The Potential Risks of CBDCs: Cato Institute Calls for Congress to Prohibit Digital Dollar

The Cato Institute, a US-based libertarian think tank, yesterday published a report warning about the potential dangers of central bank digital currencies (CBDCs). According to the report, the introduction of CBDCs will have mostly negative consequences. The Cato Institute cited dangers such as government overreach and the undermining of financial markets.

One of the biggest concerns highlighted by the Cato Institute is the potential for CBDCs to be used by governments to directly control citizens’ finances. For example, CBDCs would make it easier for the government to freeze an individual’s financial resources and lock them out of society.

Another issue cited by the report is that CBDCs could be used to set negative interest rates, which would effectively mean people lose money. While some argue that this could spur spending, others worry that this could be a problem for those with limited financial resources or fixed incomes.

Additionally, the Cato Institute points out that CBDCs have the potential to be programmed to limit access to certain goods or services. The report quotes the Managing Director of the International Monetary Fund (IMF) Bo Li, who said:

CBDC can allow government agencies and private sector players to program…targeted policy functions. By programming a CBDC, money can be precisely targeted for what people can own and what [people can do.]

Finally, the Cato Institute statement argues that CBDCs could undermine financial markets by reducing credit availability, disintermediating banks, and challenging the rise of cryptocurrency. By creating a direct link between citizens and the government, CBDCs could reduce the need for intermediaries like banks, which could lead to job losses and a reduction in financial market stability.

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Given all these potential risks, the Cato Institute is calling on the US Congress to prohibit the Federal Reserve and Treasury from issuing a digital dollar. They submit that while CBDCs may sound appealing in theory, it’s important for policymakers to consider the potential risks and drawbacks before moving forward.