CBDC Ban Does Little to Bolster Financial Privacy

Majority Whip Tom Emmer, pictured here during a gubernatorial race in Minnesota. 2010.

The US House of Representatives recently passed a bill to prohibit the Federal Reserve from issuing a Central Bank Digital Currency (CBDC) without explicit congressional authorization. Some representatives, including Majority Whip Tom Emmer (R-MN), believe a CBDC would pose significant risks to financial privacy. While the concern is certainly warranted, the government’s already-existing ability to surveil and censor transactions means that banning a CBDC does little to promote financial privacy.

Although the government is limited in its ability to surveil Americans, it has effectively deputized private banks to act as an arm of the surveillance state. Banks must report any transaction over $10,000 (or several small daily transactions that reach the $10,000 threshold) through currency transaction reports. Banks are also required to submit suspicious activity reports. The number of reported transactions have surged over time, in part because the relevant thresholds have not been adjusted for inflation. For example, the $10,000 threshold established by the Bank Secrecy Act of 1970 would be equivalent to roughly $75,000 today. As a consequence, many innocent transactions, such as buying a used car, now result in reports submitted to the government.

The government does not only require banks to report on the financial transactions of their customers, it also pressures banks to censor legitimate transactions. Consider Operation Choke Point, which illustrates the government’s capacity to target and disrupt financial services to specific businesses. Between 2013 and 2017, the US Department of Justice and the FDIC pressured banks to cease activities with legal businesses such as firearm dealers, personal services, online gaming, payday lenders, or any business that was deemed to have an increased likelihood of committing fraud and money laundering.

Other Western democracies have also engaged in financial censorship. In 2022, Canadian Prime Minister Justin Trudeau froze roughly $6.1 million in two hundred bank accounts belonging to those protesting vaccine mandates in Ottawa. This policy prevented sanctioned parties from making any transactions from frozen accounts, not merely those transactions related to the protests. It was a heavy-handed attempt to discourage peaceful political opposition.

A CBDC would seem to offer even greater latitude to surveil and censor transactions. The government would control the platform. It would not need to rely on private banks or other financial intermediaries. In practice, however, it is not clear that a CBDC would be all that different: private banks and other financial intermediaries largely comply with the government’s efforts to surveil and censor transactions already.

If Rep. Emmer and others want to bolster financial privacy, they should not merely ban CBDCs. Instead, they should promote the use of physical currency. As Andrew Bailey and William Luther explain, cash offers a high degree of financial privacy:

When you use cash, no one other than the recipient needs to know. Unlike a check or debit card transaction, there’s no bank recording how you spend your money. You can donate to a political or religious cause, buy controversial books or magazines, or secure medicine or medical treatment without much concern that governments, corporations, or snoopy neighbors will ever find out.

Correspondingly, it is difficult (though not impossible) to surveil and censor cash transactions.

Of course, not everyone is so enamored with the financial privacy features of physical currency. In his book, The Curse of Cash, Ken Rogoff argues that cash enables crime and tax evasion. He recommends eliminating large denomination banknotes. Others have called for a cashless society. Such policies are based on exaggerated estimates of the harms of cash, and represent a clear threat to financial privacy.

It is heartening to see some lawmakers express a desire to protect financial privacy. But they should not stop at opposing a CBDC. They should limit the extent to which the government can use banks and other financial intermediaries to surveil and censor transactions. And they should block efforts designed to limit the use of cash. The battle for safeguarding individual rights over financial information and freedom from undue government control must encompass all forms of financial transactions, whether digital or physical.