Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insight on policy and regulation.
Crypto is filled with contentious acronyms. The newest front has emerged around CBDCs, or central bank digital currencies—a kind of government-backed alternative to cryptocurrencies, such as the Bahamian Sand Dollar or the Nigerian eNaira. Digital payments are here to stay, whether offered through services like Venmo and PayPal, decentralized blockchains like Bitcoin and Ethereum, or government-backed projects like CBDCs, and the only question is which future wins out.
As larger economies, including the United States, explore implementing their own CBDCs, the technology has drawn outrage from the right and the left. Both Minnesota Rep. Tom Emmer, the Republican Majority Whip and crypto booster, and presidential hopeful Florida Gov. Ron DeSantis have expressed their displeasure, with the Floridian targeting CBDCs as the latest lightning rod for his culture wars. He described them as “government-sanctioned surveillance” that would “stifle innovation.”
The American Civil Liberties Union has also emerged as a critic. I spoke with Jay Stanley, a senior policy analyst focused on speech, privacy, and technology, who explained that CBDCs could serve as a public good with digital payments surging in popularity, although achieving that balance will be nearly impossible to pull off.
As crypto advocates have long argued, cash is the only truly private means of payment. Its physical nature means anyone can access it and transact with it, with the only limits being availability and volume. Bitcoin emerged as a digital alternative, but governments and private firms have devised methods to track even privacy-focused cryptocurrencies like Zcash and Monero.
Perhaps more crucially, most crypto services still require a fiat on-ramp, meaning users need to undergo some know-your-customer requirements to access crypto, especially as peer-to-peer options like LocalBitcoins and Paxful vanish. In that sense, most crypto platforms offer no meaningful privacy improvements to Venmo, PayPal, or Zelle. Meanwhile, the future of stablecoins, in the U.S. at least, looks murky as lawmakers debate legislation and would still require KYC and “seize and freeze” provisions.
As Stanley told me, a well-executed CBDC should mimic the properties of physical cash, meaning it would be fully accessible and untraceable. He acknowledged the government’s interest in tracking larger transactions to prevent money laundering, but he said the KYC requirements for CBDCs should only kick in at higher thresholds, as they do with cash—an arguably outdated $10,000 limit set in the 1970s.
“When you're talking about ordinary people and ordinary transactions, we don't think that the tentacles of the government's surveillance infrastructure should reach down to that level,” he said.
If that sounds like a pipe dream, you're right. Even so, with the country barreling toward a future that disincentivizes cash in favor of digital transactions controlled by corporations, Stanley argues that we should at least be pushing the government in the right direction—a more practical view than those held by Emmer and DeSantis, who want to ban CBDCs altogether. As he put it, there is a war on cash by credit card companies and other financial firms, but we should proactively make sure that cash equivalents remain an option.
What an ideal CBDC would look like is unclear, especially for people without bank accounts. Stanley said it could entail a combination of cryptographic techniques like zero-knowledge proofs that mask transaction data, as well as ledger-based systems held by the Treasury Department or the Federal Reserve.
“This is something that could be a real value for our economy and society if it were done right,” Stanley said.
What do you think? If you’re at Consensus this week, come let me know.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
