Momentum is building for a central bank digital currency, a kind of public option for cryptocurrencies, which advocates claim would be more stable and viable than highly volatile and speculative cryptocurrencies, and that wouldn’t require energy-intensive proof-of-work systems that can have larger carbon footprints than entire countries.

But now a Goldman Sachs-backed cryptocurrency startup, Circle, is framing such a central bank digital currency as a threat to financial privacy. At the same time, the tech firm is spending big on ads promoting its own digital alternative: a so-called “stablecoin” that it claims will provide financial reliability in a turbulent market — even though experts warn such “stable” coins may not be as trustworthy as their name suggests.

Circle stands to profit from its stated goal of making its stablecoin the dominant currency of the internet. Likewise, the company would miss out on a share of the digital currency market should the Federal Reserve issue a CBDC.

Circle’s efforts are the latest skirmish in the growing battle over who gets to manage the underlying infrastructure of the 21st-century economy. As big-money interests spar over personal privacy matters and financial reliability issues, the outcome of the conflict could determine whether the digital money that will comprise an ever-larger share of everyday transactions, from buying groceries to paying rent, will be regulated by public banks, or whether it all will be under the control of private companies looking to maximize profits above all else.

A Public Option

A U.S. central bank digital currency, or CBDC, would essentially function as a digital version of the dollar, similar to what most people use when they swipe a debit or credit card. The difference is that digital money on your credit card is backed by commercial banks, whereas a CBDC would have the backing of the Federal Reserve, just like paper money.

Other than being another form of digital currency, CBDCs don’t actually have much in common with cryptocurrencies like bitcoin. Unlike most cryptocurrencies, CBDCs don’t require a “proof-of-work” system, which involves using high-powered computers to verify transactions and issue new coins into circulation, and are the driving force behind the crypto industry’s massive carbon footprint.

CBDCs also don’t require proof-of-stake systems utilized by other cryptocurrencies like Ethereum. While the industry touts proof-of-stake as a less carbon-intensive alternative to bitcoin’s proof-of-work model, experts say these systems instead disproportionately advantage major stakeholders.

“Proof-of-stake is where instead of validating each other by doing these complex mathematical, computational processes, you validate by putting money up front,” said Rohan Grey, assistant professor of law at Willamette University. “Instead of ‘Look how much computing power I expended. I must be legitimate,’ it’s ‘Look how much money I put down. I must be legitimate.’”

Amid a wave of new private-sector financial products such as digital wallets, cryptocurrencies, stablecoins, and mobile payment apps, the Federal Reserve is exploring the potential benefits and risks of issuing its own CBDC. At the end of January, the Fed issued a long-awaited report on CBDCs, laying out basic arguments for and against the idea, without taking a definitive stance on the matter.

The report notes that electronic central bank money could provide greater safety and convenience to households and businesses because central banks don’t carry the kind of credit risk that drove the great depression and the 2008 financial crisis. The Fed also noted that such currencies could facilitate faster and cheaper payments and a greater degree of consumer access to the financial system by offering households and businesses the safety and liquidity of central bank money in a convenient, electronic form.

In contrast, the agency noted a CBDC could have potential drawbacks, such as increased risk of runs on financial firms, increased cost, and reduced availability of credit.

While the Fed report concludes with a request for public comment as the first step in a larger process that will include targeted outreach and public forums, the agency notes it does not intend to issue a CBDC without support from the White House and Congress. The development sets the stage for a legislative battle in Washington — and the crypto industry is already making a concerted effort to influence policymakers.

Quashing The Competition

As the Fed explored the possibility of a CBDC over the last year, the Goldman Sachs-backed crypto startup Circle launched an extensive advertising campaign to cast doubt on the idea of a U.S. CBDC and instead promote its own option, a stablecoin called USD Coin, as a better alternative for a dominant digital currency.

The day after the Fed released its report requesting feedback from the public, Circle launched multiple ads promoting its USD Coin on Facebook. And last month, the startup ran three ads framing cast stable coins as superior alternatives to CBDCs in Mike Allen’s Axios PM newsletter, part of the D.C. tipsheet industry that serves a massive audience of Washington insiders including lobbyists, pundits, journalists, hill staffers, and lawmakers.

“USDC can reduce friction and costs while offering transparency and security — with fewer risks than Central bank Digital Currencies (CBDCs),” the Axios ad said.

An example of the ads Circle ran in the Axios PM newsletter

At the same time, Circle expanded its lobbying efforts. The company filed a lobbying registration with the lobbying firm Invariant LLC on Oct. 4 last year, less than two weeks after Fed Chair Jerome Powell announced the impending release of the Federal Reserve report on CBDCs. On Jan. 20, the same day the Fed released its report, Circle filed a lobbying disclosure indicating the company paid Invariant $90,000 for its efforts to monitor cryptocurrency proposals and “educate” members on stablecoin and cryptocurrency issues.

