Fiat money is a government-issued currency that is not backed by a physical commodity such as gold or silver. It is considered a form of legal tender that can be used to exchange goods and services. Traditionally, fiat money came in the form of banknotes and coins, but technology has allowed governments and financial institutions to complement physical fiat money with a credit-based model where balances and transactions are recorded digitally. Physical currency is still frequently exchanged and accepted; However, some developed countries have experienced a significant decline in its use, and this trend has accelerated during the COVID-19 pandemic. “Central bank money” refers to money that is a liability of the central bank. There are currently two types of central bank money in the United States: physical money, issued by the Federal Reserve, and digital balances, held by the Federal Reserve`s commercial banks. The CBDC is generally defined as the digital responsibility of a central bank accessible to the general public. Today, in the United States, Federal Reserve notes (i.e. physical money) are the only type of central bank money available to the public. Like existing forms of money, a CBDC would allow the public to make digital payments. However, as a Federal Reserve liability, a CBDC would be the safest digital asset available to the public, with no associated credit or liquidity risk.
The Federal Reserve publishes a working paper examining the pros and cons of a possible US central bank digital currency (20. January 2022) See the latest research and publications on central bank digital currencies. More than 100 countries are researching central bank digital currencies. Image: Unsplash/Etienne Martin Wholesale CBDCs are similar to holding reserves in a central bank. The central bank grants an account to an institution to deposit funds or use them to process interbank transfers. Central banks can then use monetary policy instruments such as reserve requirements or interest on reserve balances to influence lending and set interest rates.  The official title of the Federal Reserve Act of 1913 indicates that one of the purposes of the Act was to “provide elastic money.” Federal Reserve Act of 1913, 38 Stat. 251, official title. The Senate report, which is attached to the Senate bill establishing the Federal Reserve, states that “there are certain general foundations recognized by all experts as essential and necessary” that should be incorporated into legislation, including “the issuance of elastic money against liquid bills of exchange under reasonable collateral.” 63-133, Bank and Money (November 22, 1913). See also Michael Bardo, National Bureau of Economic Research, Working Paper No. 2549, “Money, History, and International Finance: Essays in Honor of Anna J. Schwartz,” in The Contribution of “A Monetary History of the United States, 1867-1960” to Monetary History (1989), available at: The Contribution of “A Monetary History of the United States, 1867-1960” to Monetary History (nber.org) (“The Fed was created to give elasticity to the money supply, in particular to ensure easy convertibility between deposits and money and to prevent a recurrence of bank runs of the national banking era.
According to Friedman and Schwartz (Chapter 5), this goal was to be achieved by increasing and decreasing Federal Reserve notes and deposits. (quotes Milton Friedman and Anna Schwartz, “A Monetary History of the United States, 1867-1960” (1963)). Many central banks have pilot programs and research projects to determine the viability and usability of a CBDC in their economies. As of March 2022, nine countries and territories have adopted CBDCs.  The Demand Note was the first fiat currency issued by the U.S. government. These were “essentially government promissory notes and were called demand notes because they were payable `on demand` in gold coins at certain Treasury facilities.” See Bureau of Engraving and Printing “BEP History Fact Sheet,” last updated March 2013, available at: FactSheet_DemandNotes_20130410.pdf (moneyfactory.gov) In the United States and many other countries, many people do not have access to financial services. In the United States alone, 5% of adults do not have a bank account. Another 13% of U.S. adults have bank accounts, but use expensive alternative services such as money orders, payday loans, and check cashing services. In the Constitution, the founders gave Congress the power to “mint money, regulate the value of money and foreign coins, and set the standard for weights and measures.”  They said nothing about paper money, “mainly because. [They] had seen how the laws enacted by the Continental Congress to fund the American Revolution – called “continentals” – became virtually worthless at the end of the war.
 In 1792, Congress passed the Coinage Act, which from 1794 provided for a currency of the United States in which silver dollars were minted with gold coins.  All citizens were granted free minting privileges, whereby citizens could bring gold or silver to the Mint and have them minted in coins.  In the early 19th century, depositors such as banks provided silver and gold for minting and chose the coins they wanted to recover, preferring larger denominations.  Over the years, various currency laws followed, altering the composition and ratio of gold and silver in U.S. coins.  The Currency Act of 1965 expressly gave the Minister of Finance the power to “manufacture coins and issues. half-dollar or 50-cent coins, quarter-dollar or 25-cent coins, or 10-cent coins in such quantities as he deems necessary to meet the needs of the public.  The Minister of Finance has this power today.  See Marcelo Prates, “Legal troubles may delay CBDC,” February 24, 2021, in Official Monetary and Financial Institutions Forum. The word “including” indicates that the following list is illustrative, so other currency formats may be legal tender.
“), available at: Legal issues can delay CBDCs – OMFIF.  Section 16(1) of the Federal Reserve Act states that “Federal Reserve banknotes issued at the discretion of the Board of Governors of the Federal Reserve System to make advances to Federal Reserve banks through agents of the Federal Reserve, as set forth below, shall not be permitted for any other purpose.” 12 U.S.C. § 411. In 1933, the United States abandoned the gold standard.  When gold coins, gold bars, or gold certificates were issued, the American people received notes from the Federal Reserve that could be exchanged for money.  Congress then prohibited any commitment requiring payment in gold, provided that any commitment “was made before or later. shall be paid, for consideration, dollar for dollar in any coin or currency which, at the time of payment, is legal tender for public and private debts.  This law also provided that “U.S. coins and currencies (including Federal Reserve notes and circulation notes of Federal Reserve banks and national banks) are legal tender for all debts, public charges, taxes, and duties,” meaning that U.S.
coins and coins are “a valid and lawful offer to pay debts when offered to a creditor.”  There are two types of CBDCs: wholesale and retail. Wholesale CBDCs are primarily used by financial institutions. Retail CBDCs are used by consumers and businesses, much like physical forms of currency.  See, for example, Jess Cheng, Angela N. Lawson, and Paul Wong, FEDS Notes, “Prerequisites for a Multipurpose Central Bank Digital Currency” (February 24, 2021) (“[a] first consideration is whether the issuance of a general purpose CBDC would be consistent with the mandates, functions, and powers of the Federal Reserve as set forth in the Federal Reserve. the Federal Reserve Act.”); Congressional Research Service, “Financial Innovation: Central Bank Digital Currencies,” March 20, 2020 (“The Fed highlighted the legal uncertainty as to whether all the steps necessary for a successful issuance of a CBDC can be taken under the existing authority. These include whether a CBDC would be legal tender; whether the Fed could offer digital accounts or wallets to the public; and the rights, obligations and legal protections that would be available to CBDC users. Currently, the Fed must charge prices that reflect its cost of providing services to businesses and can only pay banks interest on balances with the Fed. If Congress decides to facilitate CBDCs, it could pass legislation to remove all identified legal barriers. “), available at: Financial Innovation: Central Bank Digital Currencies (congress.gov); Speech by Federal Reserve Board Governor Lael Brainard: “An Update on Digital Currencies,” to the Federal Reserve Board and the Federal Reserve Bank of San Francisco`s Office Hours of Innovation, San Francisco, California (August 13, 2020) (“There are also important legal considerations.
It is important to understand how the existing provisions of the Federal Reserve Act regarding the issuance of foreign currency apply to a CBDC and whether a CBDC would be legal tender based on its design. “), available at: Governor Brainard`s Speech on “An Update on Digital Currencies” – Federal Reserve Board. The context of the law, as well as other laws, makes it clear that “Federal Reserve notes” are fiat currency.