Central Bank Digital Currency – the digital form of a national currency that tracks transactions within a government digital ledger – is an idea that seems to be losing whatever modicum of support it had among the general public in countries across the world. As Ari Patinkin and I write in RealClearMarkets, “from the U.S. to Europe to Africa – more and more of the general populace are rejecting CBDCs as they learn what they would entail and experience them in practice.” In the U.S., just 16 percent support a CBDC issued by the Federal Reserve, according to a recent Cato Institute poll. Opposition rises even further in the poll when Americans are informed that CBDCs can be used for nefarious tasks such as monitoring personal spending and controlling the ways people spend their money.
Yet we shouldn’t count out a U.S. imposition of CBDCs yet. For reasons of both ideology and rent-seeking on behalf of certain businesses, much of the political and financial elite supports them. This coalition of business and government officials supporting more state intervention is described in a popular new country song as the “Rich Men North of Richmond,” and its singer-songwriter Oliver Anthony also expressed the sentiments of many when he decried in a recent Free Press interview the cronyist “corporations who work with our government.” Yet this coalition motivated by both ideological and rent-seeking desires has ways ways of setting the stage for policy proposals to expand governmental powers
Among these ways of ginning up support for CBDCs – as well as the Fed’s recently implemented FedNow payment system that raises similar concerns about privacy and government surveillance – is by finding supposed deficiencies in the private payment processing market and claiming a “market failure” justifies massive state intervention. Yet what advocates of CBDCs and FedNow rarely if ever acknowledge is that government regulations that distort markets are major factors in many of these deficiencies.
Exhibit A is the Durbin Amendment, which caused the number of unbanked Americans to soar. The measure was enacted in 2010 as part of the Dodd-Frank financial overhaul at the behest of Senate Majority Whip Dick Durbin (D-IL) and the lobbying of some very rich retail corporations north and south of Richmond: including WalmartWMT , TargetTGT , and the Walgreens drug store chain headquartered northwest of Richmond in suburban Chicago in Durbin’s home state. The Durbin Amendment created stringent price controls that prevent banks and credit unions from earning profits or even fixed costs on the interchange fees these financial institutions charge retailers to process debit card transactions.
When the Durbin Amendment was enacted, financial institutions had to shift nearly all debit card costs from retailers to consumers, and the poorest consumers paid the biggest price. As reported by the Los Angeles Times, before this measure was enacted, a survey by Bankrate.com found that 76 percent of U.S. banks offered free checking accounts to consumers, with no minimum balance. By 2011, only 45 percent did, according to the survey. And in 2012, that number dropped further to just 39 percent. In a study, George Mason University law professor Todd Zywicki and Geoffrey A. Manne and Julian Morris of the International Center for Law and Economics found that the Durbin Amendment is responsible for more than 1 million Americans being unbanked.
The problem of the unbanked largely created by the Durbin Amendment became the justification for even more government intervention of “public options” to compete directly with free-market providers. In 2019, the Fed voted to start FedNow to compete directly with real-time payments in the private sector. Progressives then proposed “FedAccounts,” in which the Federal Reserve would directly compete with banks and credit unions to provide deposit accounts to consumers. Now, CBDCs are being pushed by both progressive activists and some businesses, including those who wish to profit by designing the technology for government-backed digital currency.
And ironically, a new scheme backed by Durbin and a couple self-styled “populist” Republicans could play right into the hands of advocates of CBDCs by creating more so-called “market failures” that are really the fault of interventionist regulatory schemes. The new legislation that Durbin is sponsoring is misleadingly entitled the “Credit Card Competition Act,” and its advocates claim to be addressing an alleged lack of competition in the payments market. But what the legislation would really do is harm the competing players in the private payments market – including community banks, credit unions, and upstart fintech entrepreneurs — and pave the way for a dominant government-backed CBDC or credit provider.
As was the aim for the original Durbin Amendment for debit cards, the new legislation seeks to force down credit card interchange fees charged to retailers by banks and credit unions through government jawboning mechanisms. While the new legislation does not contain direct price controls as the existing Durbin Amendment does, its means of artificially bringing down interchange fees could be even more disastrous for consumers and the economy at large. In many cases, the bill would allow retailers to completely ignore consumers’ choice of credit card network and “route” their transaction through whichever card network is the cheapest. These routing mandates would cause a variety of harms.
First are the direct costs that will be borne by consumers, similar to those that resulted from the original Durbin Amendment. Just as many consumers lost free checking and received higher bank fees when the Durbin debit card measure went into effect, so will consumers likely be socked with new fees and a sharp loss in credit card rewards should Durbin 2.0 become law. A study by Zywicki and Morris for the ICLE, following up on their devastating findings of the original Durbin Amendment, finds that Durbin 2.0 could virtually end credit card rewards programs. “If merchants were to route through the least-cost provider [as mandated by the legislation], the interchange fee will not be adequate to cover the rewards being offered,” the authors explain. “Every rewards card, from airlines to entertainment, would likely disappear.”
But there’s more. As interchange fees fund technology to fight ever-increasing data security threats of fraud and hacking, the forced reduction in these fees – as well as allowing retailers to disregard consumers wishes and use cheaper networks with less robust security features – will almost certainly make consumer data less secure. As Zywicki and Morris write, “in the absence of workarounds” to the mandates that would substantially increase consumer costs and may not be technologically feasible, “the fraud rate will almost certainly increase, imposing costs on issuers, cardholders, and merchants.”
Should a major data breach occur as a result of these mandates – despite the government’s role in the breach and despite the government’s own abysmal record at keeping the data it holds secure – the private financial sector will be blamed. Then, the drumbeat will grow even louder for a government takeover with CBDCs and/or government provision of consumer credit.
Ronald Reagan explained as president how crushing regulation fuels the growth of government programs with this simple description of the mentality of many bureaucrats and politicians. “If it keeps moving, regulate it. If it stops moving, subsidize it,” he said. Politicians who rightly oppose CBDCs must not enable the justification for them by backing legislation that could cripple the efficiency of the private-sector payment system and pave the way for a government takeover.
John Berlau is Senior Fellow & Director of Finance Policy at the Competitive Enterprise Institute and author of the book George Washington, Entrepreneur: How Our Founding Father’s Private Business Pursuits Changed America and the World. Former CEI Research Associate Ari Patinkin contributed to this article.