Cash transactions are increasingly rare. More than half of transactions in the United States involved cash in 2010. The number had fallen to 28% by 2020, even before the Covid-19 pandemic, leading to wider adoption of cashless and non-cash payment. contact among companies.
But going cashless means more reliance on private businesses – banks, credit card companies, payment processors – all of which have delays and fees that hit the poor hardest. Right now, a cashless economy would exclude the 7.1 million Americans, or 5.4% of U.S. households, who are unbanked, meaning they don’t have a checking account or savings in a bank or credit union, according to the latest FDIC report. study in 2019.
This prompted the US Federal Reserve to consider supporting its own digital version of cash. A Fed-backed digital dollar would in theory function like cash – without delays, processing fees, or integration requirements – and could bring unbanked or underbanked Americans into the digital economy. Citizens could send money to each other digitally or swipe a government debit card to pay, and that money would live in a Fed-backed wallet outside of the private banking system.
Building a central bank digital currency (CBDC) carries the risk of failure, hacking, or invasion of privacy, but if the Fed can put a digital dollar online, it could make the digital economy much faster. , more efficient and more accessible to them. who needs it most.
The digital divide is widening
Today, America’s digital payment system relies heavily on the private sector. This has its drawbacks. Interest rates can be hit hard if balances are not repaid (the average US credit card balance was around $ 5,900 at the end of 2020). Banks charge an overdraft fee if a person withdraws more money from a checking account than they have. And while some apps like Venmo and Zelle make it easy for people to transfer money between themselves digitally, they’re still largely tied to bank accounts with multi-day processing times or fees for instant deposits.
What’s missing, digital currency advocates say, is a public option with no fees, delays and hassle.
The Fed revealed last summer that after years of internal research, it had partnered with the Massachusetts Institute of Technology to “understand the opportunities and limitations” of a CBDC. The project is expected to release its findings later this summer, the next step before the Fed decides if and how to implement a new currency.
“It is very expensive not to be banked and to participate in the digital economy”
Neha Narula, who heads Project Hamilton, the name of the Fed-MIT collaboration, told lawmakers on June 9 that a digital dollar offered a “major overhaul of our payments systems” in the United States. Skeptics like Republican Senator Pat Toomey have rebuffed the idea that a CBDC is necessary, arguing that a CBDC would turn the Fed into a retail bank and arguing that the private sector is doing the job well enough.
But Narula sees the opportunity as revolutionary. « If we could create a well-designed interface with a central bank digital currency, we could do for value transfer what the internet has done for information transfer i.e. create a platform for innovation, ”she said at the recent press conference. hearing.
Access to the U.S. financial system should be a public good, said Hanna Halaburda, professor at NYU’s Stern School of Business and former senior economist at the Bank of Canada. “A lot of central banks have a mandate to provide a means of transaction that would be free and accessible to everyone,” she told Quartz. It is a reality for cash but there is no digital equivalent at the moment.
The Digital Dollar Project, a research group lobbying for a CBDC in the United States, said inclusion is the number one priority. The project is a partnership between consulting firm Accenture and the Digital Dollar Foundation, a nonprofit organization co-founded by Christopher Giancarlo, the former chairman of the Commodity Futures Trading Commission (CFTC).
“It’s very costly not to be banked and participate in the digital economy,” said David Treat, director of the Digital Dollar Project and senior general manager at Accenture. “As we make more and more progress in the digital economy, this gap is only growing. “
The United States is not showing the way
The United States is not the first country to consider a digital currency. In fact, it’s a bit behind the pack. More than 60 countries and jurisdictions are currently researching or deploying their own digital tender, according to the CBDC Tracker site, operated by Boston Consulting Group.
The Bahamas have already introduced its Sand Dollar, China is testing its digital yuan, and Sweden is testing an electronic crown, among others.
The motivations are different for each country. In developing countries where people have less access to reliable and affordable banking services, CBDCs could be transformative. For those who send money across borders, digital currencies could quickly speed up the process, which is notoriously delicate and mediated by different banks and dynamic exchange rates.
In many countries, central bankers view digital currencies as a way to keep their currency dominant. “On digital currency and payments, we in Europe must be prepared to act as quickly as necessary or risk an erosion of our monetary sovereignty – something we cannot tolerate,” said the governor of the Bank from France François Villeroy de Galhau Villeroy at a recent conference.
Digital dollars for cryptocurrency
One of the biggest questions is whether an official digital currency should be set up the same way as cryptocurrency. Private cryptocurrencies like bitcoin and ether rely on blockchains, decentralized ledgers that record transactions in real time on many computers. A digital US dollar wouldn’t necessarily need it.
This poses fundamental questions for the US Federal Reserve. Will a digital dollar be managed by commercial banks or the Fed itself? Will there be a physical card associated with it so that it can include users who do not have broadband or smartphone access?
Halaburda said most of the central bank’s proposals right now are not blockchain-based, in part because there are limitations and costs associated with many different computers replicating the same transactions. Narula told lawmakers she also doesn’t believe the system should necessarily be blockchain-based, but that it should be encrypted somehow. The Digital Dollar Project, meanwhile, is considering various architectures, but believes that a distributed ledger system would provide the most robust security. He is testing a series of pilots for a US-based CBDC and building the Swedish electronic crown on distributed ledger technology.
For now, that leaves more questions than answers.
A more secure system
The downsides of a digital dollar revolve almost entirely around two issues: privacy and security.
Unlike cash, a digital system can be hacked. There are no physical barriers to raising large amounts of digital currency. A digital currency system would be an obvious target for hackers, which could put Americans’ data and finances at risk. But Narula says there are ways to secure the system, for example, by making it open source with an open API. “I firmly believe that open source software is essential for security,” she said. “The more people who search, the more likely you are to find bugs and problems. “
And a digital currency also presents a new way for the state to monitor its citizens. In China, the digital yuan is a technological advancement, a way to separate the Chinese currency from the broad reach of the American financial system, and another way for the state to expand its reach. This is less of a concern in the United States, says Treat of the Digital Dollar Project, since Americans’ constitutional rights protect them from financial oversight without due process.
But it will not be easy to convince some members of the Fed that these barriers can be overcome. For example, Fed Vice Chairman Randal Quarles said on June 28 that CBDCs could be an “illusory craze” informed by “America’s enthusiasm for novelty for centuries … susceptibility to boosterism. and the fear of missing out ”. He jokingly compared a fashionable digital currency to 1980s parachute pants, warning of the real risks of such a system as hacking. “The potential benefits of a Federal Reserve CBDC are unclear,” he said. “Conversely, a Federal Reserve CBDC could present significant and tangible risks. “
But other Fed members are more enthusiastic about it. Fed board member Lael Brainard offered a much more optimistic view of embracing innovation, while Fed Chairman Jerome Powell said he remains open to l idea of a digital dollar.
When asked by CBS News in April if the Fed is likely to implement a digital dollar, Powell simply said “it is possible,” but admitted “that it is more important to do it right than to do it right. ‘be the first’.