Should the United States issue a digital dollar, which could compete with crypto assets?


President Biden’s executive order on cryptocurrencies directs his administration to consider the potential implications of a U.S. digital dollar, which would be backed by the Federal Reserve.

Here’s what you need to know about the potential issuance of a US central bank digital currency.

What is a government-issued digital currency?

A US digital currency would be a type of digital dollar issued by the government. Unlike private crypto assets such as stablecoins, it would be issued and guaranteed by the Fed, a government entity, as are US dollar notes.

In theory, a Fed digital dollar could be used alongside traditional paper money, but many details about exactly how people would access digital dollars and how they would fit into the financial system are unclear. . For example, the Fed should decide whether consumers would access their digital dollars with accounts directly at the central bank or through existing private sector banks.

Why would the United States want this?

Proponents say a digital dollar from the Fed could make it faster and cheaper to move money through the financial system, bring people into it who don’t have bank accounts, and provide the government with an efficient way to distribute financial aid.

Some proponents say such a digital currency could help improve the effectiveness of monetary policy by allowing a central bank to change interest rates directly on accounts holding government currency. This could allow central banks to circumvent often volatile financial markets and bring monetary policy down to the detail level.

Another motivating consideration is to keep pace with other countries considering a digital currency for domestic and international payments. The United States might not want to see China, for example, create an international financial network rivaling the US dollar through its digital currency.

The Federal Reserve is trying to figure out how to keep cash relevant in a cashless world. He plans to digitize the US dollar, give people money they can access on their phones, and bypass electronic payments that can be slow and costly for businesses. Illustrative: Jacob Reynolds/WSJ

What is the risk ?

Issuing a digital dollar presents several challenges, including the fact that many Americans actively use and prefer cash. Privacy concerns should be addressed, as a Fed digital currency system would in theory allow the central bank to see what each user has done with the currency.

A Philadelphia Fed report warned that a US central bank digital currencythere could destabilize the financial system in a crisis if people withdraw their money from banks, mutual funds, stocks, and other investments and invest the funds in the Fed’s ultra-safe currency.

Some banks, facing the prospect of competition from the Fed for deposits, have previously signaled that they do not believe the central bank has the legal authority to issue digital currency without congressional authorization.

Fed Chairman Jerome Powell has indicated he sees reason to be cautious, saying getting the right digital dollar is more important than being first to market, in part because the critical global role of the dollar.

Have other countries done it?

China created its own government-issued digital currency in 2021 and recently banned transactions using cryptocurrencies issued by non-monetary authorities, citing bitcoin, ether and tether as examples. El Salvador, meanwhile, became the first country in the world to adopt bitcoin as its national currency alongside the US dollar.

China created its own government-issued digital currency in 2021.


Photo:

Bloomberg News/Bloomberg

How would this be different from privately issued stablecoins?

Some cryptocurrency companies issue stablecoins, digital currencies pegged to national currencies such as the US dollar. The Biden administration is in the early stages of considering ways to impose bank-like regulation on these assets, which some officials say could fuel financial panics and needs to be more tightly regulated. A US digital currency would be directly issued by the government.

Mr. Powell told lawmakers in January that a U.S. digital dollar could compete with stablecoins.

What is the benefit for consumers?

Depending on how a digital dollar has been constructed, there could be several benefits. For consumers with bank accounts accustomed to Venmo and other digital payment services, the difference would not be very noticeable.

For consumers without a bank account, however, it would provide the convenience of digital payments without the costs of maintaining a bank account. For example, someone who doesn’t have a bank account could get paid in digital currency and not have to go to a check cashing store to convert a paycheck to cash.

For merchants, this would likely have an advantage over credit cards as a payment system. The money would arrive almost instantly in the merchant’s accounts and he would not have to pay the fees to use Visa or MasterCardit’s

networks.

Apparently, a digital dollar is safer than a bank account, assuming it was issued by and a liability of the central bank. Indeed, since most accounts have deposit insurance, it’s not really a practical benefit.

This article may be updated.

Bitcoin, Dogecoin, Tether: the cryptocurrency markets

— Paul Vigna contributed to this article.

Write to Andrew Ackerman at andrew.ackerman@wsj.com

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