The rise of private cryptocurrencies motivated the Fed to start considering a digital dollar to be used alongside the traditional paper currency.
Politico writer Victoria Guida believes this represents a ‘Once in a Century’ Bid to Remake the U.S. Dollar.
The idea of creating a fully digital version of the U.S. dollar, which was unthinkable just a few years ago, has gained bipartisan interest from lawmakers as diverse as Sens. Elizabeth Warren (D-Mass.) and John Kennedy (R-La.) because of its potential benefits for consumers who don’t have bank accounts. But it’s also sparking strong pushback from those with the most to lose: banks.
“The United States should not implement a [central bank digital currency] simply because we can or because others are doing so,” the American Bankers Association said in a statement to lawmakers this week. The benefits “are theoretical, difficult to measure, and may be elusive,” while the negative consequences “could be severe,” the group wrote.
The explosive rise of private cryptocurrencies in recent years motivated the Fed to start considering a digital dollar to be used alongside the traditional paper currency. The biggest driver of concern was a Facebook-led effort, launched in 2019, to build a global payments network using crypto technology. Though that effort is now much narrower, it demonstrated how the private sector could, in theory, create a massive currency system outside government control.
Now, central banks around the world have begun exploring the idea of issuing their own digital currencies — a fiat version of a cryptocurrency that would operate more like physical cash — that would have some of the same technological benefits as other cryptocurrencies.
That could provide unwelcome competition for banks by giving depositors another safe place to put their money. A person or a business could keep their digital dollars in a virtual “wallet” and then transfer them directly to someone else without needing to use a bank account. Even if the wallet were operated by a bank, the firm wouldn’t be able to lend out the cash. But unlike other crypto assets like Bitcoin or Ether, it would be directly backed and controlled by the central bank, allowing the monetary authorities to use it, like any other form of the dollar, in its policies to guide interest rates.
The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative are aiming next month to publish the first stage of their work to determine whether a Fed virtual currency would work on a practical level — an open-source license for the most basic piece of infrastructure around creating and moving digital dollars.
Remake the Dollar?
No, this does not in any way “remake” the dollar. The dollar is still a dollar, it still floats, it still is not backed by gold.
The dollar itself will not change in any fundamental way.
Winners and Losers
Guida describes banks as the big losers.
Although the American Bankers Association strongly objects, it is not at all clear that banks will be big losers although they would lose interest on excess reserves, or if you prefer, interest on reserves.
The two are identical because the Fed Board of Governors reduced reserve requirement ratios on net transaction accounts to 0 percent, effective March 26, 2020. This action eliminated reserve requirements for all depository institutions finally confirming my 2005 statements “banks do not lend from reserves and there are no real reserves anyway.”
Elizabeth Warren
“Legitimate digital public money could help drive out bogus digital private money, while improving financial inclusion, efficiency, and the safety of our financial system — if that digital public money is well-designed and efficiently executed,” she said at a hearing on Wednesday, which she convened as chair of the Senate Banking Committee’s economic policy subcommittee.
Other senators highlighted the potential for central bank digital wallets to be used to deliver government aid more directly to people who don’t have bank accounts. A digital dollar could also be designed to have more high-tech benefits of some cryptocurrencies, like facilitating “smart contracts” where a transaction is completed once certain conditions are met.
Wealth Redistribution
People don’t have bank accounts but will they will all have a digital wallet? Will they understand how to use it?
This has little to do with the dollar per se, but it could make tax refunds and Congressional stimulus packages immediate rather than by check.
It’s easy to see why Warren supports this and Andrew Yang and all the free money advocates would be on board as well.
If bank accounts go away, poof, we can tax the wealthy, take money out of their accounts and immediately redistribute the funds as the progressives see fit.
Money Laundering
The overwhelming battle cry is guarantee to be the need to stop money laundering and to protect the population from evil or fraudulent cryptos.
Negative Interest Rates
Right now, negative interest rates are a tax on banks.
If the Fed can implement negative rates without taxing banks, who knows what either the Fed or Congress might do to stop alleged hoarding of dollars.
Monitoring of Every Transaction
Once in place, governments or central banks will have the ability to monitor every financial transaction. Cash will disappear.
Reasons to be Frightened
There are all kinds of reasons to be frightened about what is clearly going to happen.
Why is is going to happen?
Because China is going to do it and the ECB will follow next if the US doesn’t.
Once in place, who knows what Congress or the Fed will concoct?
I don’t and no one else does either. That’s what’s scary.
Mish
1. This is essentially the same as cash. When people
hold and and pay for things with cash the banks are not in the middle so they
cannot make any money on either the holding or the spending of cash. So,
what? There is really no change from cash.
2. Why would ordinary people use this? I see no
real advantage except for cross border transactions where currency translation
costs are eliminated, assuming the foreign receiving party wants to keep the
proceeds in digital dollars rather than convert to their own currency.
3. Since the banks cannot make any money on this it is
similar to cash in that the owner (depositor) will not be able to receive any
interest on the deposit. During normal times (not now) bank depositors
receive interest on most deposits. Even if small, this positive interest
would seem to eliminate all incentive to hold deposits in digital versus
regular deposit accounts. Therefore, I conclude that few people will hold
much money in this form and most will retain conventional deposit accounts. Yes, people who do not have bank accounts will be able to hold funds in this form, similar to a prepaid debit card or gift card. So perhaps banks could lose some small income from issuing prepaid cards, but I cannot imagine that this is much of an effect. Therefor it seems that this is really no threat to banks, except for those that make a lot of
money on currency translation.
4. For transactions within the US there is no currency
translation benefit. There will be transaction costs that someone will
have to pay. I currently pay no transaction costs for credit card, debit
card, ach, bill pay, and person to person transfer transactions. I would expect to
have to pay more if using digital currency since the bank would not be able to
subsidize the costs based on the net interest income it makes off my average deposit
balance.