The success of the cryptocurrency industry has inspired the Federal Reserve and other central banks to create their own digital currencies using the new technology. Recently, the Federal Reserve Bank of New York and a small group of private financial companies announced a 12-week pilot program to explore the feasibility of a central bank digital currency (CBDC).

Although several other central banks are testing and implementing CBDCs, this is the first move by the Fed. Unfortunately, it is not a move in the right direction.

There is a strong political appetite in the United States for government intervention to reduce economic inequality and increase financial inclusion. To this end, central bankers and politicians claim that a CBDC will promote financial inclusion, increase payment efficiencies, lower transaction costs, and improve the execution of monetary and fiscal policy.

There are two ways the Fed can implement a CBDC in the United States: wholesale and retail. The Fed’s pilot program represents a version of the wholesale model.

However, the case for a CBDC, retail or wholesale, does not hold up to scrutiny. A wholesale CBDC offers few benefits and opens the door for a dangerous retail CBDC down the line, which risks financial instability and threatens consumer privacy.

A retail CBDC gives citizens direct access to central bank digital currencies, removing commercial banks and institutions from the process. Citizens would have a direct bank…