The United States plans to radically rethink the dollar for today’s digital world

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Since its inception as the country’s national currency, the dollar has undergone many updates and changes, but nothing compares to the proposal being debated today.

The United States is cautiously considering adopting a digital version of its currency, better suited to today’s increasingly cashless world, ushering in what could be one of the most fundamental transformations of the dollar.

In this scenario, the United States would not just mint coins and print paper bills. It would also issue digital cash, or central bank digital currency (CBDC), which would be stored in apps or “digital wallets” on our smartphones.

We could then use them to pay for things, just like we do with Venmo or Apple Pay, and no real physical money would change hands.

It’s a vision of a cashless future that other countries are already embracing. China, for example, has already unveiled the digital yuan on a trial basis. India announced this week that it will also unveil a digital rupee.

Now the United States is wondering if it wants to get in the game.

Last month, the Federal Reserve released a highly anticipated document, outlining the pros and cons of a digital currency.

The Fed says this is a first step, meant to start an important conversation among policymakers and get feedback, from average people to some of the nation’s largest financial institutions.

Here’s what to know about the digital dollar.

The Apple Pay app is shown in this file photo taken October 8, 2019. Digital payment systems like Apple Pay and Venmo are becoming increasingly popular.

So how would it actually work?

Policy makers point out that we are still in the early days and there is still much to do. All in all, transactions made with digital dollars probably wouldn’t look too different from existing private alternatives that allow us to pay for things by bringing our smartphones next to readers.

China, for example, is allowing digital payments in yuan in cities where the country is piloting its digital currency, allowing citizens to make payments through an app set up by the government.

Why pursue a digital currency?

The reduction or elimination of fees is a clear benefit.

When you make a contactless payment today, it may seem immediate, but according to Chris Giancarlo, the former chairman of the Commodity Futures Trading Commission, there’s a lot going on behind the scenes.

“My mobile device tells his mobile device to inform a whole series of banks, to confirm who I am, how much money is in my bank, that there is enough money to move from my bank to his bank,” he said.

And at each step of the process, there are transaction fees. In 2020, they amounted to more than 110 billion dollars, generally borne by companies.

With a digital dollar, you could in theory cut out those middlemen. If you wanted to buy a sandwich, for example, you could transfer money from a digital wallet directly to a cashier.

This would not necessarily eliminate non-state actors entirely. In China, for example, users who want to use the digital yuan can visit banks to add money to their digital wallets.

But just having digital dollars in circulation could put pressure on credit card companies and payment processors to lower fees in order to compete. That is, if enough people start using the Fed-run version.

In China, the adoption of e-renminbi has been slow as private providers such as WeChat or Alipay are already quite popular and well established.

Another argument for creating a digital dollar is to open up digital transactions to Americans who don’t have a bank account. According to the Fed, more than 5% of American households are “unbanked”.

Providing them with a digital wallet would allow people to participate in our increasingly cashless financial operations. system.

It would also make it easier for the federal government to distribute benefits to poorer Americans. For example, the establishment of a digital dollar during the pandemic could have allowed the government to transfer money directly into digital wallets.

Image of an $8 Continental currency paper note issued by the Continental Congress to fund the Revolutionary War or the American Revolution.  After gaining independence, the United States adopted the dollar as its national currency.

Public domain / University of Notre Dame / US Currency Education Program/www.uscurrency.gov

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US Currency Education Program/www.uscurrency.gov

Image of an $8 Continental currency paper note issued by the Continental Congress to fund the Revolutionary War or the American Revolution. After gaining independence, the United States adopted the dollar as its national currency.

What are the challenges?

Without a doubt, one of the biggest issues is privacy. Since the Fed would implement and oversee the project, the central bank could accumulate a large amount of data, potentially giving it much more visibility into everyone’s interests. financial life.

This could be useful for regulators who want to fight money laundering, for example, but it would also raise serious privacy concerns.

It is therefore essential to sort out the amount of information that the Fed would like haveaccording to Raghuram Rajan, professor of finance at the University of Chicago Booth School of Business and former governor of the Reserve Bank of India.

“There will be legitimate questions about what the government knows about each individual, and also what it can do to restrict the activities of individuals,” he says.

Cybersecurity is another critical issue, especially given the rise in hacks and heists on cryptocurrency exchanges for example.

To implement a digital dollar, the US government would need to modernize the country’s financial infrastructure to ward off attacks.

A visitor walks past a logo for the e-CNY, a digital version of the Chinese yuan, displayed during a trade fair in Beijing, China September 5, 2021. China is among a handful of countries experimenting the national digital currencies.

A visitor walks past a logo for the e-CNY, a digital version of the Chinese yuan, displayed during a trade fair in Beijing, China September 5, 2021. China is among a handful of countries experimenting the national digital currencies.

So what’s the next step?

Fed Chairman Jerome Powell and his colleagues are moving cautiously and methodically.

The Federal Reserve Bank of Boston is also expected to release the results of its research into the technological challenges associated with implementing a CBDC in the United States.

It would take five to ten years to introduce a digital currency in the United States, according to several experts, but they argue that policymakers cannot sit idly by.

There are fears that by moving slowly, the United States will let other countries shape standards for national digital currencies, and the popularity of the dollar could be diminished.

After all, for decades it has been the world’s main reserve currency, which means that many countries hold their reserves in US dollars.

But Fed Chairman Jerome Powell made it clear he was in no rush. Last year, a reporter asked the central banker if he was worried the United States was falling behind countries like China.

“I think it’s more important to do it right than to do it quickly,” he replied.

Copyright 2022 NPR. To learn more, visit https://www.npr.org.

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