Alexander NaumannDigital payment methods such as private stablecoins offer consumers an additional benefit. However, they interact directly with payment transactions. Important questions arise for consumers, banks and the authorities. One thing is certain: The digital transformation will also affect government currencies.
Digital currencies in Europe and China
Europe and China are currently leading the way. The Swiss National Bank is already investigating the possibilities of a digital central bank currency (Central Bank issued Digital Currency, or CBDC for short). However, it will not be possible to pay with the digital Swiss franc for some time yet. The European Central Bank (ECB) is planning to introduce a purely digital euro. Meanwhile, the first tests with the digital yuan are underway in China. They are not the only ones. According to the Atlantic Council think tank, there are currently 87 countries around the world planning to introduce digital currencies. These account for a total of 90 percent of the world’s gross domestic product. Seven countries have already introduced digital currencies, primarily Caribbean island states and Nigeria.
Central banks are not very enthusiastic
One thing is clear: Central banks are not enthusiastic about cryptocurrencies. This is due to the following reasons, among others:
- Bitcoin and other cryptos allow payment transactions to bypass the banks.
- With the help of privacy coins or special anonymization procedures, the transfer of money can be concealed.
- There is a risk of money laundering and other risks.
- Each cryptocurrency has its own monetary policy, which is transparently recorded in the code. A parallel market is formed, and monopolists like central banks cannot stand it.
However, digital currencies have advantages that would also benefit states and banks. Larger states like the USA are also discovering Digital State Coins, but they are slower to adopt them.
USA: Where does the digital dollar stand?
Not only that, but the U.S. is also on the bandwagon. The Chinese government’s digital yuan has the potential to replace the U.S. dollar as the world’s currency. As a result, back in July 2020, the U.S. Senate held a hearing where policymakers discussed the possibilities of digital currencies. Instead of Bitcoin and Co, the topic was a possible “digital dollar” issued by the Federal Reserve, the central bank of the United States. The senators expressed skepticism about the idea that private tech companies could determine payment transactions in the future. At the same time, they saw the potential of digital currencies in terms of privacy, inclusion and resilience.
According to Chris Giancarlo, chief executive of the Digital Dollar Project, the Federal Reserve was already exploring potential applications for CBDC’s. In collaboration with the U.S. Treasury, this has resulted in local and national pilot projects in the private sector.
The work of the Digital Dollar Project (DDP)
Since then, the project has not remained idle. In May 2021, it announced it would run five pilot programs to test a CBDC rollout. The results are expected to provide the data base on which to introduce a digital U.S. dollar. Chris Giancarlo, in an interview with Al Djazeera, stressed the lack of reliable data so far.
“There are a lot of reasons why central banks all over the world are looking seriously at CBDC’s,” he told Al Djazeera. “These include data collection, economic privacy, modernization of financial systems, financial inclusion, more precise execution of government services and monetary policy.” He added, “The private sector has already been exploring the possibilities of digital assets like Bitcoin for more than a decade. Now the public sector is trying to catch up.”
Accenture to provide boost
With that said, it’s clear that the U.S. is looking to catch up with other nations and China in particular. While the project has been exploring the use of CBDC’s for a bit longer, specific plans have yet to emerge. The project is supported by Accenture. This is a technology consulting firm. Accenture is a partner in the pilot project and is funding the public sector. The company had already worked with Sweden, Canada, Singapore and France regarding the introduction of digital currencies.
The DDP’s two-step system
In its white paper, the Digital Dollar Project outlined how it envisions the future of the digital dollar. The goal here is to maintain the U.S. dollar as the world’s top reserve currency. Furthermore, the DDP proposes cooperation between the public and private sectors. The result would be a two-tier system similar to the existing model: At the top is the Federal Reserve. It has the task of lending the money to private banks. These, in turn, channel it into the economic cycle, for example, via loans. Basically, it’s business as usual.
