n September 29, Republican Senator James Lankford introduced the No Digital Dollar Act, which would require the U.S. Treasury to keep printing and coining money if the government issues an official digital currency.
Lankford said in a news release: “While some Oklahomans are open to digital currencies, many still prefer hard currency or at least the option of hard currency. There are still questions, cyber concerns, and security risks for digital money. There is no reason we can’t continue to have paper and digital money in our nation and allow the American people to decide how to carry and spend their own money. As technology advances, Americans should not have to worry about every transaction in their financial life being tracked or their money being deleted.”
Currently, there is no federal statute that prohibits the Treasury from only having a digital currency. Lankford, with this bill, is making sure that such a situation may not happen. The bill, however, goes a step further and states: “(c) NOT LEGAL TENDER. —No central bank digital currency shall be considered legal tender under section 5103 of title 31, United States Code.”
The implications of section (c) are that you must continue to print and coin money because the digital dollar will not be able to replace the stature of paper money as legal tender. This requirement goes counter to the concept of a Central Bank Digital Currency (CBDC).
Senator Lankford made several claims, but the question is: Are these claims warranted?
Before we explore these claims, let’s first understand what a CBDC is, and the reasons (almost) all nations have been examining and experimenting with the implementation of a digital currency.
What is Central Bank Digital Currency (CBDC)?
CBDC is a digital token, similar to cryptocurrencies, issued by a central bank, and pegged to the value of the country’s fiat currency. It can also be considered as the digital form of the country’s fiat currency. A CBDC is different from cryptocurrency such as bitcoin or ether, because cryptocurrencies are not issued by a central bank, and thus are very volatile.
On the contrary, CBDC, issued by a central bank, will have the backing of a government, and will attain the same attributes of its fiat currency, except for its underlying technology.
“Central bank money” refers to money that is a liability of the central bank. In the United States, there are two types of central bank money: physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve.
Consumers have held money predominantly in digital form – for example in bank accounts, payment applications or through online transactions. A CBDC would differ from existing digital money available to the public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank.
Experimenting with CBDC
A CBDC could potentially offer a range of benefits. Namely, it would provide households and businesses a convenient, electronic form of central bank money, with the safety and liquidity that would entail; it gives entrepreneurs a platform on which to create new financial products and services; it supports faster and cheaper payments (including cross-border payments); and it expands consumer access to the financial system.
On the last point, it would serve as a facilitator for financial inclusion; the Fed Economic Well-Being of U.S. Household 2021 survey indicates that cryptocurrency is mostly used by either unbanked or low-income (under $50,000) individuals.
Many central banks have pilot programs and research projects intending to determine the viability and usability of a CBDC in their economy. As of March 2022, there were nine countries and territories that had launched CBDCs, such as Nigeria, The Bahamas and Saint Lucia. There are 80 other countries with CBDC initiatives and projects underway, such as Sweden, United Kingdom and Canada.
In the United States, the Federal Reserve is engaged in a number of experiments related to digital currencies, including a hypothetical CBDC. These experiments enrich the Federal Reserve’s policy discussions related to digital currency by giving experimenters hands-on experience with the technology’s opportunities and limitations.
One example is Project Hamilton, a multiyear explanatory research project of the Federal Reserve Bank of Boston with MIT.
CBDCs are all custom-built. Some are blockchain-based systems, such as the e-Naira of Nigeria, and some are not blockchain-based systems, such as the Chinese e-CYN. But even if they were all blockchain-based, the design would be different as each government designs its own custom CBDC.
Therefore, the interoperability of CBDCs is critical, and without it, cross-border payments will not be possible. The Bank of International Settlements (BIS) Innovation Hub has two projects which examines interoperability of CBDCs between nations – one in the retail CBDC space and the other in the wholesale CBDC space.
Project Icebreaker involves the BIS Innovation Hub’s Nordic center working alongside the central banks of Israel, Norway and Sweden to test some specific key functions and the technological feasibility of interlinking domestic CBDC systems.
In the wholesale CBDC space, Project Jura, which involves Banque de France (BdF) and Swiss National Bank (SNB) working with BIS and in collaboration with six private companies, explores whether CBDCs can be used effectively for cross-border settlements between financial institutions.
Now, let’s examine Senator Lankford’s claims.
A trend towards a cashless economy
Claim: Many still prefer hard currency or at least the option of hard currency
Countries have been trending towards a cashless economy even before Covid-19 outbreak.
The Federal Reserve Bank of San Francisco reports that as of 2020, the share of cash payments in the U.S. has been 19%, down from 26% in 2019. A Gallup poll from July 2022 documented a decline in cash transactions since 2016, consistent with the trends seen in the Federal Reserve’s.
The Gallup poll shows greater use of online shopping, especially during the coronavirus pandemic. Other factors driving a decline in cash usage may be a larger number of merchants accepting electronic payment, an increase in self-checkout registers in grocery and larger retail stores, and mobile pay options that allow people to pay for purchases using their smartphones.
The trend towards a cashless economy worldwide will increase as Gen Z becomes a more active participant in the economy. Today’s teens and 20-somethings are increasingly relying on mobile payments apps such as Venmo, Zelle or Cash apps, and businesses are also increasingly willing to accept these methods.
Claim: Americans should not have to worry about every transaction in their financial life being tracked or their money being deleted
One of the core features of blockchain technology is that whatever is recorded on the blockchain can never be changed, altered or deleted – it’s an immutable ledger. Any account created on the blockchain, and the funds held in this account, can never be deleted.
If a CBDC utilizes blockchain technology, which most do, users funds are always secured. Other digital methods currently used, whether payments apps or credit cards, are subject to alteration or deletion. However, with the right design approach and mechanism, a CBDC could implement security of funds in a non-blockchain-based system. The Fed and other central banks around the world have been experimenting with CBDC design, where security is a top priority.
Since blockchain technology is immutable, transactions can be traced and tracked. Bear in mind, though, that in our traditional financial system, serviced by regulated financial institutions, all of our transactions are already continuously tracked and monitored.
Data Protection and Privacy
Claim: There are still questions, cyber concerns, and security risks for digital money
The European Data Protection Supervisor (EDPS) has recognized that consumers could have more control over personal data and security if the development of a CBDC follows a strict data-protection-by-design and by-default approach. A CBDC could increase data protection and security in digital payments and provide payers more control over their personal data.
Furthermore, privacy-enhancing technologies could be used to enhance the way anonymity is wired within the entire payment process while allowing the auditing only in pre-determined lawful cases, such as preventing money laundering, counter terrorism financing and tax evasion.
It may take a few years until a digital dollar is launched and adopted. When it happens, it most definitely will be a secure and safe system, otherwise the Fed would not allow its launch. As we increasingly trend towards a cashless economy, adoption of a CBDC would likely be seamless and there may not be a need to continue printing and coining money. The money spent on printing cash and minting coins could be used for other government initiatives, such as better education and healthcare systems, especially for under-served communities