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What does the US digital dollar mean for the future of your wallet?

(Bloomberg) — The world’s reserve currency is about to go digital, potentially changing the way Americans walk and use their money.

On Wednesday, the White House directed federal agencies from the Treasury to the Department of Commerce to conduct research on a range of crypto-related topics, including the pros and cons of the digital dollar. For consumers, the move could mean lower-cost transactions and greater access to the financial system, but it could also jeopardize their privacy and hurt US banks that rely on deposits.

And this will happen only if the government can successfully address what is likely to be a complex and controversial task.

In the executive order, the administration stated that a digital dollar has the potential to support efficient and low-cost transactions, particularly for cross-border payments, and will promote greater access to the financial system. Proponents say that the digital version of the dollar will offer some of the benefits of cryptocurrencies: a safer, faster and more flexible payment system.

However, the currency of the US central bank will not be implemented anytime soon, despite new guidance from the White House. The process is likely to prove lengthy, with questions as to whether it will provide the efficiency and ease of the current financial system. In addition, the move would potentially give the government access to financial data that critics say could violate users’ privacy.

“What you are starting to see is that the government has realized that crypto is not a fad. It is a market that has potential growth that is really innovation,” said Edward Moya, senior market analyst at forex broker Oanda. “The harsh reality is that this will probably be something that will have multiple test sequences.”

From mobile applications like Venmo and Apple Pay to debit cards, bank transfers and payment services, digital payments are already a large part of consumer daily transactions in the US. On the surface, a digital dollar would not be that much different from holding money in an electronic account. But on the back end, the mechanism through which money is transferred in the US financial system will change.

Central bank digital currencies, or CBDCs, are a direct liability of a country’s central bank, not commercial institutions. Consumers will rely less on third-party intermediaries to act as intermediaries, and will essentially work directly with the government to complete some transactions. Experts say this has the potential to enable near-instant settlement as well as lower fees, and also means that there will be no need to worry about bank failure or deposit insurance. A digital dollar could also provide a faster way for the government to deliver things like tax refunds, stimulus checks and unemployment benefits to citizens.

Bitcoin Policy Institute fellow William Luther said, “In the background, if this is a more effective technology, it would enable more transactions, cheaper transactions, and would result in businesses charging lower prices for the products they sell. ” Associate Professor of Economics at Florida Atlantic University.

digital yuan

The US government’s announcement may partly be a reaction to pressure from abroad. Many governments around the world plan to provide alternative digital currencies to remain competitive with cryptocurrencies and legal tender of other countries. CBDCs could also provide a solution to the US-dominated global banking system, and could potentially be used as a way to avoid sanctions.

More notable of these is China, which began testing its digital currency in late 2019 and encouraged its use at the Winter Olympics in Beijing earlier this year. Transactions using the digital yuan totaled $14 billion at the end of 2021.

Read more: China showcases digital yuan at Olympics as US plays catch-up

“You’re probably going to see that there will be some competition between the US and China to see who is the major player in terms of how world trade is regulated,” Moya said. “There is still an advantage to the dollar; so long as it is, the potential for gains for the digital dollar still remains.”

According to the IMF, around 100 countries are in various stages of exploring a CBDC, including India, which stunned the payments world by announcing that its central bank will issue a digital rupee in the fiscal year beginning April 1.

The main challenge for governments considering digital currencies is whether they can develop the technology needed to operate as seamlessly as the traditional banking sector. Problems in managing the rollout could undermine public confidence.

In this way, the development of a digital dollar would restart a long-standing debate in the US about whether certain services should be private or public, said Joe Carlisle, partner at SmithAmundsen and president of the law firm’s cryptocurrency, blockchain and fintech group. he said.

“The commercial banking system is quite efficient,” Carlsaare said. “It provides for transactions very quickly and there are trillions of transactions regularly going through the commercial banking system. The Fed is not going to be more innovative than this.”

Privacy concerns

A digital dollar also raises questions about financial privacy. The ledger underpinning the currency would be operated by the government, potentially giving it the ability to monitor transactions, stop them or confiscate balances.

“If the government controls the ledger, there is a risk that it will monitor those transactions without proper legal channels because it is not taking information from anyone else,” said Luther at the Bitcoin Policy Institute. “It’s just looking at its information.”

Separately, banks and financial institutions that rely on deposits from customers to run their businesses and financial lending could be affected if the digital dollar becomes popular, Luther said. The Federal Reserve issued a discussion paper earlier this year saying that a digital currency could reduce the amount of money in the banking system, increase the cost of credit and increase credit availability for homes and businesses. can reduce.

Public hype about cryptocurrencies means that the US government can no longer ignore the potential of digital currency. But apart from technology, a digital dollar would be conceptually different from cryptocurrencies like bitcoin, which are still too volatile and insufficiently accepted to be useful for payments.

“Digital dollars are backed to the same extent as your physical dollars,” said Jean Hoffmann, president of blockchain platform Chia Networks. “You expect it to be more accepted globally and less volatile, while cryptocurrencies are in this radical adoption phase and this leads to volatility.”

However, bitcoin offers a feature that the digital dollar will not: there is no central party that controls it.

“Things like bitcoin and other cryptocurrencies are in demand because they have properties that the dollar does not have,” Carlasare said.

To contact the authors of this story:
Missirlena Egkolfopolu in New York [email protected]
Claire Ballantine in New York [email protected]

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