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Central Bank Digital Currency

Robert Eisenbeis, Ph.D.
Mon May 22, 2023

The Florida legislature and Governor DeSantis spent the better part of the first two weeks of May jumping at shadows as they passed and signed a bill (SB7054) to prohibit the use of federally sanctioned central bank digital currencies (CBDCs) in Florida as money under Florida’s Uniform Commercial Code. The legislation also banned the use of CBDCs issued by central banks other than the Federal Reserve, including China’s, with its digital yuan. The rationale was that such CBDCs pose a threat to personal privacy and economic freedom via governmental surveillance of transactions, threaten to deprive community financial institutions of funds to support lending, may negatively impact FinTech innovation, and potentially limit individuals’ access to goods and services by limiting certain purchases. How real are these risks, and can the state even legally prohibit the use of a digital currency issued by the Federal Reserve or any other central bank?


Cumberland Advisors Market Commentary - Central Bank Digital Currency by Robert Eisenbeis, Ph.D.

The first issue to address is whether Florida has the power to regulate central bank currencies. Article I, Section 8, Clause 5 of the US Constitution explicitly grants to the federal government the power to regulate money, both foreign and domestic: The Congress shall have Power . . . To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures…. At present, coins and silver certificates issued by the Treasury and Federal Reserve notes are by law legal tender. Specifically, Section 31 U.S.C. 5103, entitled “Legal tender,” states: “United States coins and currency [including Federal Reserve notes and circulating notes of Federal Reserve Banks and national banks] are legal tender for all debts, public charges, taxes, and dues.” This statute means that all US money as identified above is a valid and legal offer of payment for debts when tendered to a creditor. If the Federal Reserve were to create a digital currency, it presumably would be legal tender just like coins and currency since, like those instruments, it would be a liability of the Federal Reserve serving as a direct substitute for physical coin and currency. This presumption would, of course, probably be litigated; but if upheld, it would seem to make Florida’s SB7054 moot and not legal.

Those arguing against a Federal Reserve digital currency are doing so, at this point, based upon assumptions that do not consider the facts or practical realities and costs of creating a central bank digital currency. To be sure, the Fed is deeply involved in the US payments system; but at present it deals directly only with financial institutions, clearing checks, delivering currency, and operating the automated clearinghouse to clear and exchange bulk funds transfers among financial institutions. It does not deal directly with individuals. The Fed is presently in the process of updating its automated clearinghouse functions with a new service called FedNow and is engaged in a pilot program to explore creating a digital currency. FedNow, which goes into application in July, will permit participating institutions to receive instantaneous real-time transfers of funds among as many as 10,000 financial institutions. Participation is voluntary at this time. This program is an upgrade of the current ACH services, which process transactions on a batch basis. In addition, the Federal Reserve Bank of New York initiated a 12-week program jointly with several large US financial institutions to explore the feasibility of a digital currency. It also has a joint research project with the Federal Reserve Bank of Boston and MIT to explore approaches to creating a digital dollar (see Michelle Neal, “Remarks at Singapore FinTech Festival, Singapore,” Nov 4, 2022). But as of yet, the Federal Reserve System has not made any decisions on whether to pursue such an option.

What are some of the practical implications of offering a Federal Reserve digital dollar? First, it must be recognized that the Fed does not presently have the technology or infrastructure to implement a digital currency directly to consumers. Doing so would require the ability to handle hundreds of millions of transactions and to establish accounts for individuals that could number as many as 200 million. The cost of such an infrastructure would be huge, and current law in the Monetary Control Act of 1980 requires the Fed to price payment services to cover its costs. This implies that the cost of building the infrastructure as well as its operations would have to be passed on to users in the form of account and/or transactions costs (See Then there is the issue of how individuals would create accounts at the Fed. Presumably, currency would be deposited in return for a digital currency account. Right now, there are only 12 Federal Reserve Banks, which operate only 24 branches. This means that the ability to go to an office, due to the Fed’s limited physical structure, to establish an account would not be practical for most customers. The alternative would be to establish a way to create accounts online, but getting funds into those accounts would require working through a financial institution to transfer funds to an account at the Fed. This requirement means that potential users would already have to have a bank account and be able to transfer funds from their bank to the account at the Fed. One of the arguments for creating a central bank digital currency is that it would provide access for the unbanked to the payments system. However, a recent survey ( shows that over 95% of households already have a banking relationship; and of the remaining 4.5% who are unbanked, about 3/4 have expressed no interest in having a bank account and about 1/3 cited a lack of trust in banks as the reason they did not have an account. So, the pool of potential unbanked customers, about 5.9 million households, who might gain access to the payments system through a CBDC is not only small but unlikely to actually access the system, given the design and cost constraints.

The concern about the threat to community banks and to FinTech is probably also exaggerated, especially if a CBDC does not pay interest (as is the case with paper currency) and if the Fed would have to impose large transactions fees to cover capital and transactions costs. The ability for instantaneous clearing and settlement is not likely to be a major benefit to most consumers. The present debit card system already enables instantaneous clearing and settlement as far as the consumer is concerned, and the bulk of retail transactions take place using debit cards and credit cards. In 2022, about 40% of transactions took place using credit cards, 31% using debit cards, 12% e-wallets, 12% cash, 3% prepaid cards, and 1% using point-of-sale financing. Debit cards, like cash, essentially permit instantaneous purchase, clearing, and settlement of transactions. Credit cards, on the other hand, separate purchase from both clearing and settlement. Credit cards give the user the valuable option of paying off a balance each month or deferring settlement by paying interest on the outstanding balance. Central bank currencies do not have those desirable options.

Finally, there is the issue of privacy, which could be a risk but could be addressed via appropriate restrictions. Right now, virtually all transactions can be traced by authorities, including even so-called anonymous cryptocurrency transactions. So that risk should probably not be the determining factor in deciding whether a CBDC should be adopted. Right now, the costs appear to be high while the benefits are not all that obvious. Clearly, the reasons put forth by Florida politicians and its governor for passage of SB7054 are largely smoke and mirrors and more politics than substance.


Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
Email | Bio



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