How to Opt Out of the US Digital Dollar

A “digital dollar,” or Central Bank Digital Currency (CBDC), is a potential future digital form of a country’s fiat currency, issued and backed by its central bank. A U.S. CBDC would be a tokenized version of the U.S. dollar, maintained and issued by the Federal Reserve as legal tender. The United States has not implemented a digital dollar, and the Federal Reserve has made no decision on pursuing one; its issuance would require legal authorization. This article explores the concept, current status, and hypothetical alternatives to a U.S. CBDC.

Understanding the Digital Dollar Concept

A Central Bank Digital Currency (CBDC) is a digital form of a country’s fiat currency, issued directly by its central bank. Unlike traditional digital money held in commercial bank accounts, a CBDC would be a direct liability of the central bank, similar to physical cash. This means it carries no credit or liquidity risk associated with commercial banks, making it the safest digital asset available to the general public. CBDCs function as legal tender, serving as a means of payment, a unit of account, and a store of value, like paper banknotes.

A CBDC differs from existing digital payment methods like debit cards or payment apps. Current digital payments are commercial bank liabilities, held by private banks. A CBDC would bypass this, offering a direct digital connection between the public and the central bank. This fundamental difference aims to provide a risk-free digital payment option and potentially enhance payment system efficiency.

CBDCs can also be programmable, allowing for embedded rules that dictate how the digital currency is spent. For instance, a government could program funds for disaster relief to be used only for essential goods or services. While offering potential for targeted policy implementation, this programmability raises questions about individual financial autonomy and privacy.

A CBDC is fundamentally different from decentralized cryptocurrencies like Bitcoin. A CBDC is centralized, issued and regulated by a central bank, ensuring stable value backed by the state. Cryptocurrencies are typically decentralized, unregulated, and volatile, making them less suitable for stable transactions. The level of anonymity in a CBDC is also a significant consideration, with discussions ongoing about how to balance privacy for users with the need to prevent illicit financial activities. While physical cash offers a high degree of anonymity, digital transactions inherently create an audit trail, leading to concerns about government access to personal financial data.

Current Status and Future Proposals

The United States has not implemented a digital dollar, and the Federal Reserve has made no decision regarding its issuance. The Federal Reserve actively researches and evaluates the potential benefits and risks of a U.S. CBDC. This exploration involves various discussions, technological experiments, and public feedback processes, without committing to a specific policy outcome. The Federal Reserve would only proceed with a CBDC if authorized by law, requiring clear support from both the executive branch and Congress.

Significant research efforts include Project Hamilton, a collaboration between the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative. This multi-year project focuses on understanding the technical challenges of a CBDC, testing hypothetical digital currency architectures for speed and resilience. Project Hamilton has demonstrated the technical feasibility of processing high transaction volumes, but it is an exploratory phase and not intended for public deployment.

Discussions about a U.S. CBDC involve design considerations like whether it would be account-based or token-based, and how to balance privacy with combating illicit financial activities. Policymakers are also considering its impact on financial inclusion, cross-border payments, and financial system stability. The Federal Reserve emphasizes that any U.S. CBDC should complement existing forms of money and financial services, not replace them.

A potential U.S. CBDC differs from the FedNow Service, launched in July 2023. FedNow is a real-time payment system facilitating instant payments within the existing commercial bank money framework. It is not a digital currency, is not built on blockchain technology, and does not replace physical dollars. The Federal Reserve has clarified that FedNow is unrelated to a digital currency and does not eliminate any form of payment.

Hypothetical Opt-Out Mechanisms and Alternatives

“Opting out” of a U.S. CBDC, if introduced, would involve financial choices to avoid its use rather than a formal procedural step. This means leveraging existing financial mechanisms likely to remain available, focusing on maintaining financial autonomy outside a potential CBDC system.

Continued Use of Physical Cash

Physical cash, including U.S. coins and currency, is legal tender. While private businesses are not federally mandated to accept cash, it is expected to remain available even if a CBDC is introduced. Many consumers value cash for its privacy and independence, allowing untraceable transactions without third-party involvement. Relying on physical cash for transactions would be a direct method to avoid a digital dollar. However, using cash exclusively can present practical challenges, such as difficulty documenting payments for tax or business purposes. Although cash is resilient during crises like power outages, its usage has declined in many developed countries, with approximately 18% of U.S. retail transactions currently made in cash.

Reliance on Traditional Bank Accounts and Existing Digital Payment Systems

Individuals can continue to use traditional commercial bank accounts and existing digital payment infrastructure. Funds in commercial bank accounts are liabilities of those banks, distinct from a CBDC, which would be a direct liability of the central bank. Maintaining deposits with commercial banks would keep finances within the current system.

Existing digital payment methods, such as debit cards, credit cards, and peer-to-peer payment apps like Zelle, Venmo, or PayPal, would likely remain viable alternatives. These systems rely on commercial bank liabilities and operate through established networks, distinct from a central bank-issued digital currency.

Exploration of Private Digital Currencies (Cryptocurrencies)

Certain cryptocurrencies offer an alternative to government-issued digital currency. Unlike a centralized CBDC, most cryptocurrencies like Bitcoin are decentralized and operate outside direct governmental control. This decentralized nature means transactions do not require intermediaries, offering greater financial autonomy.

Using cryptocurrencies comes with distinct considerations. The IRS treats digital assets as property for tax purposes, not currency. Any transaction involving cryptocurrency must be reported, and any gains or losses are taxable. Starting in 2025, crypto brokers will report gross proceeds from sales and exchanges on Form 1099-DA, with cost basis reporting beginning in 2026. Cryptocurrencies are also known for their price volatility, which can pose risks for everyday transactions and as a store of value.