I

ntroducing a "digital dollar" central bank digital currency would fundamentally alter how the world engages with money. Recent developments indicate that the United States is open to the idea.

What Are Digital Currencies Issued by Central Banks?

Money in the United States is currently divided into three types: central bank money, which is a liability of the Federal Reserve; commercial money, which is a liability of the commercial banking industry and is the most broadly used type of money by the general public; and non-bank money, which is a liability held by the non-banking firms such as payment processors like PayPal.

The credit and liquidity risks associated with each of the three types of money vary. Central bank money, for example, has no credit or liquidity risk because the Fed can generate money out of thin air.

Commercial bank or deposit accounts, on the other hand, carry a medium level of risk because they can go insolvent or run into liquidity problems—risks mitigated to some extent by federal deposit insurance and banks' on-demand access to central bank liquidity.

Non-bank money or credit on payment processor accounts appears to lack the full protection afforded by deposits, making it the riskiest option.

Today, the only type of money accessible to the general public in the United States is cash or physical currency. Another type of money is "bank reserves," which are only available to commercial banks and utterly inaccessible to the general public. Commercial bank money, which is formed ex nihilo when institutions create loans, is the most extensively used money by the general public today.

The idea behind CBDCs is to establish a new type of currency that resembles commercial bank money in that it is purely digital and directly available to the general public but is issued by and reflects a liability of the Fed (like cash) rather than commercial banks (like bank deposits).

As a result, in theory, this form of money would be both the safest and most easily transferable form of money offered to the general public in the future.

Signs of an Impending Digital Dollar

While the United States has not yet officially committed to establishing and authorizing a digital dollar in the form of CBDC, numerous signals from top government officials and agencies over the last two years indicate that the government is profoundly considering the idea.

The United States contains some of the most telling signs that a digital dollar is on the way. Treasury's September 2022 report titled The Future of Money and Payments was issued in response to President Biden's executive order on "Ensuring Responsible Development of Digital Assets." In March, President Biden directed several federal agencies, including the Treasury, to file reports on potential U.S. crypto regulation, such as consideration of a CBDC.

According to the subsequent reports, the agencies generally support the idea.

The US Treasury Backs CBDC Efforts

In response to the White House, the United States Treasury urged the Fed to continue its CBDC study and technical experimentation, such as work on assessing the various choices of technology and other CBDC design elements, implying that issuing a digital dollar might be a desirable outcome if calculated to be in the country's interest.

To assist the Fed, the Treasury announced the formation and leadership of an inter-agency operating group to promote the approach for developing of CBDCs. The Treasury stated in the report that while developing the U.S., Although CBDC may take several years, the government must do so to ensure the dollar's importance in the global financial order.

The Federal Reserve is already working on a U.S. CBDC

Sated in a January discussion paper titled Money and Payments: The United States Dollar in the Age of Digital Transformation that it is exploring the implications of, and options for, issuing a CBDC. While the Fed has not yet made any explicit policy recommendations, such as whether the government must issue a digital dollar or not, it has disclosed that it is planning to study CBDCs from various angles, along with technological study and testing.

Crypto is increasing external pressure

The tension from the increasingly rapid emergence of cryptocurrencies and the fast growth of competing CBDCs is the main reason the United States has been ramping up its CBDC research and development efforts over the last two years—and another reason why a digital dollar might come earlier rather than later.

Why Should You Be Concerned?

A statement from Bank for International Settlements chief Agustin Carstens may be the most effective way to explain CBDCs and why they matter. Carstens explained the distinction between physical money and CBDCs throughout a 2020 IMF discussion panel on cross-border payments.

"We have no idea who is using a $100 bill today, and we have no idea who is using a 1,000 peso bill today." The significant difference with the CBDC is that the central bank will have complete control over the rules and regulations governing the use of this representation of central bank liability, and we will have the innovation to impose it."

It's difficult to imagine how bringing a more centralized and censorable type of bank liability money will indeed reduce the amount of non-custodial and uncensorable hard currency investments like Bitcoin or Ethereum. As governments begin to embrace CBDCs, the attraction of certain digital currencies as value stores or even "safe haven" assets should grow.

How can people prepare for the arrival of a digital dollar? Let us know your thoughts by sharing this article on social media.

Posted 
Oct 16, 2022
 in 
Digital Lifestyle
 category

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