In March 2022, former U.S. President Joe Biden issued an executive order, which was soon overturned by the current President Donald Trump, just three days after his inauguration in January. The canceled order was titled "Ensuring Responsible Development of Digital Assets," and it was replaced with another decision called "Promoting American Leadership in Digital Financial Technology." Biden had hoped to usher his country into a "new era of financial transactions."
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As a result, Biden directed federal agencies to conduct research and submit reports on digital assets, including the possibility of developing a digital currency for the Federal Reserve (central bank), the necessary regulatory and legislative measures, and the impact of digital assets on financial stability and national security. Trump, however, deemed this a "threat."
He stated, "Measures must be taken to protect Americans from the risks of central bank digital currencies (CBDCs), as they threaten the stability of the financial system, individual privacy, and U.S. sovereignty." Therefore, according to a statement from the White House, "No federal agency is allowed to take any action to create, issue, or promote central bank digital currencies either within or outside the United States."
Trump also directed the Treasury Secretary to cancel the "International Cooperation on Digital Assets" framework issued by the department on July 7, 2022.
The executive order's objectives are summarized as follows:
Protect and enhance individuals' and private entities' ability to access and use public "blockchain" networks for legitimate purposes, including software development and deployment, conducting transactions with others without unlawful oversight, and self-custody of digital assets.
Strengthen and protect the sovereignty of the U.S. dollar, ensure fair and open access to banking services, and provide a regulatory framework based on technological neutrality.
The order also defined "blockchain" as any technology used to share data through a network to create a public ledger of transactions or information between participants. Blockchain connects data using encryption to maintain the integrity of the ledger and automatically distributes the information among participants. The source code for the technology must be publicly available. This ledger is commonly used in electronic financial transactions involving digital cryptocurrencies.
Federal Reserve: No Digital Dollar
An executive order is one of the highest levels of executive action, derived from its legal legitimacy based on Article 2 of the U.S. Constitution. However, it also faces a set of constraints and controls that limit its scope and longevity.
An executive order is not permanent legislation; it can be overturned or amended by the subsequent president.
In an article on LinkedIn about the digital dollar issue, American financial and technology systems professor Conrad Borwitz wrote that for the executive order to be "binding" on the Federal Reserve Board, it must first be based on constitutional authority and second, on legislation passed by Congress granting the president authority over the Federal Reserve, noting that the Federal Reserve is an independent agency.
Borwitz argued that banning central bank digital currencies (CBDCs) means "abandoning a significant monetary innovation," stressing that "the Federal Reserve may not need digital currency today, but it will need it in the future."
This was in February 4, just before Federal Reserve Chairman Jerome Powell made a final decision regarding the digital dollar. On February 11, Powell announced that the central bank would not launch its own digital currency during his tenure. This effectively closed the door to any digital dollar production until Powell's term ends in May 2026.
His statement was in compliance with the executive order issued by Trump. This occurred when Powell faced questions from the Senate Banking Committee, particularly from Republican Senator Bernie Moreno. The conversation went as follows:
Moreno: "Can I get your commitment that as long as you're head of the Federal Reserve System, we will never have a central bank digital currency?"
Powell: "Yes."
What is a "CBDC"?
The acronym stands for Central Bank Digital Currency.
Trump’s executive order defined it as a form of digital currency or monetary value, valued in the national unit of account, representing a direct commitment from the central bank. This currency is the electronic version of the nation’s official paper currency, issued and backed by central banks.
Consumers hold this currency in a "digital wallet," usually an application on a smartphone, tablet, or personal computer. Through it, users conduct financial transactions and make payments at physical or online points of sale.
Unlike cryptocurrencies like Bitcoin, which operate in a decentralized manner, central bank digital currencies are state-backed and function within the traditional financial system.
CBDCs are managed by the central bank using a digital ledger (blockchain). This means one entity (the central bank) controls the issuance and subsequent management of the currency. In contrast, physical currency (both paper and coin) or electronic forms such as Visa cards are issued by the central bank but are managed by multiple intermediaries like banks, companies, and consumers.
Ultimately, the holder of the currency also has custody over it and can track it or not.
According to the Digital Currency Index by the Atlantic Council, about 130 countries, representing 98% of global GDP, are exploring the possibility of issuing a central bank digital currency. Among these, 64 countries have reached advanced stages, including development, experimentation, or official launch.
Examples of countries that have already launched CBDCs include China with its e-CNY, Jamaica with JAM-DEX, Russia with Digital Ruble, and India with eINR.
Advantages and Disadvantages
Digital currencies have the potential to offer several benefits such as financial inclusion, convenience, and no counterparty risks with commercial banks. However, they come with some downsides, such as data privacy concerns and regulatory challenges.
According to a research paper by Swiss economist Patrick Schwefel, the benefits of CBDC for individuals and society as a whole include:
Protection from losing money, as it is stored in the central bank's digital ledger.
Improved financial efficiency, as it facilitates instant payments without intermediaries.
Reduced financial crime, as it enhances transparency and reduces money laundering and tax evasion.
Increased financial system stability, leading to fewer banking crises.
Easier access to financial services for those without bank accounts.
Reduced risks of counterfeiting and fraud.
Faster international transactions, reducing costs and facilitating global trade.
However, Schwefel also listed the disadvantages:
Privacy violations, as governments could track all banking transactions.
Weakened commercial banks, as deposits decline, affecting their lending capacity.
Vulnerability to cyberattacks.
Spending restrictions, as the currency could be programmed to limit the amount or type of expenditure.
Automatic taxes and penalties without user knowledge or consent.
It could be used as a tool for political control.
Returning to Professor Conrad Borwitz's article, he notes that one of the main arguments against central bank digital currencies is the "granting of a powerful tool for surveillance and control" by the government. However, he argues that "this is not a sufficient reason to completely ban them."
He gives examples of private sector companies that already have surveillance authority over all financial movements of their users, such as PayPal, Visa, and even banks themselves. Thus, Borwitz believes the solution is not to abandon the idea of a digital dollar but to find solutions for the potential issues that come with it, as these problems already exist in other entities.
