Thread by @GeorgeSelgin

Thread: I have great respect for @dandolfa. But I think that here he, like many other proponents of CBDC, too readily assumes that it can be viewed as a "public option," that is, something costless to a public that doesn't have to use it if it doesn't wish to.

https://twitter.com/dandolfa/status/1381776583007014915

That perspective is misleading for several reasons. First, and most obviously, it overlooks the fact that CBCD is seen by many of its advocates as a substitute for official paper currency, not a supplement to it. Rogoff famously views it so. amazon.com/Curse-Cash-Lar…

So do many central bankers who view the switch as a means for assisting negative interest rate policy, among other things.theblockcrypto.com/post/84516/deu…

Of course there's much to be said in favor of dispensing with paper money, the "horse and buggy" of modern payment systems. Still, eliminating the paper option would not be costless. Nor would criminals alone bear the costs: cato.org/sites/cato.org…

Second, when government agencies choose to enter the market as providers of any new sort of good or service, they often drive private suppliers out, either by expressly outlawing competition, or by "tilting the playing field" in their own favor.

This tendency is to evident in history to need much proof here. One need only consider the case of paper currency itself, of which the Fed has long enjoyed a monopoly it secured thanks to laws prohibiting most alternatives.

(Nor is it true that paper currency is a "public good" or "natural monopoly," or that outlawing private paper currencies, in the U.S. or elsewhere, was in the public interest. That's a long discussion, but start here: onlinelibrary.wiley.com/doi/abs/10.111…)

Digital currency is likewise neither a public good nor a natural monopoly. (Note that "public good" doesn't mean "anything the government chooses to supply.)

Even when rival payments-media suppliers aren't deliberately forced out of business, they face an uphill battle in directly competing with a central bank. The Fed, for example, regulates many private payments-media suppliers. It is no fun competing with one's regulator!

Nor are explicit regulations needed to slant the playing field. For example, the Fed can smother a would-be rival just by denying it a "Master Account," which it can do for any reason it likes--or none at all!

Thanks to its hefty seiniorage earnings and its being exempt from antitrust laws, the Fed can also make use of cross subsidies to underprice private market providers. It's doing just that with its "FedNow" real-time retail payments system.

Although the 1980 Monetary Control Act calls for the Fed to price its services in a manner that recovers costs "over the long," so as to compete fairly, in the case of FedNow, which is to be completed in 2023 or 2024, the Fed is playing loose and fast with the law.

In fact, the Fed admits that it "has not yet determined the final fee structure for the FedNow Service." So how can it possibly know when it will recover its costs? In fact, it is virtually certain that to compete with private-rival RTP, it will have to operate at a loss.

That is it will take so long to recover its costs that it will have a negative net present value at going rates. No private enterprise could afford it. In the same way, private rivals may find themselves unable to profitably compete with the Fed in the digital currency market.

Shorter-run waste is the least of the potentially adverse consequences of such a lack of private-market competition. The real danger is lack of currency-market innovation going forward. Think again about our horse-and-buggy paper currency. Why do we still have it?

Could it be that we do because central banks and government mints (our coins are even more old-fashioned!) monopolized the market for hand-to-hand currency long ago, and have only recently faced competition from nonbank fintechs?

Could it be that, if we grant them monopolies, intentionally or otherwise, of digital currency today, two centuries from now we will be wondering why we still rely on ca. 2020 digital currency technology?

So CBDC "option" isn't a free lunch: it isn't just an extra menu item consumers can choose, or not, the presence of which can't possibly make them worse off. It is an option we should consider only with due attention to its potential, non-trivial immediate and long-run costs.

Att'n: @dandolfa @DanAwrey @Aarondklein @DavidBeckworth @BobMurphyEcon @PeterContiBrown @Frances_Coppola @nic__carter @DanEricRohde @FintechDiego @greg_ip @lawrencehwhite1 @LevMenand @norbertjmichel @jp_koning @ProfKateJudge @MorganRicks1 @TheStalwart @TimDuy @WilliamJLuther

@threadreaderapp please unroll.

Apologies for that inapt link. This one is more appropriate: engage.hoganlovells.com/knowledgeservi…