Disturbance. It comes in the form of a digital currency for the US dollar. Last week, the Biden administration detailed a comprehensive plan for launching a central bank digital currency (CBDC) in the coming years. The Department of Energy, Department of Commerce, Department of Treasury, and other agencies have looked into the administration and regulation of a CBDC.
The government is partially responding to the explosive growth of digital currencies. About three out of ten US adults are currently investing in some form of cryptocurrency or “crypto” such as Bitcoin or Ethereum. These digital “coins” rely on a decentralized network of computers to verify financial transactions and exclude third parties such as banks or credit cards.
The good, the bad, and the ugly of crypto
Proponents of crypto point to its affordability, efficiency, and ability to reach consumers with little or no access to traditional banking services. With just a cell phone or a crypto ATM, consumers can easily send and receive digital currencies, even across international borders.
On the other hand, crypto is still largely unregulated and volatile. Investors in Bitcoin, for example, saw returns of over 70% in 2021, but the currency is down nearly 60% year-to-date. And if you send your payment to the wrong account (known as a “digital wallet”), there may be no way to retrieve it. Crypto has also been used for money laundering, fraud, and to finance terrorism. Several bipartisan bills have attempted to address some of these issues, and the industry itself has called for regulation.
At the same time, creating a government-backed digital currency presents a number of challenges. CBDC transactions could be prosecuted by the government, raising serious privacy concerns. Banks would lose business and fees, which could hurt lending in low-income communities. US Senator Mike Lee (R-UT) introduced a bill last week opposing the creation of a CBDC. “An American CBDC would not offer US citizens anything that they cannot already obtain through private financial innovation,” Lee said. “Instead, it could publicize every Federal Reserve transaction while turning banks and credit unions into mere wallets rather than private lending institutions.”
Why does the government want to get involved?
There is no guarantee that the CBDC will clear all political and logistical hurdles to launching a digital dollar, but there are two reasons the government is pushing the effort.
First, cryptocurrencies are no longer a curiosity or a fad; If the government doesn’t develop CBDC, it risks making the greenback obsolete in the long run. Remember that the dollar is the global reserve currency. Countries around the world hold dollars in central banks to help even out interest rates and smooth international transactions. This system gives the US enormous financial influence and advantages. If another country’s currency is digitized in a way that leaves the dollar in the dust, Americans will lose that financial advantage. Our ability to influence foreign governments, such as through recent sanctions against the Russian government and oligarchs, would also be hampered.
Second, the US is far behind other governments in developing state cryptocurrencies. For example, China began work on its digital renminbi (e-CNY) in 2014 and launched a successful test run at the Beijing 2022 Olympics, despite being a prototype. The EU is developing a digital euro to be tested by 2023 and rolled out by 2026.
What happens next?
The government will continue to devise policy solutions to some of the more thorny issues raised by a digital dollar. As in other countries, there will be testing and prototyping, and Congress is likely to get involved further. So when will the CBDC start? According to Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center, “The United States is far away! . . . Most likely, it will be several years before anyone uses a digital dollar in real life.”