Invariant also raked in $340,000 over the course of 2021 for lobbying Congress on behalf of Coin Flip, a cryptocurrency ATM company that first listed USD Coin on its network of roughly 2,700 ATM machines in June 2020. Coin Flip’s lobbying efforts began in December 2020, when it spent $10,000 before its first lobbying disclosure in January 2021. Coin Flip’s lobbying expenditures increased throughout 2021, with the most recent disclosure on January 20 detailing $90,000 in spending.

According to Frederico Grinberg, an economist in the Monetary and Capital Markets at the International Monetary Fund, one explanation for Circle’s pressure campaign is that it fears a U.S. CBDC would compete with private coins in the digital currency space and cut into profit margins.

“There’s competition in the market for means of payment,” said Grinberg. “It’s natural that competition erodes profits. So, if a CBDC were to exist, it would naturally compete with traditional entities like banks, payment service providers, and things like stable coins.”

How Stable Are Stablecoins?

Stablecoins like USD Coin are a type of cryptocurrency backed by assets not tied to the blockchain, such as government-issued currencies like the dollar or commodities like gold or silver. According to Circle’s recent ads, the USD coin would be a better option than a CBDC for a dominant digital currency because it would help establish the dollar as the currency of the internet and protect financial privacy by keeping digital money out of the central banking system.

In theory, that’s because someone who holds USD Coin should always be able to exchange it at a one-to-one ratio with the dollar. But if too many people were to exchange their coins at once and the stablecoin issuer lacked the reserves to meet demand, stablecoin users could be left with worthless digital currency and no means of exchanging it for promised dollar equivalents.

As Tim Swanson, head of market intelligence at the blockchain company, Clearmatics, points out, companies like Circle can’t issue the currencies backing their stable coins like a central bank, and therefore can’t guarantee the stability or value of their product.

“It’s dramatically misleading or even outright lying for stablecoin issuers to compare their product to what a CBDC would be,” said Swanson. “Central banks are the lenders of last resort. They don’t have credit risk and, apart from the country collapsing, they’re there through thick and thin. From a marketing standpoint, [stable coins] may try to promise the same guarantees, but they can’t.”

The most prominent example of such credit risks is Tether Limited, the first company to issue a stablecoin. In 2019 Tether agreed to pay an $18 million fine to the State of New York, after the state’s attorney general’s office found the company had no reserves to back its stablecoins during certain periods of time. Around the same time, a lawyer for Tether admitted the company could only back 74 percent of its stablecoins with dollar equivalents.

According to Grey, companies like Tether have an incentive structure to be overly optimistic about their ability to back their stablecoins. This could result in a crisis similar to what happened during the great depression, when large numbers of anxious depositors withdrew their bank deposits, leading to bank failures and the loss of millions of Americans’ life savings.

“The big risk with any privately issued IOU that promises to be redeemable on demand for public money like the dollar… is that when people demand redemption, you’re not going to be able to honor it,” said Grey. “This is the classic ‘bank run’ model and I think it absolutely applies to stablecoins.”

The Fight For Public E-cash

Circle’s ads also claim CBDCs carry the “specter” of privacy erosion and could “deplatform people from the lawful use of money,” while stablecoins offer greater privacy protection.

Much of the concern about CBDC-related privacy issues stems from the fact that such currencies are based on an account system, rather than digital tokens used by cryptocurrencies. In an account-based system, the central bank can theoretically see every transaction involving a CBDC and potentially invalidate them as it sees fit. Under token-based models, users keep their currency in private digital wallets that central banks can’t monitor.

But according to Grinberg, while CBDCs, by their nature, will never be completely private, it’s unlikely central banks would ever monitor all CBDC transactions.

“The old discussion of accounts versus tokens is about privacy and whether it’s completely anonymous or the central bank knows everything,” Grinberg said. “It’s hard to think you’d have either of those extremes. Central banks won’t issue digital money that’s completely anonymous because at some point, the law may need to know something about a transaction and if the central bank observes everything, the adoption of CBDCs may be much lower.”

According to Grey, while there are valid concerns about the privacy implications of CBDCs, it suits companies like Circle to act like CBDCs can only exist as an account-based currency. Grey believes the fight for privacy in public money will ultimately determine whether regulators allow such privacy for private assets like stablecoins.

“It allows Circle to criticize CBDCs and say the only hope for financial freedom and privacy is our alternative in the private sector,” Grey said. “If we are going to have a chance in hell of having genuine transactional privacy and anonymity, it’s going to be through litigating the fight for public e-cash. If we lose it for public money, we’re going to lose it for private money as well.”

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