How a Central Bank Depository Currency Can Improve the Global Financial Network

Outline: Should Digital Currency Replace Paper Currency in the United States?

1. Introduction

a. Hook

i. Imagine a world where everyone uses electronics or cards to conduct financial transactions? A world where no one exchanges cash or coins for payment for service but a swipe of a fob or press a button, and currency is transferred.

b. Preliminary Thesis statement

i. In the United States, replacing paper money with digital currency as legal tender will eliminate the requirement for government insurance on deposits with financial institutions while maintaining the currency’s liquidity.

ii. Some feel that digital currency increases the danger of cyberattacks and weakens the foundation of financial security; however, an increase in Cybersecurity professionals and user privacy protection guidelines will reduce those concerns.

2. Body Paragraphs

a. History of currency in the U.S.

b. Global Impact of U.S. Currency

c. Argument

Digital currency should replace paper currency as legal tender

• Argument#1: Digital Currency risk-free liability of the Fed – removes the need for government insurance on deposits

• Argument#2: Digital Currency provides central bank liabilities with confidence in their acceptance and reliability

• Argument#3: Digital Currency can be saved as liquid asset outside of the private financial system

c. Counterclaims

• Counter#1: Cyber-attacks / CBDC failures

o Rebuttal#1 Increase Cyber Security professionals

o Rebuttal#1 Importance of US CBDC that will encourage global support

• Counter#2: Weakens the financial security provided paper currency

o Rebuttal#2: Protect user Privacy & reduce the risk of inadvertent loss of funds

o Rebuttal#2: Advance payment-related crime-fighting tactic

d. Concluding Technique:

i. A system that will support digital currency transfer exists within the infrastructure of cross-border financial markets.

ii. The U.S. creation of a CBDC will have a galvanizing effect on global support for CBDC’s worldwide.

iii. The U.S. can learn from other nations’ failed attempts and create a digital currency that will set the standard for the rest of the planet.

Should Digital Currency Replace Paper Currency in the United States?

Imagine a world where everyone uses electronics or cards to conduct financial transactions. A world where no one exchanges cash or coins for payment for products or services rather uses a swipe of a fob or press of a button, and currency is automatically transferred to the recipient. In the United States, replacing paper money with digital currency as legal tender will eliminate the requirement for government insurance on deposits with financial institutions while maintaining the currency’s liquidity. Indeed, this transition is already underway but some consumers feel that digital currency increases the danger of cyberattacks and weakens the foundation of financial security. An increase in cybersecurity professionals and user privacy protection guidelines, however, will reduce those concerns. The purpose of this paper is to provide a brief history of currency in the U.S., an assessment of the global impact of U.S. currency, and an analysis concerning the respective strengths and weaknesses of transitioning to a digital currency. Finally, the paper presents a summary of the research and key findings concerning these issues in the conclusion.

History of currency in the U.S.

During its 244-year history as a nation, the United States has used two basic monetary systems for its public sector currencies. The first monetary system that was used in the U.S. was a bimetallic standard using gold and silver that was based on fundamental constitutional authority. For example, Article I, Section 8, Clause 5 of the U.S. Constitution specifically stipulates in part that, “The Congress shall have Power . . . to coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” This authority means that, “In practical terms, [the Constitution] said that any legal tender money created by the federal union or the states or the ‘people’ had to be gold or silver coins, or redeemable in gold or silver coins of specified weight and fineness” (Timberlake, 2012, p. 349).

This bimetallic standard, however, was changed into a monometallic gold standard by 1879 which was subsequently eliminated by the mid-20th century due to the cumbersome nature and increasingly impractical terms of the standard (Timberlake, 2012). For instance, according to the historians, “On June 5, 1933, the United States went off the gold standard, a monetary system in which currency is backed by gold, when Congress enacted a joint resolution nullifying the right of creditors to demand payment in gold” (FDR takes the United States off the gold standard, 2021, para. 3). Since that time, the U.S. dollar has assumed increasing importance for the global economy and these issues are discussed further below.

Global impact of U.S. currency

Over the past several decades, the U.S. dollar has gained increasing importance in the conduct of international commerce. This importance is attributable to the comparative enormity of the U.S. economy as well as its stability in an increasingly volatile marketplace. In addition, the global impact of U.S. currency has also been reinforced by the openness to capital flows and international trade, together with a demonstrated rule of law and prioritized property rights (Bertaut et al., 2021). In fact, it is reasonable to posit that the U.S. dollar is the most well-recognized paper currency in the world today.

These factors have combined to make the U.S. dollar the preeminent currency in the world today. In this regard, financial analysts with the Federal Reserve emphasize that, “The depth and liquidity of U.S. financial markets is unmatched, and there is a large supply of extremely safe dollar-denominated assets” (Bertaut et al., 2021, p. 2). Indeed, the results of the 2019 Triennial Central Bank Survey conducted by the Bank for International Settlements showed that the U.S. dollar accounted for the vast majority (88%) of global foreign exchange transactions in April 2019 (Bertaut et al., 2021). Taken together, it is clear that any changes in the existing U.S. currency model will have far-reaching effects and these issues are discussed further below.

