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How a New Digital Dollar Could Shake the US Financial System

How a New Digital Dollar Could Shake the US Financial System
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How a New Digital Dollar Could Shake the US Financial System. The Federal Reserve says it hasn’t decided whether to pursue a digital currency but notes that a CBDC “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.”

“The Federal Reserve does not intend to proceed with the issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law,” the Federal Reserve also says.

A US CBDC wouldn’t replace cash or paper currency. “The Federal Reserve is committed to ensuring the continued safety and availability of cash and is considering a CBDC as a means to expand safe payment options, not to reduce or replace them,” the Federal Reserve said.

Senior Biden administration officials told reporters that “the implications of potentially issuing a digital dollar are profound.” But those officials added that they intend to “maintain the centrality of the dollar in global financial markets and in the global economy.”

Digital Currency Can Be a Tool for Surveillance

Digital currency issued by a central bank can be used as a tool for government surveillance of citizens and control over their financial transactions. This has been a concern with China’s digital currency, which is in the early stages of rollout. As Akram Keram, an expert on China at the National Endowment for Democracy, wrote last year, “With digital yuan, the CCP [Chinese Communist Party] will have direct control over and access to the financial lives of individuals, without the need to strong-arm intermediary financial entities. In a digital-yuan-consumed society, the government easily could suspend the digital wallets of dissidents and human rights activists, for example.”

The Federal Reserve said that any US-issued digital currency “would need to strike an appropriate balance between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity.” That could be accomplished with an intermediated model in which “the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments,” thus “facilitat[ing] the use of the private sector’s existing privacy and identity-management frameworks,” the Federal Reserve said.

The Federal Reserve provided more information on a potential digital currency in a report issued in January 2022.

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Biden Seeks Analysis

The report ordered by Biden is to be produced by the secretary of the treasury, in consultation with the secretary of state, attorney general, secretary of commerce, the secretary of homeland security, director of the Office of Management and Budget, and director of national intelligence.

The report is supposed to analyze the potential implications of a digital currency on economic growth, stability, and “financial inclusion”; the relationship between a US-issued digital currency and digital assets administrated by the private sector; “the future of sovereign and privately produced money globally and implications for our financial system and democracy”; “the extent to which foreign CBDCs could displace existing currencies and alter the payment system in ways that could undermine United States financial centrality”; potential implications for national security, financial crime, and human rights; and the effects that foreign CBDCs may have on US interests generally.

The executive order encourages the Federal Reserve to “assess the optimal form of a United States CBDC” and develop a strategic plan “that evaluates the necessary steps and requirements for the potential implementation and launch of a United States CBDC.” Biden also wants the Federal Reserve to evaluate how a CBDC “could enhance or impede the ability of monetary policy to function effectively as a critical macroeconomic stabilization tool.” Biden further asked federal agencies for an assessment of whether Congress would need to make legislative changes before the US can issue a digital currency.

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