If someone — like us — told you that the U.S. should have a digital dollar, you might be forgiven for asking: Doesn't it already? After all, people already use credit cards, debit cards and smartphones to pay for things. Those transactions aren't digital?
Yes and no. Electronic payments require a behind-the-scenes settlement process that sometimes moves slowly, unlike paper bills or coins that instantly change hands. They also have mounting surcharges. True digital money would behave like cash even though it wouldn't have a physical form. Instead, it would be exchanged via a digital "wallet" — an app on your phone or similar device. Such accounts would be managed by the Federal Reserve.
Central bank digital currencies, or CBDCs, as you'll sometimes hear them called, are not to be confused with cryptocurrencies, which are meant to exist outside government (or any central) influence and the values of which fluctuate, sometimes wildly, against the dollar and other government-issued (fiat) currencies. They also are not the same as "stablecoins," which are cryptocurrencies designed to have price stability.
CBDCs already exist in a handful of countries, most notably China, and are being explored by dozens of others. The U.S. is prospecting as well, though slowly. There are risks if the pace is too slow.
The primary one is competition to the dollar's longstanding status as the world's reserve currency. Some 60% of foreign reserves are held in assets denominated in U.S. dollars. That gives this country flexibility in financing its needs, along with some degree of influence over global affairs and an ability to monitor international transactions.
A second complication that could arise if U.S. complacency leaves a vacuum comes from private companies wishing to fill it. Think about alternative but fungible currencies in online gaming or social media — closed environments in a balkanizing economy vs. a unified unit of exchange.
The benefits of allowing the government time to get digital currency right? One is privacy — controls on tracking would be necessary. Other concerns worth study are the impact on lending reserves if consumers could bypass commercial banks, and the danger of hacking and cyberattacks.
The benefits — besides reduced friction — of having a formal digital currency?
Sheila Bair, the former chair of the FDIC who was prominent in the response to the 2008 financial crisis, makes a strong case that a digital dollar could provide a more effective way to get relief money directly in the hands of families needing it, while limiting fraud.
Bair also writes that "digital wallets could be more accessible to unbanked or underbanked populations, who fear the complexity and fees too often tied to checking accounts." (It's worth noting opposing arguments — that people with lower incomes rely more heavily than others do on physical cash, and that there are inequities in the adoption of technology. But coins and bank notes aren't going away in the foreseeable future, and smartphone use is increasingly ubiquitous among all groups.)
The Federal Reserve Board does not have a consensus on a digital dollar. One governor, Christopher Waller, considers it a "solution in search of a problem." Another, Lael Brainard, said she doesn't think it sustainable for the U.S. to lack a digital currency when other countries have one.
The Federal Reserve Bank of Boston, with the help of the Massachusetts Institute of Technology, is doing initial research and is expected to report on its work soon, though any virtual minting of digital money could be years away. There are also several private-sector pilot projects.
We encourage the efforts and would encourage a degree of haste. People may be accustomed enough to the basic framework of the monetary system to consider it a constant, but in fact it evolves. In no field does the entity on top remain there by leaving the innovation to others.
