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Recent moves in the US to ban central bank digital currencies (CBDCs) represent a win for the private sector, but have significant implications for the US payments sector and beyond.

On January 23, President Trump issued an executive order that instituted a ban on the development and use of CBDCs, which, it said, “threaten the stability of the financial system, individual privacy, and the sovereignty of the United States”. 

Framed essentially as a protection against government overreach and surveillance, the ban is rooted in the quasi-libertarian approach of the Trump administration and the Elon Musk-led "Department of Government Efficiency". 

The move puts the digitalisation of money into the hands of private sector stablecoin operators such as Circle and Tether, which manage USDC and USDT respectively. 

Such firms will be able to profit from the move and can now push ahead in the race to digitalise the dollar. 

The fear of surveillance

91����ԭ�� spoke with Chris Giancarlo, a former chairman of the Commodity Futures Trading Commission (CFTC) and co-founder of the Digital Dollar Project, a non-profit formed to explore a US CBDC. 

He said the Trump administration is rightly keen to avoid a Chinese-style CBDC that operates as “a system of surveillance, censorship and state control of citizens' financial liberty”.

Giancarlo stressed that there is a strong need to modernise the dollar and to future proof its reserve currency status, and to do so in a way that is consistent with the values of a free society. 

“It can be done through the private sector, but we're as concerned about a lack of privacy in the private sector as we are in a public sector digital currency,” he said. 

“In fact, even more so because in the private sector there are no fourth amendment protections.”

Without the competition of the US Federal Reserve, Tether and Circle will be able to progress unfettered, allowing them to dominate the sector and call the shots on surveillance and privacy. 

“This move gives a huge sense of relief to revered stablecoin issuers like Circle, because they now know that they will not be competing with the US Treasury, or with the Federal Reserve because if there actually was a true government dollar stablecoin, no one would use anything else,” one source told 91����ԭ��. 

“I’ve been hearing about a digital dollar for about eight years now and it doesn’t seem to be any closer than it was, so it's not like the US CBDC plans were imminent. But whatever they were, they have now effectively died, at least for the time being.” 

Big Brother is watching

Although a CBDC might bake financial surveillance into the payments system, assuming that a private sector-run stablecoin would avoid this same pitfall is misguided, according to several sources. 

Know your customer (KYC) and anti-money laundering (AML) rules are already in place to ensure companies in the digital space share information with the government, and a state-run system would fast track this process and allow for real-time payments monitoring. 

Since President Trump’s inauguration, a regulation-lite agenda has been implemented, including steps such as the defunding of the Consumer Financial Protection bureau (CFPB), yet these laws remain intact and companies should not expect them to be removed. 

Regulators such as the Securities and Exchange Commission (SEC) are already concerned about so-called "privacy coins" like Monero and DASH that aim to enhance privacy, according to one source, who added that it seems unlikely that even within the new pro-crypto environment the desire for completely private cryptocurrency payment methods will trump AML or KYC concerns. 

“The easiest thing for someone who's sceptical of Chinese stablecoin, but who likes stablecoins generally, would be to say they don’t quite trust Chinese stablecoins but will use the US government's dollarised stablecoin instead, and that I think a lot of people would be comfortable doing that,” they said.

“If the choice is between the Chinese and the US government's stablecoins, then large numbers of people would choose, based on very little data, dollarised stablecoins just for the relative transparency and relative predictability they offer.”

However, if the choice was the Chinese government versus Tether or Circle it would be a different story, they added. 

Jim Harper, non-resident senior fellow at the American Enterprise Institute (AEI), agreed that CBDCs have privacy concerns, but suggested that financial surveillance is already engrained in the system. 

“The CBDC is oddly blamed for current financial surveillance policy. It's a fascinating dynamic, where people say ‘we're really in the soup if we have a central bank digital currency’ — but we're in the soup already,” he said, referring to a “gigantic financial surveillance overhang”. 

Harper added that it is farfetched to even assume a CBDC or stablecoin could be privacy protective, and that financial surveillance reform would play a more important role in protecting consumer privacy than a simple ban on CBDCs. 

“A CBDC does not need proof of work and could be centrally administered without the cost of mining and coordination. If everybody’s assets are on that system and the government can’t see what a transaction is, then it is really in a poor position to censor or freeze assets,” he said. 

“It could be censoring government spending or illicit spending, it wouldn’t know.” 

The cost of doing business

The direct monetary costs of the payments system are vast, with several percentage points of every payment in the system — amounting to more than $50bn a year — coming out without much real purpose, Harper said. This could be returned to consumers in a competitive market. 

The continued dominance of Visa and Mastercard, for example, means the pair share an effective duopoly and can determine the rates paid by merchants, which will generally be passed to the consumer. 

The Trump CBDC ban ensures that the payment system remains in the private sector, and therefore in the hands of companies with incentives to profit from fees and transactions. 

And, as sources suggest, this comes with little in the way of privacy protection. 

One advantage of a CBDC controlled by the Federal Reserve or another government entity is that it would ensure interoperability. 

A single overarching system in widespread use would remove the challenges that several competing digital dollar systems with privacy concerns would encounter. 

Coming legislation

The likelihood of proper legislation on stablecoin usage in the next few months is high, given the CBDC ban and the boost it will bring to competition. 

Giancarlo insisted on the need for such legislation. “If the government is going to pass stablecoin legislation, basically creating a licensure regime for stablecoin operators to license the dollar, then there ought to be restrictions,” he said.

“Just as when a McDonald's franchise gives you a franchise for the brand, it comes with restrictions, limitations and requirements.”

And, he argued, legislation should do the same thing. 

“If the government is going to license stablecoin operators and basically create a digital version of the dollar, then it should come with restrictions consistent with US norms and notions of freedom and liberty.”