Arguments in support of CBDCs often relate to cash, since the former would function as an alternative to the latter. For example, many point out that CBDCs would provide a digital alternative for the unbanked, who rely on cash to make transactions. A CBDC, they argue, would enable those left behind by the private sector to finally reap the rewards of financial inclusion. They do not seem to appreciate that many among the unbanked simply prefer to use cash. The FDIC reports that, “among unbanked households in 2019, more than half (56.2 percent) were not at all interested in having a bank account.”
Some maintain that a CBDC should replace cash even if cash is preferred by some consumers. They usually point to cash usage among criminals and tax cheats, noting that a CBDC might prevent these undesirable transactions. Of course, replacing cash with a CBDC would also likely reduce financial privacy for law-abiding citizens, as well. The public policy question, therefore, is whether the gain from reducing crime and tax evasion warrants the loss of financial privacy.
A recent New York Times article by Eswar Prasad would seem to suggest we need not worry much about that tradeoff. “The end of cash is on the horizon,” Prasad writes. If a cashless future will soon be upon us, we will suffer the loss of financial privacy regardless of whether the government launches a CBDC. Why not also reap the benefits by introducing a CBDC? Indeed, failing to launch a CBDC “could be a lost opportunity.”
Consider me a skeptic. Predictions of our cashless future have been made for decades. And, despite huge advances in digital payments, currency in circulation continues to rise. In per capita terms, currency in circulation has increased from around $2,116 in January 2000 to $5,461 in January 2020. It accelerated over the course of the pandemic, to $6,325 in January 2021.
William J. Luther is the Director of AIER’s Sound Money Project and an Associate Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular writings have appeared in The Economist, Forbes, and U.S. News & World Report. His work has been featured by major media outlets, including NPR, Wall Street Journal, The Guardian, TIME Magazine, National Review, Fox Nation, and VICE News. Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.