The dollar is the world’s most powerful currency, and the US has been an export powerhouse for decades. But that position is under threat as other countries launch their currencies.
The Federal Reserve’s chief technologists laid out their case for creating a dollar that lives entirely in digital form. They said the question isn’t whether to make it happen, but how. And many people want to see the plan move forward.
What’s the Plan?
In a recent report, the Fed’s Faster Payments Task Force said that it would take an “unprecedented level of cooperation” from banks and other private-sector players for the US to issue a digital dollar. But it could be done — if technologists, bankers, and regulators work together to figure out the best way to do so.
Adoption would require “the coordination of multiple stakeholders across both the public and private sectors,” said the task force created last year by Fed Chair Janet Yellen.
The report is the first comprehensive look at how the US banking system could handle a digital dollar — everything from who would develop the technology to what kind of verification process would be needed to ensure security.
In its report, the Fed raised two main questions: First, whether it’s even possible to create an entirely digital currency, which features would make an ideal dollar alternative. The report notes that in countries where customers have access to deposit accounts at banks, there are much fewer cash transactions than in the United States—which suggests that digital alternatives might work here as well. It also lays out criteria for success:
Digital dollars would need to be secure and convenient to use across many platforms (including physical ATMs). They’d need to be able to move seamlessly between accounts and into cash. The system would maintain strong oversight of users’ identities to ensure privacy and prevent fraud.
What Would Happen if the Dollar Was Disrupted?
We’ve heard for years about the death of the dollar, but it’s still alive and kicking. However, there’s a sense that the dollar’s days are numbered. As every significant country in the world seeks to control its currency, more countries are starting to question whether the dollar should be their reserve currency.
Any disruption of the dollar would dramatically affect our economy and financial markets.
The disruption of the dollar could take place in several ways:
Disruption Through Deflation
If deflation occurs in a country like Japan or Europe and their currency becomes weak, importing products from U.S.-based companies isn’t easy. It could also make it difficult for companies in those countries to pay their employees based on a fixed salary paid out in dollars.
Disruption Through Devaluation
If a country believes that a U.S.-based company undercharges them on an import or export transaction, they could devalue their currency.
The reason is to hold off competition from other countries launching their own sovereign digital fiat currencies. However, China has already launched its cryptocurrency, which supports cross-border transactions in Yuan, and Japan is also moving ahead with many plans to launch a Yen token.
Digital dollars could also be used for private transactions beyond the purview of regulators and tax authorities, thus raising concerns about money laundering and tax evasion.
The US dollar is the “world’s reserve currency,” meaning most global transactions use dollars. So, it is because the biggest economy in the world backs it, and its central bank (the Federal Reserve) can create an unlimited supply of dollars whenever it wants via “printing.”
Last year, we saw the launch of China’s first official digital currency, and now a Fed Governor has thrown his support behind the concept in general.
While the Chinese digital currency is pegged to the dollar—effectively functioning as a federally-backed cryptocurrency—there are broader implications for what such a system could mean for the global economy.
As reported by Bloomberg, Lael Brainard, a Federal Reserve governor who’s also a member of the central bank’s rate-setting committee, spoke positively about major bank-issued digital currencies (CBDC) at an event in New York City on Friday. While Brainard stopped short of announcing any plans for the Fed to issue its digital currency, she said that such a move “could promote a faster payment system and a more inclusive global monetary system.”
People have argued that this new currency is another way for banks and credit card companies to make more money from people who use their services. If you buy something using your digital dollars, then you’re likely going to pay more in fees than if you had just used cash in the first place.
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