Cryptocurrency is increasingly entering the mainstream. Not surprisingly, the regulations lag far behind the technology. In an attempt to remedy that situation, the Biden administration is implementing a government-wide cryptocurrency regulation strategy.
One small part of this policy rollout is exploring the possibility of a central bank digital currency — in other words, a “digital dollar.” For the average consumer though (and even for people who are fairly immersed in the financial world), the idea of a digital dollar is a murky concept.
I might drop a few bucks in the cash box at my local friends of the library used bookstore, or flash a roll of bills at Mardi Gras when the entire city of New Orleans momentarily becomes a cash business. Other than that, it’s already rare for me to handle physical U.S. legal tender. For day-to-day transactions, the elegant tap of a card or smartphone to a tiny payment console will do. Given that existing U.S. currency is already pretty digital, what would really change if we went to a central bank-issued digital dollar?
The change for consumers would probably not be immense, or even noticeable initially. When you make a payment today via your mobile device to transfer money from your bank account to another account, there is a whole series of communications between a string of banks confirming your identity and checking whether your balance is high enough to cover the transaction. This happens so quickly that you can’t really tell, but there are generally small transaction fees at each link in the chain of communication. Even small transaction fees add up over time, and in 2020, these types of fees totaled more than $110 billion.
With a digital dollar, on the other hand, the middlemen taking their cut along the way could, in theory, be eliminated. China, for instance, has a pilot program that allows citizens to make payments using its digital yuan currency via a government app. In this system, citizens hold digital yuan in their electronic wallets, meaning currency would not necessarily be in the hands of private providers (the electronic wallet, in essence, replacing a private bank account).
China’s pilot program has shown some success, but it’s a long way from eliminating transaction fees entirely. Several entrenched payment providers remain very popular in China even where the government app is also in use.
Since the transaction fees are currently borne mostly by businesses, convincing U.S. consumers to adopt the digital dollar and install some sort of government-issued app could be quite a challenge. In case you didn’t notice when one in five of them refused to get a lifesaving vaccine, Americans can be a suspicious lot.
Still, simply having a central bank-backed digital currency in circulation might pressure private payment processors and credit card companies to try to stay competitive by lowering their fees.
In addition to potentially eliminating third-party processors when transferring money, moving to a digital dollar could help combat fraudulent transactions and make it easier to either disperse government benefits or collect taxes. There are certain security risks — no one is going to hack a big sweaty wad of dead presidents stuffed into your pants pocket. On the other hand, the risk of nefarious cyber-intrusion is probably no worse than the risk of encountering a cutpurse on the subway.
Right now, the Fed is compiling public feedback on the idea of implementing a digital dollar, and certain Federal Reserve branches are studying the concept in greater depth. Nothing is expected to happen at lightspeed: Even the most optimistic experts say we are five to 10 years away from the introduction of a digital currency in the U.S. Yet, despite the elongated timeframe, the methodical approach that is underway to investigate the viability of a central bank-issued digital dollar shows that Fed Chair Jerome Powell and the Biden administration are committed to moving the ball forward.
A central bank digital currency is not going to dramatically change your way of life. But hey, if the digital dollar is executed properly, it can eliminate a few unnecessary processing fees. At the end of the day, that would make it a win for the overall U.S. economy and a worthwhile pursuit.
Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at email@example.com.
For more of the latest in litigation, regulation, deals and financial services trends, sign up for Finance Docket, a partnership between Breaking Media publications Above the Law and Dealbreaker.