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Countries around the world are beginning to experiment with creating their own digital currencies. Similar to popular cryptocurrencies like Bitcoin, these currencies would exist entirely virtually. But unlike Bitcoin, they would be minted and managed under the authority of a nation’s central bank, meaning they would be an official legal tender that could be spent wherever traditional money was accepted.
Last year the Bahamas became the first country to establish what’s known as a central bank digital currency, or CBDC, but interest isn’t limited to only small nations. By one count, 81 countries — representing 90 percent of the world economy — have been exploring creating their own CBDC. China, Japan, Sweden and South Korea have begun trials by minting a limited supply of their digital currencies. The Bank of England and Central Bank of Europe are also preparing their own trials.
The United States is also considering creating a CBDC but is approaching the issue with more caution than many other nations. Federal Reserve Chairman Jerome Powell said earlier this year that exploring digital dollars was a “high priority project.” Last month, however, he emphasized that “it’s more important to do this right than to do it fast.”
Why there’s debate
Advocates for creating digital dollars say the new currency would have all the advantages of cryptocurrencies but none of the drawbacks. In theory, CBDC transitions wouldn’t have to involve private banks, meaning the challenges of access, processing delays and fees could all be eliminated. “I think it could result in faster, safer and cheaper payments,” Treasury Secretary Janet Yellen said. Supporters say digital dollars would allow the government to more easily track fraud, influence financial policy and prevent volatile cryptocurrencies from undermining the economy.
Others say the U.S. has an obligation to join the CBDC market in order to prevent other countries — particularly China — from undermining America’s global economic position and using the currencies as a tool for authoritarian control.
Opponents say digital dollars would create an enormous amount of risk for traditional financial markets, since there’s no way to know how they would affect investor behavior. Many also reject the idea that other countries’ CBDCs would pose any meaningful threat to America’s ability to influence the world economy.
Conservative critics say a CBDC would allow the government too much power to monitor and potentially manipulate private business transactions. Others argue that the potential benefits of digital dollars could be achieved through better regulation of existing cryptocurrencies.
Officials generally agree that it’s unlikely the U.S. will issue digital dollars any time soon. In January, Powell said it would be “years, rather than months” before an American CBDC might become available.
The U.S. can’t let other nations set the standards for digital currencies
“We may soon be living in a CBDC world. And if America stays on the sidelines, it could miss its chance to influence what that world looks like.” — Emily Parker, CNN
America’s global economic position will suffer if it stays out of the CBDC market
“With private companies pushing deeper into the digital currency space, rival countries seeking to seize leadership and a public that is moving further away from physical currency, the U.S. is facing a world in which it may not control or even lead the world’s payment systems.” — Dion Rabouin, Time
Americans would benefit from taking banks out of financial transactions
“Banks control the deposit dollars they generate. Their focus on profits means they provide grossly unequal access to financial services essential for earning, spending, saving and surviving. … Instead of private bankers, public officials would decide how much of the digital money to generate and how to lend or spend it into circulation.” — Jeffrey Sklansky, Washington Post
Digital dollars would have all the benefits of cryptocurrencies with none of the risk
“CBDCs benefit from some of the features of other crypto assets, including the ability to achieve instantaneous transfers. … At the same time, the element of central bank control over CBDC issuances gives them stability and predictability that is often absent from crypto products.” — Barnabas Reynolds and Donna Parisi, Reuters
Digital dollars would help poor Americans the most
“It is hard to get a credit card if you don’t have much money, and banks charge fees for low-balance accounts that can make them prohibitively expensive. But a digital dollar would give everyone, including the poor, access to a digital payment system and a portal for basic banking services.” — Eswar Prasad, New York Times
It would be hard to use digital dollars for illegal activities
“In a CBDC world in which digital bank codes are visible to the clearing institution, it becomes much easier for the authorities to identify the parties to a transaction, which greatly simplifies the detection of criminal activity and eliminates the black markets characteristic of countries that deal largely in physical money.” — Ajay S. Mookerjee, Harvard Business Review
Digital dollars would inject unnecessary risk into the U.S. financial system
“During high economic stress, digital runs — panic conversions of other forms of money into CBDCs — would further destabilize the system. Even in prosperous times, CBDCs would provide a huge target for hackers and terrorists seeking fortune or havoc.” — Paul H. Jossey, National Review
This system would give far too much power to the government
“If central bank digital currencies were to become our payment system, government control of all purchases would become a viable option. … I don’t know about you, but I sure wouldn’t want politicians and bureaucrats wrestling with the temptation to enact laws and regulations controlling each and every transaction in America.” — James Miller, Connecticut Mirror
Digital dollars would be a privacy nightmare
“These currencies come with serious risks. Without additional privacy measures, central bankers shouldn’t establish them.” — Alexander William Salter, Wall Street Journal
The rapid evolution of cryptocurrencies makes CBDCs unnecessary
“A FedCoin is not an absolute necessity. Many of the benefits of future innovation should be equally attainable with private blockchain-based tokens.” — Andy Mukherjee, Bloomberg
Digital currencies aren’t a threat to America’s economic dominance
“CBDCs are coming. But they won’t change the face of international payments. And they won’t dethrone the dollar.” — Barry Eichengreen, MarketWatch
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