Strengths and weaknesses of replacing paper currency with digital currency as legal tender

The trends are clear and the U.S. is rapidly becoming a cash-less society due to the proliferation of digital payment options and the availability of digital accounts. The most recent findings from the Fed concerning the use of cash as a payment method showed to significant decline in recent years but most especially after the onset of the ongoing Covid-19 pandemic as follows:

· U.S. consumers made an average of 34 payments in October 2020, down from 39 in 2019;

· Cash use accounted for 19% of all payments, down seven percentage points from 2019;

· Small-value payments, defined as transactions under $25, declined by 26%;

· Total value spent increased from $4,236 to $4,760;

· Average value of cash held in consumers’ pocket, purse, or wallet increased to $74, up $20 from 2019; and,

· Approximately 72% of U.S. consumers reported making an in-person payment over a 3-day reporting period, down from 91% in 2019 (2021 findings from the Diary of Consumer Payment Choice, 2021, para. 4).

In sum, American consumers are not using cash as frequently as in the past, preferring digital payment options that are far more convenient and safer. In addition, besides the significant savings in costs that are associated with printing and distributing paper currency across the country, replacing paper currency with digital currency as legal tender also has some other important arguments in its support. For example, implementing a digital currency would provide the Fed with risk-free liability by removing the need for government insurance on deposits.

In addition, digital currency would provide central bank liabilities with enhanced confidence in their acceptance and reliability by consumers, international businesses and other governments alike. For instance, the results of a study by Campbell (2021) showed that, “Digital currencies will help governments fight malfeasance, smooth the transfer of assets across borders, and enable central banks to deal directly with citizens —especially helpful in times of crisis” (p. 92). This is an important and timely point given the wide array of existential crises facing the world today, each with its own profoundly severe economic implications, but there are some other benefits that are related to this factor as well. In this regard, Campbell adds that, “The widespread adoption of such currencies stands to slash the operating expenses of the global financial industry. These amount to over $350 a year each for every human being on earth” (p. 92).

Finally, digital currency can also be saved as liquid asset outside of the private financial system. For example, financial analysts with the International Monetary Fund point out that just like the public sector, the private sector can also issue its own version of digital currency (Adrian & Mancini-Griffoli, 2021). According to these authorities, “Some forms [of private sector digital currencies] can be redeemed for cash at a fixed face value [which are] fully backed with very safe and liquid assets and are usually referred to as e-money” (Adrian & Mancini-Griffoli, 2021, para. 4). It is important to note, however, that some types of digital assets such as cryptocurrencies are not currently regarded as digital currencies. As noted above, digital currencies that are issued by the private sector as termed e-money such as the popular Stablecoin medium. By contrast, though, Bitcoin and other crypto assets are subject to inordinate levels of volatility which make them an investment asset rather than a type of digital money (Adrian & Mancini-Griffoli, 2021).

Notwithstanding this impressive list of strengths in transitioning to a digital currency, the public and private sectors have some significant challenges that must be taken into account in this calculus. For example, digital currencies that are issued by the public sector in any country are termed a “central bank digital currency,” which is basically a digital form of physical cash that can be manipulated in the same ways are other digitized data, including facilitating its transfer and storage using a wide range of computer-based applications (Adrian & Mancini-Griffoli, 2021). More to the point, any diminution in the existing trust of U.S. currencies due to cyberattacks by transitioning to central bank digital currency would likely have an immediate adverse effect on its perceived value by other countries. For example, according to Ney (2020), “Central bank digital currencies, or CBDCs, refer to the digital form of fiat money. Rather than issuing physical cash or coins, the government issues digital tokens whose value is backed by the full faith and credit of the government” (p. 73).

In fact, the current alarm that is being sounded by the U.S. government and private sector analysts over the growing number of zero-day attacks such as Log4Shell that require a never-ending stream of patches just to stay operational are indicative of some of the cyber-attack threats that digital currencies face today. Indeed, the stakes are just about high as they go when it comes to the stability of the U.S. dollar, and any disruption of the financial network would threaten national security interests and have truly global implications that could devastate the world’s financial network for weeks, months and even years.

Proponents of digital currencies, of course, cite the ability of cybersecurity professionals in preventing such attacks in the first place and their ability to respond to them effectiveness if they do occur, and additional resources could be directed at this resource given the significant cost savings that are associated with the transition to digital money. Further, the need for this transition has become even more important due to the increased prominence of other national currencies in the global marketplace. For instance, according to Ney (2020), “The US dollar must go digital. A digital dollar will not only benefit the US economy through financial stability at home, it will also improve America’s financial security abroad, particularly in light of China’s economic rise” (p. 74). Moreover, the U.S. is well positioned to assume the vanguard in this area, and a strong central bank digital currency will encourage additional support from other members of the international community.