A digital dollar that is backed by the US government could speed up money transfers and make it more accessible than the existing banking system, according a Federal Reserve paper (via CNBC). However, the paper is not intended to be a recommendation for creating a central bank digital currency (or CBDC). The creation of a digital currency would make a significant shift in the role that the government plays in our finances. There are potential downsides, including making commercial banks less appealing to consumers and limiting the Fed’s ability influence the financial system. The Fed invites comments, even on any details that the paper might have missed.
According to Reuters, the paper is a step towards the creation of a digital currency. It comes at a time that around 90 countries are looking into their own digital currencies. The European Central Bank is currently investigating the creation a digital Euro. China has been testing a digital Yuan since 2014. Stablecoins, which are tied to the US dollar in some cases, have been rising in popularity in the cryptocurrency world.
According to the paper, the government also wants to continue supporting the “dominant international role of U.S. dollars.” Bloomberg points out that the government could make it easier for other companies, such as other companies, to design systems compatible. Bloomberg also notes that the government may have made its research public.
A digital currency issued by the central bank could combine the benefits of both federally-backed cash as well as privately-controlled digital money such:
Transfers between people and businesses are quick and easy, even across borders.
Accessibility for those without bank accounts who might have difficulty opening accounts at private financial institutions
More safety and consumer confidence — Banks can fail or run into liquidity problems, but this is less likely than with the US government.
There are also potential downsides. The government would need to manage the market’s reaction to the US assuming a traditional role previously held by commercial banks. It would also require citizens trust the government with their financial information. However, the paper vaguely suggests that this concern could be mitigated by allowing intermediaries to address privacy concerns “by using existing tools.”
Blockchain-based digital currencies don’t necessarily have to be. In its paper, the Fed states that no particular design or technology has been suggested yet and that it will continue to explore “a wide range” of options.
According to the paper, a digital currency would need to be privacy-protected and interoperable, widely transferable, and identity verified if it was to be created by the central bank. The reserve is currently exploring distributed, centralized, and blockchain methods of creating a currency.
The paper is worth reading if you are interested in the future money. The 22-point questionnaire will allow you to voice your opinions and expertise.