in the U.S., politicians are arguing about whether a so-called digital dollar is a vital component of our economic security or a shortcut to government interference and an erosion of privacy and individual rights.

MA: So, today on the show, we'll take a look at central bank digital currencies. We'll find out what they are, what the pros and cons of a CBDC could be and we'll ask do countries really need them. That's coming up after the break.

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HIRSCH: When the first cryptocurrency, Bitcoin, was invented, it was conceived as a payment system free from any kind of government control. Eswar Prasad is a professor of trade policy at Cornell University. He's also the author of a book called "The Future Of Money."

ESWAR PRASAD: Bitcoin was supposed to be a medium of exchange without having to rely on a trusted intermediary like a bank or credit card company or even central bank money.

MA: Yeah. The whole point of cryptocurrency was that it was supposed to be decentralized, removed from central bank control, removed from government influence or interference.

HIRSCH: Yeah. Eswar says it hasn't really worked out that way. Of course, cryptocurrencies depend on government money and the trust inherent in official currencies. After all, you need official money to buy crypto. And crypto, like Stablecoins, are literally linked to government money. But crypto is doing a great job, he says, in one particular area - updating our payment systems.

PRASAD: Payment systems, especially in the U.S., are hopelessly inefficient.

MA: He's talking about the network of banks, credit card companies and payment processors most of us use when we move our money around. And as we've talked about on the show a lot of times, this system is slow, expensive, riddled with vulnerabilities. But crypto networks present consumers with an alternative.

HIRSCH: Yeah. Innovators are using the technology underlying crypto to develop payment systems like Circle and Stripe that advocates of crypto claim are quicker, cheaper and potentially more secure than legacy systems. Now, that's gotten the attention of governments and central banks who are keen to find out whether the technology could help their citizens via a central bank digital currency or CBDC. Government crypto, in other words.

PRASAD: Is there a way of accomplishing multiple objectives, making the payment system cheaper and more efficient, making sure that everybody, whether or not they have a bank account or credit card, can get access to the digital payment system, and maybe even make digital payments easier across national borders? Because that is something that matters a lot to economic migrants sending remittances back to their home countries, importers, exporters, and so on.

MA: Advocates say crypto technology could make it easier for governments to get money to the places it needs to go. The argument goes if everyone had a digital wallet issued by the central bank, distribution of money by the state would be a snap.

HIRSCH: Yeah. Eswar says it could certainly give governments a lot more control over how that money was handled. For example, it would have made it much easier for the government to direct COVID payments here in the U.S. and even to control them.

PRASAD: For instance, you could set expiry dates on money so that if the government wanted to give people money and made sure they spent rather than saved it, it could code into the digital units of money that that money has to be spent within, say, three months or six months so that you get an economic boost and people don't end up saving that money.

MA: Of course, government crypto is kind of a misnomer because, like we said, the whole point of cryptocurrency was that it was supposed to decentralize money. Now governments are talking about centralizing money even more than it already is with their own version of crypto, which is a radical departure.

HIRSCH: Yeah. Here in the U.S., the Federal Reserve may create money, but it doesn't actually administer it or control its flow. It leaves that to the banking system. The government can monitor the flow of money in and out of accounts, but if it wants the really dirty details about how we spend our money, well, it needs to appeal to a court of law. A CBDC, because it would be controlled and administered by the central bank, well, it could allow the government to see everything everywhere all at once.

MA: And some countries are going all in on the idea of a central bank digital currency. For instance, you've got Jamaica, the Bahamas and Nigeria who've all launched CBDCs. And then you have China, which is midway through the process of launching its digital yuan. But there's a problem with that one.

PRASAD: The problem is that nobody wants the digital yuan simply because AliPay and WeChat Pay are doing a great job of providing digital payments. Most people use one or both payment networks, so they don't see the point.

HIRSCH: Yeah. AliPay and WeChat Pay, these are two private payment systems. They're kind of like Apple Pay or Google Pay, but they also effectively provide banking services to millions of citizens in China and beyond. Eswar says the Chinese government let them build up their businesses because the Chinese banking system wasn't up to the task. Now, they dominate the banking landscape.

MA: But Eswar says not every country thinks the private sector on its own is enough.

PRASAD: So having a public payment option is still important. Also, one can think about providing a backstop so that in case of a crisis of confidence or technological vulnerabilities, you will still have a public payment option that is available to all citizens and businesses. You don't want the economy to come to a grinding halt because people can't make payments.

HIRSCH: No, you don't want that, but it doesn't sound beyond the bounds of possibility. Still, even with that reasoning, the idea of a central bank-controlled currency raises hackles.

PRASAD: The fact that many of us in countries like the United States have easy access to credit cards and other forms of digital payment that we're used to, that we find convenient, makes it less important for us to have new digital payment forms. And then there is a deeper fear that people have, of course, about the loss of privacy.

MA: When you spend your dollars today, those transactions are generally private. As in, the government does not know about them unless it asks, and even then, it's not a cinch to find out what you've been doing with your money. That could change if we had a digital currency controlled by the central bank. And that is not all.

PRASAD: One can see this being turned into much darker objectives. One could think about government saying that we want our digital money to be used for buying certain things and not for buying certain other things. So you can think of a much darker world where if there are no safeguards on what the government does with its digital currency, it can start using a CBDC as an instrument, not just of economic policy, but even as an element of social policy.

HIRSCH: No wonder some politicians are lining up to condemn the idea of U.S. dollar CBDC. A bill to bar a so-called digital dollar was introduced in the Senate in February. Governor DeSantis of Florida banned CBDCs in his state last year. Eswar says the fact is, though, that while the Federal Reserve in the U.S. has been looking into the possibility of a CBDC, it is a long way from implementation.

PRASAD: The Fed has been very clear that while it will make the technical preparations, should the day come when a digital dollar is considered useful, that it will not move forward unless there is broad political and public support.

MA: As for the argument that a CBDC is needed to shore up the dominance of the U.S. dollar and its position as a global reserve currency, Eswar says that, in the end, any financial system depends on trust.

HIRSCH: Yeah. He says that while cryptocurrencies might pose as decentralized and free from traditional financial institutions, the fact is that crypto only works because it's backed by money issued by central banks, the most trusted of which is the U.S. dollar.

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MA: This episode is produced by Corey Bridges, with engineering by Ko Takasugi-Czernowin. It was fact-checked by Sierra Juarez. Kate Concannon edits the show, and THE INDICATOR's a production of NPR.

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