On the other hand, digitization could yield technological advances that frustrate the ambitions of would-be technocrats. Blockchain technology is an obvious example. By facilitating secure, anonymous peer-to-peer exchange, blockchain shields the identities of transactors from prying eyes. Governments could, of course, punish vendors merely for accepting cryptocurrency, but this extraordinary step is very costly. Bundled with improvements in cryptography, many parts of the digital economy could become ungovernable.
Imagine a new, independent class of proprietors with unmediated access to capital, cryptographically protected against government expropriation. Political philosophers going back to Aristotle believed a secure middle class is the best guardian against tyranny. More recently, Christian intellectuals such as Hilaire Belloc and G.K. Chesterton argued that political and economic freedom depend on widespread access to productive assets. While they occasionally indulged too deeply in their romantic visions of free yeomanry, some of their insights concerning the relationship between liberty and human flourishing could find expression in the digital economy. Instead of creating the conditions of dependence and servility, digitization could be a new foundation for ordered liberty.
The Pros and Cons of a Digital Dollar
The conflicting forces unleashed by digitization are particularly clear in the debate over central bank digital currencies. About 80 nations, representing 90% of global income, are exploring a digitized form of national money. In the United States, the Federal Reserve is interested in the idea but has not yet taken concrete steps to create one. Fed officials should think carefully before they do.
Electronic money is nothing new. Almost everyone with a checking account has used it at some point. Digital dollars are already here in the form of electronic bank balances. But central bank digital currencies are different. If the Fed creates a digital dollar, those liabilities will be claims not on private banks but on the central bank.
A public digital dollar has several benefits. It can lower the transaction costs of payments processing, increasing the efficiency of both national and international economic activity. The resources saved through reduced transaction costs can then be put to other, better uses. Everyone is wealthier. For those concerned with equality, a public digital dollar offers another way the underprivileged, and especially the unbanked, can access the financial system. Central banks can offer direct individual accounts, unconstrained by profitability and with minimal hassle. Financial inclusion is important, even apart from efficiency considerations.
But a public digital dollar could have major costs as well. These costs depend on whether we get a “wholesale” or a “retail” central bank digital currency. The former is restricted to financial institutions. The latter is available to the public. In the limit, a retail digital dollar could assign an account to every citizen and permanent resident.
If this seems too good to be true, it may well be. The retail option is much more dangerous, both politically and economically. While a wholesale digital dollar largely functions to improve interbank settlement (the process by which banks clear each other’s liabilities), a retail digital dollar could give the central bank a frightening level of control over the economy.