At the same time, the U.S. government wants to keep control over the development of the CBDC. During the May 2020 hearing, the topic of developing the digital currency in cooperation with private companies also came up. This proposal did not win applause. The state retains a monopoly on the distribution of money, it was argued. Private employees could not be trusted to handle the national currency responsibly, he said.
Digital dollar yes, blockchain no?
Meanwhile, the former president of the Federal Reserve Bank of Boston, Eric Rosengren, was allowed to take a look at the state of development. Specifically, it’s about a research paper from the Federal Reserve Bank of Boston and MIT. According to him, the digital currency meets the requirements in terms of processing volume and speed, Forbes reports. However, the development is likely to take a while due to regulatory and bureaucratic hurdles. The main concerns are privacy and security. What has been missing from all the discussion about the digital U.S. dollar so far was also scarce in this research paper: blockchain technology.
A blockchain or other form of distributed ledger will very likely not play a role in the digital dollar, he said. The project is not built on any blockchain. The following points give the Federal Reserve pause for thought:
- Lack of speed
- Questionable scalability
- Small amount of transactions that can be processed simultaneously
- Decentralization is not desired
Furthermore, not only the Fed, but also Congress and the White House would have to agree on a CBDC. All these institutions must give their approval. It will probably be a while before this is achieved.
What is the function of the digital dollar?
It is still unclear what exactly the digital U.S. dollar will be. The 2020 hearings were also increasingly about stable coins. Thus, it is possible that the U.S. government’s CBDC could essentially be a dollar-backed stable coin (without blockchain). However, this is quite unlikely. Instead, the end result could be a means of payment for the Internet. Or it could become a replacement for the real U.S. dollar. This prospective CBDC would be under the full control of the FED. The Federal Reserve would decide on the distribution and the money supply. As with the regular U.S. dollar, it would theoretically be a liability. The FED must be able to repay the money. However, like any other fiat money, it would be backed by nothing. Trust in the FED alone determines the value of the CBDC.
What do consumers get out of the digital dollar?
A digital U.S. dollar would come in handy in times of financial distress. It could be sent easily and directly to U.S. citizens with the right app or wallet. This would allow it to reach consumers who don’t have a bank account or physical mailing address. For everyone else, it simply means: no cash, digital only. How effective and reliable the payment network will actually be remains to be seen. One thing is certain: criminals will have to look for other options or seek technical means to disguise their payment transactions. Anonymous cryptocurrencies like Monero (XMR) could help them here.
And citizens outside the U.S.?
For citizens outside the U.S., meanwhile, little is likely to change. Few in Europe own physical U.S. dollars; for the most part, it’s money in their bank accounts. The CBDC could be a boon for guest workers and migrants. Like cryptocurrencies, digital central bank money could be easier and less bureaucratic to send. For example, to families back home. However, this is still pure speculation. The FED could also simply prevent such transfers by only allowing addresses within the US. It would be technically possible.
What is the Federal Reserve System?
The Federal Reserve is the central bank of the United States. It alone has the privilege of printing and circulating money. President Woodrow Wilson granted it this right when he signed the Federal Reserve Act on December 23, 1913. It continues to decide on the amount of credit and provides a range of financial services at the national and international level.
Further links
- Digital Swiss franc: Switzerland is pioneering the idea
- Digital Euro: EU lags behind digital money
- GNU Thaler: Digital cash without blockchain
FAQ – Frequently asked questions
It is very likely that a smartphone app will be used. QR codes can be scanned via smartphone, then the buyer confirms the payment process and the transfer is made. This app is linked to the bank account. However, nothing works without a smartphone.
That is not yet clear. It is conceivable that both monetary systems will coexist for a while. In the long term, however, there is a trend toward purely digital money. The states hope that this will give them more control and a more efficient monetary system.
A CBDC will be worth exactly as much as the central bank determines. In this respect, digital central bank money is no different from fiat money. The competitiveness of the national economy, international trade and monetary policy will also play a role. The decisive factor will be whether the digital dollar can also hold its own as the world’s reserve currency.
