The United States is discussing whether to adopt a digital dollar: NPR

A shopper pays cash for merchandise on December 26, 2000 in Austin, Texas. The Federal Reserve is considering whether to adopt a digital version of the dollar, in what will constitute a fundamental revision of our national currency.

Joe Raedle / Getty Images

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Joe Raedle / Getty Images

A shopper pays cash for merchandise on December 26, 2000 in Austin, Texas. The Federal Reserve is considering whether to adopt a digital version of the dollar, in what will constitute a fundamental revision of our national currency.

Joe Raedle / Getty Images

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

The United States is carefully considering whether to adopt a digital version of its currency, one that is better suited to today’s increasingly cashless world, and is embarking on what may be one of the dollar’s most fundamental transformations.

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

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

It is 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 said this week that they would also unveil a digital rupee.

The United States is now considering whether to enter the game.

Last month, the Federal Reserve issued a long-awaited paper outlining the pros and cons of a digital currency.

The Fed says it is a first step, intended to kick-start an important conversation among decision-makers and gather feedback, from average people to some of the country’s largest financial institutions.

Here’s what you should know about the digital dollar.

The Apple Pay app will appear in this file image taken on October 8, 2019. Digital payment systems such as Apple Pay and Venmo are becoming increasingly popular.

Jenny Kane / AP

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Jenny Kane / AP

The Apple Pay app will appear in this file image taken on October 8, 2019. Digital payment systems such as Apple Pay and Venmo are becoming increasingly popular.

Jenny Kane / AP

So how would that really work?

Politicians emphasize that these are still early days, and there is a lot that needs to be hammered out. All in all, digital dollar transactions probably would not seem so different from existing private options that allow us to pay for things by bringing our smartphones next to readers.

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

Why Pursue a Digital Currency?

Reducing or eliminating fees is a clear benefit.

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

“My mobile device asks his mobile device to inform a whole range 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 says.

And at every step of the way, there are transaction fees. In 2020, they raised more than $ 110 billion, which was generally borne by companies.

With a digital dollar, you can in theory eliminate these middlemen. For example, if you wanted to buy a sandwich, you could transfer money from a digital wallet directly to a cashier.

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

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

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

Another argument for making a digital dollar is to open up digital transactions for Americans who do not have bank accounts. According to the Fed, more than 5% of US households are “unbanked”.

Giving them a digital wallet will allow people to participate in our increasingly cashless finances system.

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

Image of an $ 8 Continental Currency Paper 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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Public Domain / University of Notre Dame / US Currency Education Program / www.uscurrency.gov

What are the challenges?

Without a doubt, one of the biggest problems is privacy. Because the Fed wanted to implement and oversee the project, the central bank could accumulate an enormous amount of data, which could potentially give the central bank much more insight into everyone. economic life.

For example, it may be useful for regulators who want to combat money laundering, but it will also raise serious privacy concerns.

That makes it crucial to sort out how much information the Fed wanted 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 how much the authorities know about each individual, and also how much it can act to limit activities from individuals,” he says.

Cyber ​​security is another critical problem, especially given the increase in hacks and robberies on, for example, cryptocurrency exchanges.

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

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

By Han Guan / AP

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By Han Guan / AP

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

By Han Guan / AP

So what’s next?

Fed leader Jerome Powell and his colleagues are moving forward cautiously and methodically.

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

It will take five to ten years to introduce a digital currency in the United States, say several experts, but they claim that politicians can not sit still.

There is concern that the US, by moving slowly, will allow other countries to set standards for national digital currencies, and the popularity of the dollar may decline.

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

But Fed Leader Jerome Powell has made it clear that he is not in a hurry. Last year, a reporter asked the central banker if he was worried that the US was sinking behind countries like China.

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