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Does the U.S. Treasury Have It Out for Private Cryptocurrencies?

By Allen Taylor | Cryptocracy | 23 Sep 2022

One of the biggest concerns regarding the recently published Treasury Department report on CBDCs, titled The Future of Money and Payments, is that a central bank digital currency (CBDC) could easily be used to track private citizens. And because it could be used that way, the fear is that it will be used that way. Of course, much of that fear springs from imaginations belonging to people who haven’t read the document.

I’m more interested in what the Treasury actually proposed rather than what a bunch of fearmongers are saying. So, I read the 56-page report from beginning to end.


General Thoughts on the Presentation


Before I get into specifics, I’d just like to point out that the paper reads like a white paper, a thought leadership piece put out by a global consulting company like PwC or Gartner. In fact, that’s essentially what it is—a thought leadership white paper published by the largest national treasury department on the planet. Having read many of these, and written a few, it was easy to recognize.

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Some people are saying the report lacks clarity. But that criticism is either a red herring to divert attention away from an actual discussion on CBDCs or misses the point. The report wasn’t intended to be a final say in how a CBDC is structured. It’s the starting point for the discussion. Rather than issue clear details on every aspect of a potential digital dollar, the Treasury simply wanted to offer suggestions on how such an implementation could take place if it was deemed in the national interest. And that’s precisely what they published.

I won’t say I agree with every point, but I don’t disagree with every point made in the paper either. And I’m keenly aware that one agency’s intention says nothing about future agendas of individuals and organizations that may implement a CBDC or have their hands in its management. The following response is a response to the paper as it is written.


Thoughts While Reading the Treasury Report


While reading the report, I took some notes. These are my initial reaction to the report. I may feel differently a week from now, or next year. For now, I offer the following thoughts as my initial reaction to the Treasury’s report.

  1. On page one, the Treasury says money has three core functions, and reports that is true whether public money or private money. The fact that the Treasury recognizes private money means, in my mind, it recognizes the legitimacy of cryptocurrencies. I saw nothing in the report that would indicate an outright condemnation of private digital currencies.

  2. While I appreciate the recognition of private money’s legitimacy, the Treasury's definition of private money is narrow. It relegates private money to “commercial bank money” and “certain liabilities of nonbanks.” Not mentioning peer-to-peer money is an issue because it means the Treasury may deem cryptocurrencies illegitimate even without stating so. I think the Treasury should broaden its definition of private money to include peer-to-peer digital variations.

  3. The Treasury admits that cash carries risk of counterfeit, theft, and error while stating outright that "terrorists and other criminals have increasingly turned to cash to transfer funds." This admittance nullifies any argument that anti-crypto factions make against cryptocurrencies. Cash is more difficult to track and cannot audited, while cryptocurrencies can both be tracked an audited, at the transactional level. The Treasury's report is an endorsement of digital currency in general, and I would argue a semi-endorsement of private cryptocurrencies.

  4. The implications of a CBDC being used for cross-border payments and remittances is interesting. It's unclear right now how that might impact Ripple/XRP, but I'm confident that Ripple could and would seize the opportunity to implement a CBDC for cross-border payments and remittances.

  5. It is very likely that a CBDC would create an entirely new industry of competitive cross-border payment services, giving rise to new entrants. This was likely on the minds of the Treasury authors who wrote the report.

  6. It is unclear how intermediaries will be impacted by a CBDC. The Fed could program its digital dollar in such a way that banks and other intermediaries are intrinsically involved in distribution and control of the currency in the same way they are involved in the distribution and control of physical cash. A CBDC could also be a "back door" to regulating stablecoins as intermediaries involved in managing the distribution and auditing of a CBDC could also be involved in the same for stablecoins. The CBDC would then become the backbone of the digital monetary economy.

  7. A CBDC may be insured by the FDIC whereas private cryptocurrencies would not be. Through this insurance, the Fed can encourage mass adoption of its CBDC while discouraging the use of private cryptocurrencies without outlawing them.

  8. By acknowledging instant payment systems and stablecoins, the Treasury is effectively endorsing them. However, it does admit that instant payment systems are an upgrade to the current financial system while warning that stablecoins are more risky. In fact, the Treasury recommends regulating stablecoins to mitigate consumer risk. What is even more interesting is that other forms of cryptocurrency aren't mentioned at all.

  9. The Treasury states outright that a CBDC would have three core features: 1) It would be legal tender; 2) It would convertible 1:1 into reserve currency or paper; and 3) It would clear and settle "with finality nearly instantly." The fact that the Treasury is not recommending that physical cash disappear completely should silence those who believe the sole purpose of a CBDC would be to track everyone. It should silence them, but it won’t.

