The design of a potential digital dollar should take into account privacy and the ability to transact anonymously, according to a United States Treasury official. Graham Steele, the Assistant Secretary for Financial Institutions at the Treasury Department, emphasized this point during a recent conference focused on payments in Texas. He addressed the Federal Reserve’s FedNow system and central bank digital currencies (CBDCs), highlighting the challenges of minimizing illegal transactions while safeguarding user privacy.
The treasury official discusses the importance of anonymity in CBDCs
Steele emphasized the importance of preserving privacy and anonymity in the design of any potential retail CBDC. He suggested exploring technologies and methods, including Privacy Enhancing Technologies, that can enable such protections. Recognizing the potential benefits and risks of a CBDC, the treasury official mentioned that it could foster a competitive payment environment. However, he also cautioned that a retail CBDC, directly backed by the Fed, could serve as a safer option for consumers during bank runs, which could otherwise destabilize private sector lending.
Referring to recent banking crises, Steele noted that access to non-deposit alternatives outside the banking system may have altered the nature and speed of bank runs. While the US has not yet decided on pursuing a CBDC, a group led by the Treasury is currently evaluating its implications. This evaluation involves assessing policy objectives related to global financial leadership, national security, privacy, illicit finance, and financial inclusion.
Evaluating the implications of a private digital currency
Regarding the Fed’s FedNow instant payments system, the treasury official expressed his belief that having multiple options for payment operations promotes choice and competition, ultimately enhancing payments system resilience. However, the system has faced political opposition. Presidential hopefuls Robert F. Kennedy Jr. and Ron DeSantis have expressed concerns, arguing that it could pave the way for a CBDC, which they believe would grant excessive control to the government.
In April, Federal Reserve Board Governor Michelle Bowman expressed skepticism about the justification for a CBDC beyond its use in interbank and wholesale transactions, stating that it is “difficult to imagine” a broader role for it.
As the discussions around CBDCs and digital dollars continue, privacy considerations are becoming increasingly significant. Striking the right balance between privacy and combating illegal activities will be crucial in designing a digital dollar that meets the needs of users while addressing regulatory concerns. The ongoing evaluation by the Treasury-led group reflects the importance placed on understanding the implications of a CBDC for various policy objectives, including privacy, to make informed decisions about the future of digital currencies in the United States.