Move over, Bitcoin and other forms of cryptocurrencies: the board of governors of the Federal Reserve System of the United States — which is the central bank for the country — is considering the creation of a digital version of the United States dollar as what is known as a central bank digital currency.
Should the United States Dollar Become Digital Currency?
A central bank digital currency — or CBDC — “could potentially offer a range of benefits”, according to this official paper titled Money and Payments: The U.S. Dollar in the Age of Digital Transformation from the Federal Reserve System of the United States. “For example, it could provide households and businesses a convenient, electronic form of central bank money, with the safety and liquidity that would entail; give entrepreneurs a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments); and expand consumer access to the financial system. A CBDC could also pose certain risks and would raise a variety of important policy questions, including how it might affect financial-sector market structure, the cost and availability of credit, the safety and stability of the financial system, and the efficacy of monetary policy.”
Many people already use money in a digital manner due to technology, which includes credit cards and remote banks that do not have a single physical building as a branch — and that is only two of many examples. Going for a long period of time without touching a single form of money these days has been easier to do than ever; so people have become accustomed to dealing with currency on a virtual basis for years. That could help ease the transition to a central bank digital currency.
Two of the benefits and one of the risks of a central bank digital currency from the aforementioned paper are highlighted in this article, as they could affect people who travel internationally.
Improvements to Cross-Border Payments
One of the potential benefits of the issuance of a central bank digital currency by the United States is to streamline cross-border payments by using new technologies, introducing simplified distribution channels, and creating additional opportunities for cross-jurisdictional collaboration and interoperability. Realizing these potential improvements would require significant international coordination to address issues — such as common standards and infrastructure, the types of intermediaries that would be able to access any new infrastructure, legal frameworks, preventing illicit transactions, and the cost and timing of implementation.
Support the International Role of the United States Dollar
Preserving the dominant international role of the United States dollar could be another potential benefit of the issuance of a central bank digital currency by the Federal Reserve System. The dollar is the most widely used currency in the world for payments and investments; and it also serves as the reserve currency of the world. The international role of the United States dollar benefits the United States by — among other things — lowering transaction and borrowing costs for households, businesses, and government in the United States. The international role of the dollar also allows the United States to influence standards for the global monetary system.
The United States dollar is currently widely used across the globe because of the depth and liquidity of financial markets in the United States, the size and openness of the economy of the United States, and international trust in institutions and rule of law of the United States — but the implications of a potential future state in which many foreign countries and currency unions may have introduced central bank digital currencies is important to consider If these new central bank digital currencies were to become more attractive than existing forms of the United States dollar, global use of the dollar could possibly decrease — and the issuance of a central bank digital currency by the United States might potentially help preserve the international role of the dollar…
Safety and Stability of the Financial System?
…which leads to one of the potential risks of the issuance of a central bank digital currency by the United States: because central bank money is the safest form of money, a central bank digital currency which is widely accessible would be particularly attractive to risk-averse users — especially during times of stress in the financial system. The ability to quickly convert other forms of money — including deposits at commercial banks — into central bank digital currency could cause runs on financial firms to be more likely or more severe. Traditional measures — such as prudential supervision, government deposit insurance, and access to central bank liquidity — may be insufficient to stave off large outflows of commercial bank deposits into central bank digital currency in the event of financial panic.
Final Boarding Call
I would think that one of the benefits of the issuance of a central bank digital currency by the United States would be to save money on paper and metal to create physical currency — whether its use is significantly reduced or eliminated altogether — especially when considering that certain denominations have been considered to be obsolete and are in danger of being eliminated.
As I first reported in this article on Friday, January 8, 2016, Philip Diehl wants to eliminate the penny — and he attempted to do just that during his time when he was the director of the United States Mint from June of 1994 through March of 2000 — and he is not the only person who believes that the penny is obsolete. A growing number of countries have been eliminating their version of the penny from circulation in recent years — such as the Bahamas on Thursday, December 31, 2020 and Canada on Monday, February 4, 2013 as only two examples.
However, the board of governors of the Federal Reserve System will need to figure out how to ensure that the central bank digital currency — if it becomes reality — will not be subject to security issues with technology while simultaneously being a preferred digital currency, as that would be my most significant concern after reporting in article after article here at The Gate about security breaches with sensitive personal information and financial data.
One benefit of cryptocurrency is that it is secure because it is not a physical form of currency; so cybercriminals can only steal cryptocurrency if they are aware of the private keys for the wallet and people can use it anonymously. Many people also like cryptocurrency because it is decentralized and not governed or regulated by a single entity — but that can also be a risk, as transactions are considered irreversible and final.
The introduction of a central bank digital currency would represent one of the most significant innovations in money in the history of the United States — so broad consultation with the general public and key stakeholders is essential. The aforementioned paper describes the economic context for a central bank digital currency, key policy considerations, and the potential risks and benefits of a central bank digital currency in the United States.
The board of governors of the Federal Reserve System does not intend to proceed with issuance of a central bank digital currency without clear support from the executive branch of the United States and from the House of Representatives — ideally in the form of a specific authorizing law…
…and your input and feedback is requested on this issue — but you must submit your thoughts and feedback here by Friday, May 20, 2022.
Photograph ©2016 by Brian Cohen.
