US Should Disavow CBDCs and Set the Standard for Financial Privacy Protection


It took Canadian Prime Minister Justin Trudeau less than a week to reconsider for invoke the Emergencies Act. Trudeau had used this authority to crush the Freedom Convoy demonstrators in Ottawafreezing the bank accounts of individual protesters, crowdfunding platforms and their payment service providerscorn civil liberties groups maintain that the Emergency Measures Act should not have been used to quell non-violent protests.

Trudeau may have gone too far, but Americans should have no illusions: the same principles that allowed Trudeau to freeze Canadians’ bank accounts are rooted in American law and regulation.

In fact, the United States has spent decades leading most developed countries down the same path, ignoring fundamental principles in the name of preventing money laundering, tax evasion and the financing of terrorism. Central bank digital currencies (CBDCs) may very well end up crowning these efforts, but regulators have already have enormous discretion and leverage over banks and other financial institutions.

The most recent manifestation of this kind of power in the United States was Operation Chokepoint, when a group of bureaucrats from several independent federal agencies (including the Federal Deposit Insurance Corporation) began excluding legal businesses from the banking system. . It was mainly aimed small lenders, gun dealersand several other politically disadvantaged industries.

Although it may seem surprising, federal banking regulators were not guilty of anything illegal in Operation Chokepoint.

In 2003, the FDIC issued directives stating that “institutions face heightened reputational risks when entering into certain agreements with payday lenders, including agreements to issue loans on terms that could not be offered directly by the payday lender”, and that “Payday loans raise numerous consumer protection issues and attract a great deal of attention from consumer advocates and other regulators, increasing the potential for litigation.

If the FDIC – or any other federal banking regulator – issues these kinds of guidelines, there is virtually no recourse for a bank. They must comply because regulators may ultimately revoke their federal deposit insurance and shut them down. If regulators believe, for example, that lending to fossil fuel companies puts the bank reputation in danger, or that this constitutes a dangerous or unhealthy practicethey can force the bank to change its lending behavior and customer base.

This kind of leverage excites many climate change activists, but their elation is rather short-sighted. If public opinion changes or if different opinions shape agency policies, then the same authority could be used to target, for example, renewable energy companies.

Or, worse, regulators could use their authority to target groups engaged in constitutionally protected political protests. Just as in the Canadian situation, it would be very easy for federal regulators to argue that a large protest endangers the economy and, therefore, the banking system. Even if the protesters are ultimately able to win a court battle, their victory would come long after the protests have ended.

The only way for the government to stay neutral is to stay out of it, and that’s next to impossible in the current system. This would require an almost 180 degree reversal in the regulatory approach taken by the United States and most national governments.

More narrowly, it would also require a major U-turn in broad anti-money laundering rules and knowing your customer’s rules (AML/KYC). Thanks to these rules (largely imposed on the rest of the world by the United States), financial privacy is virtually non-existent.

Although most ardent cryptocurrency supporters still hope that the new technology can help strengthen financial privacy, they no longer deny the reality of the AML/KYC regime. They now know, for example, that any third-party intermediary helping with a cryptocurrency transfer — third-party exchanges and wallet providers, such as Coinbase — must adhere to all the same AML/KYC rules required of banks and other financial firms.

Crypto users, as well as anyone who prefers to use paper money, should also understand how harmful a retail-based CBDC would be if used within the existing legal framework. Narrowly focused AML/KYC rules, along with broader operational regulations, ensure that governments can use CBDCs to provide full control over people’s money and disintermediate the private financial sector.

This kind of control over people is incompatible with a free society, and the United States should lead the charge in the opposite direction.

Luckily, it’s not too late to forgo the launch of a retail-based digital currency or catch up on past mistakes that have infringed the privacy of law-abiding citizens. The United States should never have led the way by criminalizing the use of money or designating private companies as law enforcement. He should have done whatever was necessary to strengthen the protections guaranteed by the Fourth Amendment to the Constitution and to foster strength and diversity through competition in private capital markets.

The comparative advantage of the United States is supposed to lie in protecting the rights of individuals against the excesses of government. He can assert this leadership position by setting the standard for personal financial privacy. Fintech has evolved so much that this leadership is more important than ever.

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