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The Future of the American Dollar: A Completely Digital Currency?

In what could be history repeating itself, the Biden administration has recommended that the Federal Reserve (the Fed) create a US Central Bank Digital Currency (CBDC). While President Biden's Executive Order from last year identifies key priorities, a casual observer would have to question if the federal government can take such a large leap forward in financial technology and service.

After the Second Bank of the US was ended, banks became chartered by the state in which they operated. Each state had its own regulations, but most required private banks to hold a reserve of government bonds and maintain enough gold and silver coins to exchange for bank notes. As banks generally drafted their own notes, notes from a distant bank would not always be readily accepted and would trade at a discount where accepted.

The Civil War provided the legislative desire for a nationally recognized currency, which would be accepted everywhere and maintain a consistent value at any bank. To implement this, federal charters were issued with the requirement that member banks would issue standardized notes and accept the notes issued by other member banks.


After a few years, Congress passed legislation that taxed notes issued by banks still operating under state charters, destroying the market for non-standard currencies. After several bank waves of panic occurred as a result of too strict federal regulations, the Fed was created to assist with bank liquidity by providing supplemental national notes. These notes eventually completely replaced the standardized notes issued by banks.


Where private bank notes were once redeemable in gold and silver, today's Federal Reserve notes are only representative of US debt. As such, our modern currency no longer exists exclusively as physical cash and coins. Economic transactions may still be measured in dollars, but from traditional checks to digital apps, financial institutions offer a number of banking and payment systems that electronically transfer and store funds.


The latest financial innovation is cryptocurrencies (crypto), a collection of currencies designed to be entirely digital and can operate within an entirely digital payment system. One class of crypto is designed to be tied to either a national currency or some set measure of a recognized commodity so that their values are intended to remain stable in relation to the value of that asset. When properly designed and maintained, these stablecoins operate along the same principles of US banknotes once maintaining an equivalent value of gold or silver coins.


As a payment system crypto offers a nearly instantaneous payment process, whereas transactions processed through traditional means can take days or weeks to be completely processed through each intermediary financial institution. To its credit, the Fed is working towards improving its traditional operations so that processing can take place continuously instead of just during its current banking hours. Their intent is to cut transaction times to several hours and they expect this to be achieved later this year.


As with all financial opinions, the past is not indicative of future results, however, as Fed Chair Jerome Powell has stated that we wouldn't need crypto if we had a US CBDC, I wouldn't bet against the government if they proceed with their efforts. Should the Fed implement a CBDC, they would likely push for crypto to either be heavily taxed or outlawed entirely and would eventually push to go completely digital with all financial transactions. At that point, the American dollar will be entirely based on the trust people have in the federal government. Trust that the computer servers work, trust them not to be hacked, trust that money is correctly accounted for, that it is distributed properly, trust that your accounts are not frozen, and trust that you are able to spend it where and how you want.


William Baker has worked for several political campaigns in Southwest Michigan. He holds a degree in Mathematics from the University of Alaska Fairbanks, a passion for finance, and the imagination of a lawyer.


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