  10. In terms of CBDC design, the Treasury recommends both wholesale and retail. Both could pay interest but wholesale would likely pay higher interest, meaning it would benefit banks more. It would also ensure banks would serve as intermediaries. Interest on CBDCs would encourage adoption and "crowd out the production of potentially risky forms of private money" (i.e. cryptocurrencies). In that statement, the Treasury reveals its sentiments toward crypto in general, casting a suspicious eye to anything that is not a CBDC.

  11. The Treasury seems to prefer a wholesale model.

  12. The Treasury appears to recommend making the CBDC ledger a private ledger to protect user privacy and reduce cybersecurity and financial risks. A public ledger, the report says, could also inhibit adoption of a CBDC. The clear implication is that the Fed and banks would have access to that ledger while no one else would. I'd also add that no government agency should have access to the ledger without a properly issued search warrant. The Treasury’s report does hint at that, but this is one place in the report where a little more clarity could be helpful.

  13. The Treasury recommends two systems - a single-tier and a two-tiered. The single-tier would be Fed direct to the public. Two-tiered would be with intermediaries. The Treasury favors a two-tiered system. The report is clear that intermediaries need not be banks. This could open the door for private wallet issuers such as MetaMask, Exodus, Atomic wallet, Ledger, Trezor, and others could petition to become intermediaries, which would effectively put them under a regulatory scheme. Such a system would require intermediaries to issue KYC/CMT/AML controls, not only on the CBDC but also on other cryptocurrencies they support. I’m not altogether comfortable with handling regulatory power to the federal government over private digital wallets, but that is the implication.

  14. The future of payments and money could be open source, allowing for more robust public-private entity partnerships. It could also lead to a deeper relationship between the U.S. and international partners.

  15. Interestingly, the Treasury department is not threatened by the emergence of foreign digital currencies. However, it does believe that a U.S. CBDC would protect the dollar's lead in financial markets. They also seem to imply that the emergence of instant payment systems, tokenized assets, and automated market makers make a digital dollar nearly inevitable.

  16. Foreign CBDCs make it more difficult for the U.S. to enforce sanctions and give bad actors a way around them. A U.S. CBDC would make it easier to enforce sanctions as it would come with requirements for any entity, foreign or domestic, tied into the system to agree to such enforcements. I can see all kinds of legal issues arriving from this.

  17. The Treasury's report recommends more research into privacy-enhancing features using zero-knowledge proofs. If that were to happen, it could kill private privacy-based cryptocurrencies such as Monero in every place other than black markets.

  18. I also find it interesting that the Treasury addresses a governance structure that includes consumer protections against abuse by government entities, such as violations of the Fourth Amendment. The only feasible governance structure that could include such protections is a decentralized infrastructure that includes government watchdog groups and consumer financial advocacy organizations. Maybe even some private citizens with an eye toward ensuring that all U.S. laws are followed regarding legitimate criminal investigations that do not violate civil rights.

  19. Another interesting design feature suggested is offline functionality to ensure broad financial inclusion for people without access to technology. Along the same lines, the report suggests preserving the ability for consumers to use cash if they choose. The Treasury states outright that a U.S. CBDC should not be mandatory. I'm all for each of these suggestions as I believe that maximum consumer choice should be the public policy. Along that line, I'd also suggest making public use of financial technology available in public libraries for the unbanked and underbanked to utilize if they choose.

  20. It's clear that the Treasury is seeking a pathway toward a single-digital-currency system without outlawing private cryptocurrencies. I think this is a wise path even as the Treasury appears to be suspicious of private cryptocurrencies, particularly private stablecoins. While it is suspicious, it doesn't call for an outright ban on them. As long as political factions don't intervene and hijack the CBDC for their own agendas, the Treasury's approach appears to be a step in a fair direction. That doesn't mean it is perfect, but it does mean maximizing and respecting consumer choice with regard to the use of a CBDC as well as private cryptocurrencies.

  21. Considering the U.S. government's commitment to environmental sustainability, it is likely that a CBDC would not employ a proof-of-work governance structure and would also likely use a permissioned blockchain.


Final thoughts


We are a long way from the implementation of a central bank digital currency. Things take a long time in the U.S. because we tend to enter into lengthy discussions on policy, method of implementation, etc. I suspect we are at least a decade away from any substantial development of a CBDC, let alone the implementation. The Treasury Department’s report is simply the beginning of the discussion.

Read the Treasury’s report for yourself right here.

Cryptocracy is a decentralized newsletter published several times a week. I curate the latest news and crypto analysis from some of the brightest minds in crypto, and sometimes offer a little insightful and snarky commentary. Always fresh, always interesting, and always crypto.

First published at Cryptocracy. Not to be construed as financial advice. Do your own research.

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Allen Taylor
Allen Taylor

Writer, editor, publisher. Content strategist for fintech, blockchain, and crypto firms.


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