Given the controversies aroused by many of last week’s executive orders, it’s understandable that those redesigning Treasury’s payment system generally escaped notice. They shouldn’t. On purpose or not, President Trump has mandated that digital currency henceforth counts along with the dollar as U.S. fiat currency. That is a very, very big decision with consequences far beyond the ostensible goal of speeding Treasury payments and, yet again, ending waste, fraud, and abuse.
As I laid out in my book, there is nothing preordained about the dollar serving as the U.S. “fiat” currency. The medium of exchange a sovereign demands to honor its obligations is the fiat currency, but nothing forces the citizenry to accept it if the sovereign state is weak, the fiat currency is of dubious value, or options such as gold – the centuries-old go-to or a digital alternative – are better. As the U.S. gained economic power at home and abroad, the fiat currency Lincoln selected to fund the Civil War – the dollar – came to dominate U.S. transactions, especially those with the federal government. Now, the dollar is the dominant fiat currency not only at home, but is also the reserve currency around the globe. This “exorbitant privilege” is preordained by the United States; it was earned.
Now though, the U.S. is stepping back from the once “almighty dollar.” The President said it will accept alternatives to the dollar for tax and all other payments to and apparently also from the Treasury. The executive order centralizing U.S. government payments lays out dollar alternatives including not just those one might expect – direct deposits, debit or credit card payments – but also instruments transmitted via “digital wallets, real-time payment systems” and other “modern electronic payment options.” This gladdens the hearts of those pressing the President’s crypto “golden age”, but a sovereign state that accepts or even pays obligations in anything other than the fiat currency legitimized by a central bank creates alternative fiscal regimes at grave peril, especially if the sovereign state enjoys exorbitant privilege because its fiat currency is the global reserve go-to.
The complexities of the blithe statements in the executive order are mind-bending. Whose digital wallet denominated in what? Which “real-time payment systems?” What “modern” payment instruments? Some of these might be denominated in dollars; others not. If not, what?
Would acceptable digital currencies be only stablecoins which, one hopes, would have reserve-asset backing beyond a wing and a prayer? Or, would they be bitcoin or other digital-wallet instruments distinguished principally by volatility, anonymity, and dubious holders? Treasury could accept new payment instruments, convert them into dollars, and then deposit only dollars into its account at the Fed, but then it will take grave risk that taxes paid are no longer taxes that can be converted into debt reduction and federal spending unless the fiat-currency fiscal system also goes into new cryptoassets.
To be sure, currency is defined not only as a medium of exchange, but also as a store of value. Thus, even if Treasury cottons to all sorts of digital currencies, Americans may not want to be paid in these instruments or use them for anything but gambling that taxes paid in digital currency will be a sound speculative bet because Treasury bears the cost of any changes in digital-currency valuation. Could Treasury issue debt only in dollars if, as this executive order demands, it accepts digital currencies in return? Again, the ability of speculators to take advantage of taxpayers seems unlimited.
Banks enjoy a unique benefit because, – at least for now – when the dollar is the sole form of fiat currency, anything anyone does in a digital currency has to surface to enter the legitimate U.S. economy and banks are still the guardians of these entry and exit points. Similarly, the dollar’s reserve currency value defines via banks around the world the entry and exit points for much of the global economy. But, if the dollar no longer serves as U.S. fiat currency, then the dollar is no longer the only form of payment cycling through what used to be the banking system. In very short order, a new fiat-currency regime is likely also to define a new payment system – indeed, the President seems to intend this. Tech platforms? Payment-service providers? Who else?
Would or could these new systems ensure ubiquity, finality, and equity? Equity is not an acknowledged payment goal, but it’s one I think critical to ensure that all payees and payors have access to reliable payments at comparable cost. Now, anyone can send a paper check costing only a stamp to Treasury or go online with no added costs imposed by the federal government to pay taxes. Would this remain the case if Treasury welcomes all commerce? The White House isn’t thinking about this, but we surely should.
I can now pay my obligations to a friend by trading who picks up the bill or receive “reward points” from an airline, but I of course paid my taxes this weekend in dollars. Amex points might have been more cost-effective, but dollars are demanded and dollars I sent. What’s to come now that I don’t have to send dollars? I don’t know, but I’ll start looking for memecoins touting goats and chickens for my 2025 taxes just in case.