Politico, 6/12/21, by Victoria Guida Fed explores ‘once in a century’ bid to remake the U.S. dollar The rise of private cryptocurrencies motivated the Fed to start considering a digital dollar to be used alongside the traditional paper currency. The Federal Reserve is taking what may be the first significant step toward launching its own virtual currency, a move that could shake up banks, give millions of low-income Americans access to the financial system and fortify the dollar's status as the world’s reserve currency. The idea of creating a fully digital version of the U.S. dollar, which was unthinkable just a few years ago, has gained bipartisan interest from lawmakers as diverse as Sens. Elizabeth Warren (D-Mass.) and John Kennedy (R-La.) because of its potential benefits for consumers who don’t have bank accounts. But it’s also sparking strong pushback from those with the most to lose: banks. “The United States should not implement a [central bank digital currency] simply because we can or because others are doing so,” the American Bankers Association said in a statement to lawmakers this week. The benefits “are theoretical, difficult to measure, and may be elusive,” while the negative consequences “could be severe,” the group wrote. The explosive rise of private cryptocurrencies in recent years motivated the Fed to start considering a digital dollar to be used alongside the traditional paper currency. The biggest driver of concern was a Facebook-led effort, launched in 2019, to build a global payments network using crypto technology. Though that effort is now much narrower, it demonstrated how the private sector could, in theory, create a massive currency system outside government control. Now, central banks around the world have begun exploring the idea of issuing their own digital currencies — a fiat version of a cryptocurrency that would operate more like physical cash — that would have some of the same technological benefits as other cryptocurrencies. That could provide unwelcome competition for banks by giving depositors another safe place to put their money. A person or a business could keep their digital dollars in a virtual “wallet” and then transfer them directly to someone else without needing to use a bank account. Even if the wallet were operated by a bank, the firm wouldn’t be able to lend out the cash. But unlike other crypto assets like Bitcoin or Ether, it would be directly backed and controlled by the central bank, allowing the monetary authorities to use it, like any other form of the dollar, in its policies to guide interest rates. The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative are aiming next month to publish the first stage of their work to determine whether a Fed virtual currency would work on a practical level — an open-source license for the most basic piece of infrastructure around creating and moving digital dollars. But it will likely be up to Congress to ultimately decide whether the central bank should formally pursue such a project, as Fed Chair Jerome Powell has acknowledged. Lawmakers on both sides of the aisle are intrigued, particularly as they eye China’s efforts to build its own central bank digital currency, as well as the global rise of cryptocurrencies, both of which could diminish the dollar’s influence. Democrats have especially been skeptical about crypto assets because there are fewer consumer protections and the currencies can be used for illicit activity. There are also environmental concerns posed by the sheer amount of electricity used to unlock new units of digital currencies like Bitcoin. Warren suggested the Fed project could resolve some of those concerns. “Legitimate digital public money could help drive out bogus digital private money, while improving financial inclusion, efficiency, and the safety of our financial system — if that digital public money is well-designed and efficiently executed,” she said at a hearing on Wednesday, which she convened as chair of the Senate Banking Committee’s economic policy subcommittee. Other senators highlighted the potential for central bank digital wallets to be used to deliver government aid more directly to people who don’t have bank accounts. A digital dollar could also be designed to have more high-tech benefits of some cryptocurrencies, like facilitating “smart contracts” where a transaction is completed once certain conditions are met. Neha Narula, who’s leading the effort at MIT to work with the Boston Fed on a central bank digital currency, called the project “a once-in-a-century opportunity to redesign the dollar” in a way that supports innovation much like the internet did. Still, there are a slew of unanswered policy questions around how a digital dollar would be designed, such as how people would get access to the money, or how much information the government would be able to see about individual transactions. The decision is also tied to a far more controversial policy supported by Democrats like Warren and Senate Banking Chair Sherrod Brown to give regular Americans accounts at the Fed. “What problem is a central bank digital currency trying to solve? In other words, do we need one? It’s not clear to me yet that we do,” Sen. Pat Toomey (R-Pa.) said. “In my view, turning the Fed into a retail bank is a terrible idea.” And, “the fact that China is creating a digital currency does not mean it’s inevitable that the yuan would displace the U.S. dollar as the world’s reserve currency,” he said. For their part, banks fear a Fed-issued digital currency could make it easier for customers to pull out large amounts of deposits and convert them to digital dollars during a crisis — the virtual equivalent of a bank run — putting financial stress on their institutions and making less money available to provide credit for people, businesses and markets. It could also potentially deprive them of customers, something the lenders say would interfere with lawmakers’ vision of increased financial inclusion. “While it is true that deposit accounts are often the first step towards inclusion, the benefits of a long-term banking relationship go well beyond a deposit account,” the ABA said in its statement. “The same is not true of a [central bank digital currency] account with the Federal Reserve, which would not grow into a lending or investing relationship.” The Bank Policy Institute, which represents large banks, has also argued that many of the benefits of a digital dollar are “mutually exclusive (because they are predicated on different program designs) or effectively non-existent (because the program design that produces them comes with costs that are for other reasons unbearable).” “The decision on whether to adopt a central bank digital currency in the United States is appropriately a long way off,” BPI President and CEO Greg Baer said. “There are also complex and serious costs that will need to be considered.” But many lawmakers think it's worth the effort to look into it. “The Federal Reserve should continue to explore a digital [currency]; nearly every other country is doing that,” Sen. Bill Hagerty (R-Tenn.) said at the hearing, citing the risk for the U.S. to lose its ability to deploy economic sanctions as effectively with decreased usage of the dollar.
