North Carolina resists the CBDC tide with new payments ban

Privacy and sovereignty concerns over central bank digital currencies (CBDCs) mean that a digital dollar won’t be coming to the US state of North Carolina anytime soon.

On Sept. 9, the state’s Senate overrode the governor’s veto and passed into law a bill that forbids the state from accepting CBDCs as a form of payment.

The bill also prohibits the United States Federal Reserve from conducting any “testing” of a digital dollar in North Carolina.

Given that no major economy has yet to implement a CBDC at scale, and that the US is dead last among G7 nations when it comes to even researching and developing a CBDC, it seems North Carolina’s action is largely symbolic.

“It’s an opportunity for us to send the signal that North Carolina, the ninth largest state in the union, is not interested in a federal central bank digital currency,” State Senator Brad Overcash told the Carolina Journal following the floor vote.

North Carolina’s new ban raises some serious questions about whether these concerns are well-founded, what they mean for financial innovation in the US, and whether the new law is even legal.

What’s driving anti-CBDC “eruptions”

The bill doesn’t particularly come as a surprise, according to Ananya Kumar, deputy director for the future of money at the Atlantic Council’s GeoEconomics Center — at least since the US House of Representatives passed the CBDC Anti-Surveillance State Act in May.

That House action made the United States “the only country in the world passing a ban on CBDCs,” Kumar explained to Cointelegraph. Elsewhere, eleven other states, including Texas, have taken up similar proposals in their state legislatures.

Still, there may be good reasons for the US and its individual states to move cautiously. The United States simply has more to lose. After all, its dollar is the world’s reserve currency. 

“There are serious financial stability concerns with issuing a CBDC, especially given the role of the dollar in the global economy,” acknowledged Kumar. “There are also technological concerns like privacy.”

“Concerns about privacy and individual sovereignty are key reasons for the bill prohibiting a central bank digital currency in [North Carolina],” Nir Kshetri, a professor at Bryan School of Business and Economics at the University of North Carolina at Greensboro, told Cointelegraph. Such concerns have been raised worldwide, too, he added.

As of May 2024, 134 countries and currency unions, accounting for 98% of global gross domestic product, are exploring a CBDC. However, to date, only three countries have fully implemented a CBDC — the Bahamas, Jamaica and Nigeria — said Kshetri.

“Yes, it is anticipated that other anti-CBDC eruptions could occur, both in the United States and globally,” he continued. Consumers value privacy in CBDCs to protect against issues like spam, stalking, theft and identity theft.

People also have questions about digital surveillance, “especially in regions with low trust in public institutions,” Kshetri noted. Others worry that CBDCs could also exclude those without government-issued IDs.

An election-year stunt?

Some have suggested that the CBDC ban could be presidential-election-year posturing. It wouldn’t be the first time. 

However, Kumar doubts this is the case. “I think CBDCs had become politicized even before the election cycle began, although it has intensified, and there are several such anti-CBDC bills across the states in the US.”

Donald Trump says “If you’re in favor of Crypto, you better vote for Trump” pic.twitter.com/5AGYIfsNOg

— Randi Hipper (@missteencrypto) May 9, 2024

“There is a strong distrust of government among certain portions of the US population,” Richard Holden, a professor of economics at the University of New South Wales, told Cointelegraph.

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While this is a minority of the population, the United States may have to grapple with CBDC innovation in a way that many other countries may not, he suggested, adding:

“A CBDC would likely get much less pushback in many European countries, or Australia/Canada/New Zealand, or perhaps the UK.”

“The concerns about privacy have been raised in many countries, and this links into the financial innovation/financial crime prevention debate regarding CBDCs and crypto assets,” Nicholas Ryder, a professor in Cardiff University’s School of Law and Politics, told Cointelegraph.

Creating CBDCs with privacy guardrails

Some policymakers have suggested adding more privacy guarantees into CBDCs in an effort to win over support.

But even that may not be so simple. 

“More privacy safeguards may lead to increased risks of tax evasion, money laundering, terrorism financing and other illicit activities,” explained Kshetri.

Central banks face a trade-off between meeting customer preferences for privacy and providing regulators with access to data on user identities and transactions, he continued. 

