Moreover, digital currency would be available to banks and citizens and to people who today do not have access to bank accounts, who are excluded or completely excluded from the financial system. On that basis, a digital dollar could theoretically work like cash, with no delays, processing fees, and onboarding requirements, which would introduce Americans without bank accounts into the digital economy. With volatile prices and limited use, it could function like a dollar without widespread acceptance as a tradable asset.
When citizens send in cash, they draw a government debit card to pay for it, which lives in a US Federal Reserve wallet and not in a private banking system. Building a digital Central Bank Currency (CBDC) carries the risk of failure, hacking, and invasion of privacy. Still, the Fed could make the digital economy more efficient and accessible to those who need it by retracing the digital dollar.
Following the successful introduction of decentralized cryptocurrencies such as Bitcoin and Ethereum, a value store that is not managed by a central authority, governments and central banks around the world are exploring the possibility of creating their own digital currency, also known as a digital central bank currency. Some central banks in the US and elsewhere have begun to explore the idea of issuing their own “digital currency,” which is essentially a Fiat version of a cryptocurrency that functions like physical cash and has the same technological advantages as other cryptocurrencies.
This would provide unwelcome competition for banks and a safer place for depositors to invest their money. Transfer payments, such as those provided to people by the government during the COVID 19 crisis would be facilitated because the money would be deposited in digital wallets. The Fed would invest in financial assets equal to deposits and liabilities, centralize lending, and politicize lending decisions, turning the Fed into government lending to banks.
Cryptocurrencies are unlikely to replace government-backed currencies. Contrary to what third-party names suggest, third-party stable coins are not stable enough to attract consumers from fiat currencies and undermine the ability to develop countries’ central banks to conduct monetary policy. The global record of politicized lending by governments and banks is dismal.
The Swedish central bank is considering the introduction of a digital version of the Fiat currency around the world, and the objectives they have in mind are not to reduce innovation but rather to provide safeguards for the payment system to ensure that it is not the private sector that is facing a crisis of confidence.
Physical currency is still used in most countries (with the exception of Sweden), but the use of cash is decreasing as consumers around the world make transactions in physical currency using credit cards and mobile phones to pay. In most countries with financial systems, electronic currencies dominate. In China and India, small micro-transactions with street vendors can be carried out using decentralized payment systems and mediated not through traditional banks but by other platforms.
Looking at the landscape of cryptocurrencies, it is useful to keep in mind a distinction: the distinction between digital central bank currencies that use the same cryptographic technology like Bitcoin and unofficial cryptocurrencies such as the newly created ether, which have no digital assets (they have the support of the US dollar). Virtual currency, defined by the European Central Bank in 2012, is a type of unregulated digital money issued by its developers, controlled and used by members of a particular virtual community, and accepted. According to the further analysis report 2015 ECB Virtual Currency Scheme, a virtual currency is a digital representation of value that a central bank, credit institution do not issue, or e-money institution. It can be used as an alternative to money in certain circumstances.
Many of the necessary arguments are valid, but they overlook the larger point that the US is not a laggard in today’s hyper-competitive digital currencies and blockchain standards and that it will win the race for the future of money and payments. By governing through a trusted CBDC, the United States has the opportunity to deepen its role in the global financial system, surpassing China in digital currencies, and in an effort to expand the power of US banks around the world and support the next generation of financial innovation and inclusion.
The impetus behind such digital central bank currencies in many other countries (CBDCs) coupled with the idea that they could weaken the global role of the dollar and additional regulatory concerns about private stable coins, appears to have led the Federal Reserve to issue its own digital dollar stable coin. Elements of federal policy were published in telegrams from Fed Chairman Jerome Powell, in which he discussed central banks’ “research into issuing their own digital currency.
As the cryptocurrency market continues to attract attention and digital technology threatens to end the entire financial system, governments and reserve banks are running to keep pace and maintain their own. Jerome Powell, the chairman of the Federal Reserve, has urged regulation of stablecoins (cryptocurrencies pegged to a benchmark such as the US dollar). Federal Reserve governor Lael Brainard indicated that the Fed would explore a digital central bank currency (CBDC) in some cases, but the response seems to strengthen stablecoins. At the same time, many, especially in China, are exploring ways to use digital technologies to create their own central bank digital currencies (CBDCs) to challenge US monetary hegemony and the value proposition of decentralized cryptocurrencies.