Which legitimate American citizen/permanent resident can currently not open and maintain a bank account? Never heard or seen such person. A person who can't open a bank account certainly does not have funds to send back and forth even if it was fully electronic. Total nonsense perpetuated by certain politicians and the private crypto supporting industry. Note that we speak here of people who don't have certain privileges taken away because of past criminal convictions.
I don't see any practical difference between "digital money" as used in this article, and the "digital money" I already send/receive with Venmo, spend on my credit card, or see in my bank account. Less still once Fedwire is finally upgraded (supposed to be 2023) to allow cheap instant transfers. It seems like a bunch of BS wherein the primary goal is to expand government control - giving the Fed the ability to 'cancel' dollars thus circumventing the ZLB, and also to convert untracable cash to fully tracked "digital cash".
Would be ironic if the main legacy of the Crypto Era was to make governments realize that a fully totalitarian monetary system was possible, and give them the push needed to implement it.
It's really baffling me that people don't get the difference between a venmo, PayPal, credit card and a currency that is running on a distributed ledger...perhaps because so few understand what's really going on in the backend.
This is an interesting statement. If you could expand a little in the differences, that would be appreciated. Thanks.
Pointless. The USD is mostly digital now anyway. The whole point of crypto is ANONYMITY. It's supposed to function like ca$h... untraceable. Every penny of every USD digital-dollar transaction will be logged into a host of databases, hashed, re-hashed, analyzed, taxed, and sold.
Well that's pretty simple when you know how transaction banking works. Venmo, PayPal et al are basically internalizers, which means they are using a private ledger and most transfers are internal bookings that are instantly cleared. In order to get access to the system you have to onboard to the payment provider and that is a major hurdle for everyone who does not have a bank account. Instant bank transfers work slightly different. When you see the money on your account a couple of minutes after your counterparty sends a transfer, your bank basically gives you a credit line for the amount because banks settle after t+x. Wires, ACH, SEPA or Tipanet would be way too slow for instant settlement. And here you have three major advantages of a distributed ledger which basically are the basis of the success of cryptocurrencies: 1. You don't need to onboard anywhere. You only need internet access (smartphone) and a public key to participate in transactions. This is true for the redneck who only deals in cash as well as for the dude who usually has to exchange his local currency into USD on the black market in LatAm. No need for the black market anymore as well as for payment providers. 2. Transactions are instant because there is no settlement. It takes seconds to send millions of US denominated stablecoins and this is true for the payment to Starbucks and to a dropshipper in Thailand. 3. You can follow the money endlessly without any interuption as every single transaction is recorded forever on the distributed ledger, which is a major advantage for law enforcement, the IRS and secret services. Think about how much effort it is to follow a guy who collects terrorist financing 50$ wise just to send an international wire from his bank account to some guerilla group in Irak. It did not take too long to figure out how many BTC the Hamas received since 2019 because the adresses were known and they cashed out via Binance. This probably was found out by only a handful of analysts. Transaction banking today is a dumpster fire of layers upon layers upon layers of middlemen, clearing services, internalizers, transaction reporting companies, local and national banks. Banks today spend more money on backoffice and administrative staff than they do on trading or creating new products. The entire system is just incredibly clogged and inefficient. Average Joe doesn't realize that because all he can see is...well, a couple of colored buttons on his iPhone The thing that most crypto haters fail to see is the fact that it's not about making an existing system better. The average American guy is so integrated into payment systems that he probably even won't see a difference between distributed ledger technology and his good old PayPal. But the focus isn't on first world blue colar slaves. It is on including the average Joe of 2nd and 3rd world countries into the USD currency system and at the same time being able to follow all that money around no matter where and when the transaction took place