The PWG report also notes, however, that the potential for the increased use of stablecoins as a means of payment raises a range of concerns related to the potential for destabilizing runs, disruptions in the payment system, and concentration of economic power. The PWG report highlights gaps in the authority of regulators to reduce these risks. The Federal Reserve provided more information on a potential digital currency in a report issued in January 2022.
China is among a handful of countries that are experimenting with national digital currencies. To implement a digital dollar, the U.S. government would need to modernize the country’s financial infrastructure to stave off attacks. If you wanted to buy a sandwich, for instance, you could transfer money from a digital wallet directly to a cashier. The idea is that it could help business by speeding up international settlements.
One possible sticking point could be if people are using their Fed accounts to purchase illicit goods, such as cannabis. While states across the country have legalized cannabis for medical and recreational use, it’s still illegal on a federal level. If someone purchased the substance from a dispensary using digital dollars, the government could theoretically decide to impose criminal sanctions for the transaction. The Federal Reserve is engaged in extensive economic and policy research on digital currencies, focusing especially on financial inclusion and financial stability. Threats to existing payment services—including operational disruptions and cybersecurity risks—would apply to a CBDC as well. Any dedicated infrastructure for a CBDC would need to be extremely resilient to such threats, and the operators of the CBDC infrastructure would need to remain vigilant as bad actors employ ever more sophisticated methods and tactics.
The paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a U.S. In acronym-addicted Washington, D.C., the digital dollar is referred to as a CBDC, or a central bank digital currency. It would be a virtual version of the physical cash you carry in your wallet, resembling a government-issued version of cryptocurrencies like Bitcoin.
“In this space, you could imagine the creation of a central bank digital currency – as opposed to something like bitcoin – might have a positive impact,” Small said. China, which outlawed cryptocurrency last year, is leading the “in-development” pack with the digital yuan, having trialed over $5 billion worth of transactions since June 2021. China has conducted various real-world pilot runs to test the “reliability of economic theories, the stability of systems and the controllability of risks,” according to a recent report by the People’s Bank of China. These pilot runs included giving digital yuan to a random pool of applicants to be spent at designated offline locations or on the site of China’s largest online retailer, JD.com. CBDC transactions would need to be final and completed in real time, allowing users to make payments to one another using a risk-free asset.
Thinking about establishing a digital dollar is really a defensive move, because China is issuing a digital currency and a lot of other countries around the world are considering digital currencies. If the U.S. government does not consider its own version of a digital dollar, it will be left behind. One of the most basic advantages is that you get rid of the inconvenience of physical cash. Of course, we have alternatives to physical cash already, here in the United States, through all these other electronic forms, such as credit cards or digital payments systems, such as Venmo. Essentially, they are payments enabled between commercial banks or by a payment transactions provider.
The government could potentially restrict access to funds or credit, implement negative interest rates on cash, collect taxes automatically or eliminate physical cash entirely. The government could also monitor digital transactions and collect data on Americans’ financial activities. On the government’s side, a digital dollar could make it easier for the Fed to adjust monetary policy.
If the US government monitors everything you buy — from milk at your local store to poker chips during your next casino trip — there’s potential for abuse. “All sorts of profiling could emerge out of that, and hackers might deem that database to be quite valuable, too,” Peebles said. “So you could picture predatory marketing to the elderly, for example, if the data got out.” In order to serve as a means of payment and a store of value, money must be accessible to the general public. The means by which the general public accesses different types of money vary.
