The Pros and Cons of a “Digital Dollar” | Voice of America

WASHINGTON – A senior Federal Reserve official raised eyebrows in the financial services world last week by saying the central bank is speeding up the development of a plan that could result in the issuance of a digitized version of the U.S. dollar. In doing so, she indicated that the United States is joining a growing movement among major economic powers to rethink how money will be exchanged in the future.

The United States would not be the first country to consider launching what is known as a “central bank digital currency”, or CBDC. China is playing a leading role. But the dollar’s importance to world trade and the world economy in general makes the Fed’s interest in the project particularly significant for the development and acceptance of what would amount to some form of digital “currency”.

Supporters of a CBDC cite a future in which electronic payments between individuals or businesses could be instant and permanent, without a bank acting as an intermediary, and in which even people without access to a bank account could easily receive secure electronic information. Payments.

Skeptics are voicing multiple concerns, including concerns about confidentiality, pointing out that the system could give the federal government access to transactions that individuals would prefer to do in private. There are also economic concerns, such as the possibility that a digital dollar circulating freely around the world could replace national currencies issued by central banks in small countries.

Whether this is a good thing or not, the ability for national governments to issue digital versions of their own currencies is gaining ground globally, with China paving the way for a digitized version of the yuan that is already in circulation. limited.

David Treat, a senior executive at Accenture who leads the consultancy firm’s digital currency efforts, said his company has worked with the majority of central banks in the G-20 countries, and he estimates that a quarter of them will have some sort of digital currency in circulation by 2024.

With CBDCs seemingly an inevitable part of the world’s financial future, here are some of the pros and cons of new technology applied to the world’s most widely used currency.

Pro: low volatility

Unlike other digital currencies, such as Bitcoin, a digital US dollar would be worth exactly that: one dollar. The owner-owned digital “token” is backed and guaranteed by the Federal Reserve.

“There is no doubt as to its value,” said Treat. “Whether it’s the dollar in your wallet, the dollar in your savings account, or the central bank’s digital currency version of $ 1 in your digital wallet, all are still equal to $ 1. “

Advantages: efficiency

While normal digital transactions can seem instantaneous, there is a vast network of digital infrastructure that underpins even a simple Venmo money transfer, requiring multiple exchanges of information between financial service providers confirming that the person who making the payment has the resources to cover it, and the recipient is equipped to receive it. A failure in any part of the system may result in a delay in payment confirmation.

In contrast, Treat said, a digital dollar would work like cash, in that all the information needed to verify that a transaction took place exists in the token stored in a digital wallet. When a payment is made, this information is encoded in the token itself, making this information a permanent part of the token.

This means that two people with digital wallets on their smartphones could theoretically exchange digital dollars for goods and services without an internet connection, provided the devices can connect through the now ubiquitous near-field communication technology. (When both digital wallets regained an Internet connection, a record of the transaction would be stored in a “distributed ledger” which would add an additional degree of security.)

Pro: global accessibility

A reliable digital dollar could be used around the world, both in cross-border and domestic transactions.

“One of the main potential benefits of the CBDC would be the reduction in costs and friction in cross-border trade,” said Daniel Gorfine, director of the Digital Dollar Project, a nonprofit effort that helps roll out a dollar. “It is important that the United States take a leadership role in setting global standards around the CBDC to nurture this potential. “

With the proliferation of smartphones even in some of the world’s poorest countries, CBDCs in general could help bring many people around the world into the digital economy.

“As a digital wallet on a mobile device is less costly from a technological, operational and regulatory perspective, more unbanked or underbanked people can benefit from efficient access to the financial system,” said Gorfine, who answered the questions. in an email exchange with VOA. “This should certainly be true in the United States and abroad; indeed, the experience of countries like Kenya shows that digital access can have a highly inclusive effect on underserved populations.

Downside: privacy concerns

The idea that the Federal Reserve would operate a system to track countless financial transactions made by individuals worries privacy advocates. Many point to China’s digital yuan system, in which the government views access to transaction data as an explicit feature.

In an interview with CoinDeskTV last week, Brian Brooks, who was the acting chief regulator of US national banks during the Trump administration, said he doesn’t think the US should go down the same path as Beijing. .

“The idea of ​​channeling everyone into the [Federal Reserve] for a CBDC it’s a bit like asking people to go back to the post office, ”said Brooks, now CEO of cryptocurrency trading platform Binance. “I just don’t think it’s the American way. It’s clearly the Chinese way, but I don’t think we’re going to see it in this country.

Supporters of a CBDC, like Treat, say the Fed’s operation of the system should be seen as a boon to privacy advocates, as the central bank would be bound by the Fourth Amendment ban in the U.S. Constitution. on the abusive search and seizure of personal information.

Disadvantage: undermining local currencies

Allowing individuals outside of the United States to easily exchange payments into U.S. dollars might be good for people at the individual level, but bad for countries trying to manage a national currency.

If the dollar supplanted local currency as the preferred medium of exchange, it could undermine the purchasing power of the individuals who depend on it and undermine the ability of the local central bank to manage its own money supply.

It’s a problem that Gorfine says needs to be addressed.

“Studying the potential for increased international dollarization is prudent,” he said. “However, there may be ways to mitigate some risks, including limiting digital dollar holdings… In the long term, as demand for access to digital currencies grows, it is good that these offerings are substantiated. by strong democracies that integrate key standards and the rule of law with the digital currency supply.