By Louis Lehot, business and technology lawyer at Foley & Lardner LLP in Silicon Valley

The Bitcoin rollercoaster has brought a lot of attention to cryptocurrencies over the past year, but you still can’t pay your taxes with them. Aside from some state-level moves to accept cryptocurrencies, taxes must still be paid in the U.S. dollar. And yet, as more businesses go through their own digital transformations, many have been wondering when the economy will experience its own digital paradigm shift.

The idea of a digital dollar is not new. Digital currencies have been discussed for decades, and some even argue that the dollar is already digital. There is merit in that characterization. Most of the money in the U.S. money supply is not cash — what consumers generally consider money to be — but debt-backed derivatives of cash deposits. Since those dollars exist digitally, the dollar already is essentially a digital currency. But the recent discussions of a digital dollar revolve around creating a federally backed central-bank digital currency (CBDC).

CBDCs share some technological characteristics with cryptocurrencies, but they differ in organizational structure. CBDCs are by definition centralized, meaning that the issuer of the currency has direct control over it. In recent years, there has been more talk of CBDCs, particularly as China has pushed to become the first major issuer of a CBDC. (The Bahamas has the distinction of issuing the first CBDC — the Sand Dollar.)

China’s experiment with a digital yuan has sparked both governmental and private-sector discussions of the merits and risks associated with CBDCs. One common concern with the digital yuan is the increased control that it gives to the Chinese government. Some view this control as a threat to the West, and the fear of lagging behind technologically seems to have spurred many countries to consider issuing their own CBDCs, with about 80% of central banks now open to the possibility. In the U.S., both Janet Yellen (secretary of the Treasury) and Jerome Powell (chairman of the Federal Reserve) have expressed interest in a digital dollar. Expect to hear more concrete news this summer.

Any digital-dollar initiative would likely require action from Congress, and it would also trigger a host of legal questions. For example, how would people acquire accounts? If accounts were tied to banks, the digital dollar would work only for those with bank accounts. As of 2019 (the latest data available from the government), 5.4% of U.S. households are unbanked. While that percentage is small and has been declining over the past decade, it still encompasses 7.1 million households. Would those people be prohibited from using a digital dollar?

If the digital dollar were not tied to bank accounts, the government would have direct control over transactions, which would lead to privacy concerns while also threatening the traditional banking industry. As Bloomberg reported in March, the American Bankers Association believes that a digital dollar “is a costly solution in search of a nonexistent problem,” while credit-card companies are trying to make sure that they would not be cut out of any proposed CBDC.

The long-term effects on businesses are difficult to predict given the lack of concrete information at the moment. But as with any paradigm shift, there likely will be unforeseen consequences. Pay attention to developments in this space.

Louis Lehot is an emerging growth company, venture capital, and M&A lawyer at Foley & Lardner in Silicon Valley. Louis spends his time providing entrepreneurs, innovative companies, and investors with practical and commercial legal strategies and solutions that make sense, at all stages of growth, from garage to global.


The Rise of Central-Bank Digital Currencies: A Primer on CBDCs was originally published in DataDrivenInvestor on Medium, where people are continuing the conversation by highlighting and responding to this story.