The Federal Reserve Weighs The Pros and Cons Of The U.S. Digital Currency

While the dollar has undergone numerous changes, nothing compares to the radical move to go digital.

The U.S. is carefully rethinking adopting a digital version of its currency to cope with today’s increasingly cashless society. Who knows, it could be one of the dollar’s ultimate transformations?

In that situation, the country would mint the coins and paper bills and issue digital cash. To be called a central bank digital currency (CBDC), it would be stored in apps or digital wallets on our smartphones.

It’s a goal of a cashless future that other countries are already implementing. China, for instance, has introduced the digital yuan on a trial basis. And India this week said it would launch a digital rupee.

Now, the U.S is considering whether it wants to dive into the trend.

Last month, the Federal Reserve released a paper presenting the advantages and disadvantages of a digital currency. The agency said it is an initial step to jumpstart dialogues among policymakers and generate feedback from other stakeholders.

How would the U.S. digital currency work?

Legislators emphasize that these are just the beginning, and many things need to be deliberated. Generally, the transactions conducted with digital currency wouldn’t look too different from existing traditional means. It would still allow us to pay for things we need by bringing our smartphones to digital readers.

China allows digital yuan payments in some pilot cities for its digital currency, enabling citizens to transact via an app.

What are the advantages of having a U.S. digital currency?

Reducing or eliminating fees

When you make a contactless payment at this moment, it may look instantaneous. But according to Chris Giancarlo, the former chairman of the Commodity Futures Trading Commission, plenty of things happen behind the scenes.

Also, every step may require transaction fees. In 2020, they constituted more than $110 billion, typically shouldered by businesses.

 With U.S. digital currency, you could conceptually eliminate go-betweens. However, it wouldn’t necessarily eradicate non-government players. In China, users who use the digital yuan can go to banks to add money to their digital wallets.

Open up digital transactions to Americans who don’t have bank accounts.

A digital dollar would provide digital transactions to Americans who don’t have bank accounts. According to the Fed, over 5 percent of U.S. households are “unbanked.” So, providing them with digital money would allow citizens to participate in the cashless financial ecosystem.

Help the government to distribute benefits easier.

The digital dollar could have allowed the government to transfer relief payments directly into digital wallets during the pandemic.

What are the challenges of having a U.S. digital currency?

Privacy

Once the project pushes through, the central bank could accumulate a vast amount of data. And it possibly gives them more visibility into everyone’s financial life. While it could be helpful for regulators, it would also raise privacy issues. 

Cybersecurity 

Given the surge in finance-related scams, the implementation of U.S. digital currency would require the government to modernize the country’s financial infrastructure. 

Next Steps

Federal Reserve Chair Jerome Powell and the team move cautiously and methodically. They are soliciting feedback from the public after releasing their paper last month. And just last week, the Federal Reserve Bank of Boston released preliminary results of its ongoing research into the technological challenges related to adopting a digital currency in the U.S.

With all the pros and cons of the plan, Powell has clearly said that he is in no hurry. He believes that it is more important to do this right than fast. 

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