Thus, the Reserve Bank of Australia (RBA) — to take one example — has said that a key design consideration for a wholesale CBDC is the level of privacy and anonymity that the central bank can offer, Kshetri noted.

“The RBA argues that a CBDC cannot fully replicate the anonymity and privacy of cash due to concerns about facilitating the shadow economy and illegal activities,” said Kshetri.

In his book Money in the 21st Century, Holden argues that federal governments should have to apply for something like a FISA warrant (i.e., a court order) to access any details of an individual’s CBDC use.

This would mean that prying into an individual’s digital dollar or digital euro account would be the exception, not the rule.

“In short, privacy can easily be protected,” Holden told Cointelegraph. “And people who engage in criminal activity are already subject to things like wiretapping, which is much more invasive.”

The danger of falling behind in innovation

Kumar said that, in the GeoEconomics Center’s view, the US is falling behind other countries in CBDC development. 

“You only have to compare the US to its peer central banks — the Bank of England, ECB [European Central Bank], and the Bank of Japan — all of which are ahead of the US,” answered Kumar. “The Fed’s participation in Project Agora, which looks to upgrade its bank-to-bank infrastructure, is a positive sign.”

The Fed has been clear that it will not proceed with a CBDC without US congressional approval, said Kumar, adding:

“I also think that it curbs financial innovation in the US by trying to stop financial sector experimentation that could prove to be useful in the future, and discourages allies from working together with us on these issues, especially on technology and regulatory standards development.”

Europe is moving faster

Europe is also approaching CBDCs cautiously, but it is still much further along in the development process than the US.

The European Central Bank, responsible for the development of the digital euro in the euro area, is currently “in a phased pilot stage” and will make a decision in 2025 or 2026 about whether to deploy CBDCs, recounted Kumar, adding:

“There has been some resistance to the digital euro, but not nearly at the scale of the US.”

The private sector in Europe seems to be participating in the development of the digital euro, while elsewhere, 19 of the world’s G20 economies are also in the pilot and development stage of a CBDC, “meaning that the largest economies in the world are interested in furthering the exploration of CBDCs,” added Kumar. 

Every country’s reason for doing so is different, of course. Domestic market factors often loom large, such as the role and mandate of its central bank and financial regulation.

Some even questioned the North Carolina bill’s legality. “I doubt it’s legal,” Holden said, adding: 

“I’m not a constitutional lawyer, but I suspect it’s clearly unconstitutional. As a thought experiment, a state couldn’t declare that the pound [sterling] was the only legal tender in their state.”

Still, “I understand why people have these concerns,” continued Holden. “And it’s true that cash has a strong degree of anonymity. But anyone who leaves any digital footprint — including using a debit or credit card — is subject to the government knowing about that.”

Why is the crypto sector hostile to CBDCs?

It sometimes seems as if the crypto industry, or at least a significant part of it, is hostile to CBDCs. 

The Blockchain Association’s head of industry affairs, Dan Spuller, for instance, hailed the North Carolina legislature for overriding Governor Roy Cooper’s veto and sending a strong message to the Federal Reserve “that NC stands united against #CBDCs.”

“Many crypto enthusiasts oppose CBDCs because they are against centralized control,” said Kshetri. Satoshi Nakamoto’s epochal white paper, published in 2008 amid a financial crisis, envisioned a digital currency independent of central bank control.

“For example, the text in Bitcoin’s genesis block references a London Times article about the [then] crisis, highlighting the massive bailout funds received by banks from central banks and governments,” Kshetri recalled.

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Opposition from the crypto industry “doesn’t surprise me,” said Holden. “A CBDC would almost completely crush cryptocurrencies because it would substitute for them.” Indeed, he argues in his book that this is a strong rationale on the part of governments for establishing a CBDC in the first place.

Then again, CBDCs may simply be a “wildcard” for the crypto industry, David Primo, a professor of political science and business administration at the University of Rochester, told Cointelegraph. 

CBDCs raise some thorny questions for the sector, after all. “Will it lead to a shift away from private cryptocurrencies? Will it bring with it a host of regulations that limit the permissible use of private cryptocurrencies?” In short, added Primo:

“The industry is still young, and a CBDC could alter its trajectory dramatically.”