This week, I attended the exciting INFiN MoneyTrends conference in Austin, where I gave the Regulatory Keynote address on Monday. The conference is a gathering of cutting-edge innovators in consumer finance, including small-dollar lenders, check-cashing facilities, and others who provide crucial financial services for consumers and small business and incorporate innovations such as cryptocurrency and other forms of FinTech to better serve their customers.
Following are excerpts from my keynote talk, “FedCoin, FedNow, and FedAccounts: Threats to Consumer Financial Services from Federal Solutions in Search of a Problem”:
Thanks to all of the organizers of this great conference for having me here. And thank all of you for attending my session Getting outside the Beltway and meeting the entrepreneurs and innovators—especially all of you at this conference who are pioneering innovations in FinTech [financial technology] and finance—gives me hope that so many people are finding solutions to pressing issues like access to credit and financial inclusion. This conference is definitely a thoroughfare in the road back to what we like to call at my organization the Freedom to Prosper for all. …
Through almost two centuries and a half, America has seen continued innovation that led to greater access to consumer and small business credit, both in terms of the range of items that can be collateralized, from old guitars to car titles to credit ratings and credit scores that went from being used to rate the credit quality to businesses to that of individuals.
FinTech innovations in the Web3 world have the potential to create even more optimal solutions and further expand financial inclusion, but there are individuals who want governments of the world to basically nationalize financial technology and even major parts of the financial sector. This would have devastating results for individual privacy, consumer welfare, and the continued private sector innovation necessary to keep America competitive.
The government’s proclivity to target business and consumers operating in politically disfavored industries, as we saw in Operation Choke Point during the Obama administration, illustrates the dangers of the government coopting the technology of entrepreneurs and innovators and using its power to shut out private providers of consumer financial services and directly provide payment services and credit. Under Choke Point, several small businesses and consumers lost access to financial services, as banks stopped lending to and accepting deposits from these customers. Just north of us in Canada, a few months ago, even the most minor participants in the truckers’ Freedom Convoy movement saw their bank accounts frozen. Government controlled digital currencies, deposit accounts, and payment systems—under which financial regulators would have direct knowledge of individual transactions—have the potential for similar politically motivated abuses on a much wider scale.
As this presentation is entitled, Fedcoin, Fednow, and FedAccounts are solutions in search of a problem. The tortured rationale for these federal products combines the common demonization of small-dollar loans based on the inappropriate utilization of the annual percentage rate, an overemphasis on real-time payments as a poverty and savings solution, and just plain envy of private sector innovations such as cryptocurrency. Instead of admiring the private sector’s FinTech innovation, Fed Governor and now Vice Chair Lael Brainard expressed alarm and the need for the Fed to directly compete with these private sector innovators.
If the only result of the Fed entering the digital currency market were inefficiency and slowing down private sector innovation, perhaps we could live with that. But given the nature of the Fed’s powers, its issuance of a central bank digital currency would have major implications for everything from macroeconomics to cybersecurity to financial privacy. Most importantly, central bank digital currency would inevitably cause a massive shift toward government allocation of money and credit that would magnify to political favoring and disfavoring of industry we saw with Choke Point.
Under a CBDC [Central Bank Digital Currency], the Fed would not just create money as it does today through methods such as raising and lowering the discount rate and in which the cash is distributed through a randomized process by various financial institutions. Now the Fed, with the click of a button, would not just create but actually distribute and allocate money connected to its giant electronic CBDC ledger. Under a CBDC, dollar deposits would be liabilities of the Fed rather than of the thousands of banks and credit unions in existence today.
Even in a hybrid CBDC system, banks and credit unions would lose much of their deposit base to the Fed, depriving them of the ability to make deposit-funded loans to businesses and consumers. The consequences of that would either be a credit drought or government stepping in to make up some of the shortfall, as progressives propose. Once again, the financial regulators who designed Choke Point would be able to vastly influence what industries do and do not get credit and other financial services.
And then there is the mere fact that the government has the ledger connected to the CBDC and can see the purchases you’ve made from dog food to cannabis to firearms to birth control. Once the government has that data, it could decide some, shall we say, creative thing to do with it. Saule Omarova—again doing us all a favor by saying the quiet part out loud—has written that both CBDCs and FedAccounts would be very useful in that the government could, quote, “credit” and “debit accounts for behavior it liked and disliked.
So, in conclusion, to borrow a phrase from the 80s, we should just say no to FedCoin, FedNow, and FedAccounts.
I’ll post my full speech, as well as other info from the great sessions of the conference, later on.