Is the U.S. quietly edging toward adoption of a digital dollar?

In March 2022, President Joe Biden issued an executive order directing the Office of Science and Technology Policy to prepare a report on the risks and benefits of creating a digital dollar for the U.S.

In acronym-addicted Washington, D.C., the digital dollar is referred to as a CBDC, or a central bank digital currency. It would be a virtual version of the physical cash you carry in your wallet, resembling a government-issued version of cryptocurrencies like Bitcoin.

The presidential executive order is hardly the only time the federal government has asked itself whether it is time for the U.S. to adopt digital currency.

Just a few months after the Biden executive order, the New York Federal Reserve launched a 12-week program using simulated data to test a so-called digital dollar.

Supporters of CBDCs say they can help make banking services cheaper, easier, faster and more accessible for all Americans.

However, critics argue that a digital dollar would generate major privacy concerns and hand over too much power to the federal government.

What Is a Digital Dollar?

A digital dollar would be a form of legal tender in the U.S. that could be used to purchase goods and services, and settle all and any outstanding debts. But it would exist in virtual form only, stored and exchanged online via computer networks, never taking the physical form of paper banknotes.

CBDCs resemble cryptocurrencies like Bitcoin. But while Bitcoin is managed by a decentralized network made up of tens of thousands of participants, CBDCs are highly centralized assets managed by governments and central banks.

More and more, the use of physical cash is being replaced by digital transactions, via credit cards, debit cards and payment apps. However, transactions using digital dollars would be very different—that’s because a digital dollar would be a direct liability of the Federal Reserve, rather than a commercial bank or another financial institution.

How Would a Digital Dollar Work?

In today’s U.S. financial system, people access their money via banks, each of which has its own distinct system for tracking payments and deposits. As a result, transactions involving multiple banks can involve delays of one to three working days, since action is required from intermediary banks to ensure they are completed accurately.

With a digital dollar, there would most likely be a single, unified system for tracking payments and deposit, run by the Fed or another government entity. It’s worth noting that the central bank has yet to commit to creating a CBDC in the first place, so the final form of a digital dollar system remains an open issue.

Presently the Fed is studying how a digital dollar could help expand consumer access to the financial system and support faster and cheaper payments.

Advantages of a Digital Dollar

A 2021 survey by the Federal Deposit Insurance Corporation found that 4.5% of U.S. households are “unbanked.” That means no members of those households have a bank account. Without a bank account, these Americans also do not have access to many digital payment systems, such as Apple Pay and Venmo, because those services require links to bank accounts.

Fed digital dollar accounts could be structured to have no fees and no minimum balances, potentially granting digital banking access to all Americans.

Payment companies charge fees each time a user completes a transaction. Credit card users often don’t see those fees because the fees are paid by the merchants selling goods and services. One of the potential advantages of a digital dollar could be to reduce or even eliminate transaction fees.

In addition, merchants don’t receive the money you pay in a credit card transaction immediately. In fact, it typically takes a few business days for those payments to reach the merchant’s account.

In theory, a digital dollar would move all digital transactions to a single ledger, and payments from a federal account would clear instantly. In addition, a digital dollar would be accepted everywhere that accepts the regular dollar, meaning there would be no need to determine if a company or person accepts a certain credit card or uses a certain payment app.

On the government’s side, a digital dollar could make it easier for the Fed to adjust monetary policy. For example, the economic stimulus payments the government sent out during the COVID-19 pandemic could have been deposited into every American’s digital dollar accounts instantly. In theory, the payments could have been easily tracked to reduce fraud and mistakes.

Paul Farella, managing director of registered investment advisor Willow, says a digital dollar could also make the job of the Internal Revenue Service cheaper and more efficient.

“The government could easily process and return taxes, benefits, refunds and so on with ease, saving taxpayers dollars and time,” says Farella, who holds the Certified Digital Asset Advisor (CDAA) from the PlannerDAO group.

Downsides of a Digital Dollar

Critics of a digital dollar say it would hand too much power to the U.S. government. Critics contend that it would open the door for the Federal Reserve to more tightly control how Americans spend and save their money.

The government could potentially restrict access to funds or credit, implement negative interest rates on cash, collect taxes automatically or eliminate physical cash entirely. The government could also monitor digital transactions and collect data on Americans’ financial activities.

Adam Jordan, director of investments for Paul R. Ried Financial Group, says oversight of transactions and access to financial data likely increase the appeal of a digital dollar from the government’s perspective.

“CBDCs have all the elements that governments have always been drawn to, the two key pieces being tracking and control,” Jordan says.

Digital Dollar Skeptics

Many Fed officials like Fed Chair Jerome Powell have been noncommittal on a digital dollar. But Fed Governor Michelle Bowman recently highlighted the risks involved in setting up a CBDC system.

In a recent speech, Bowman argued that less than one in 20 U.S. households are unbanked. Those unbanked households say they simply don’t want a bank account or don’t trust banks.

“I think it is unlikely that this group would find the government somehow more trustworthy than highly regulated banks,” Bowman said.

Fed Governor Christopher Waller has also said a digital dollar just simply isn’t necessary.

“What is the major market failure in the current U.S. payment system that a CBDC and only a CBDC can solve?” Waller recently said.

The Fed is already addressing some of the problems of slow and costly transactions by launching the FedNow digital payments system, which is expected to go online in July 2023. The goal of the FedNow system will be to facilitate low-cost bill payments, money transfers, paychecks, government disbursements and other consumer activities.

In March, Republican Senator Ted Cruz reintroduced legislation to ban the Fed from creating a digital dollar system, which he says could be used as a “financial surveillance tool by the federal government.”

Republican Florida Governor Ron DeSantis has said a U.S. CBDC could pose a risk to Americans’ Second Amendment rights.

Democratic Presidential candidate Robert Kennedy Jr.—a controversial anti-vaccine activist and conspiracy theorist—has said the government could potentially freeze Americans’ digital dollar funds to force them to comply with “arbitrary” federal mandates.

When Will the U.S. Launch a Digital Dollar?

The Fed is still evaluating the potential impact of a digital dollar. It currently has several studies, pilot tests and experiments underway to determine the technology’s opportunities and limitations.

As for Americans in general, it is unlikely they will form a consensus for or against a digital dollar until they get a sense of the structure of a U.S. CBDC and how much of an impact, if any, it would have on the average American.

Farella says the Fed may opt to create a digital dollar that is not a pure CBDC but rather a public-private hybrid currency.

“The U.S. may issue a CBDC, but in my opinion it is more likely to lean on public-private collaborations as it does with most infrastructure, research, and economic development projects,” he says.

Farella says that process could involve the Fed “tapping the business sector to do the heavy lifting while providing guidance and then applying a regulatory framework on top.”

Nicholas Juhle, chief investment officer at Greenleaf Trust, says the transition to a digital dollar would be extremely complicated, and it likely won’t happen any time soon.

“The transition itself would be a significant undertaking requiring adoption of systems and standards that instill trust throughout the financial system,” Juhle says.

He says the pool of stakeholders in the U.S. dollar extends far beyond the nation’s borders. The government would need to make sure the transition to a digital dollar is smooth or it would risk destabilizing the entire global financial system.

“I believe the U.S. will eventually issue a digital dollar, but I think we are years away from that happening,” Juhle says.