The United States is losing the global race to determine the future of money, and this might spell doom for the all-powerful dollar

The e-renminbi, an all-digital form of China's paper currency that can be accessed and accepted by shops and customers without an internet connection, credit, or even a bank account, has begun rolling out in cities across the nation.

China has introduced its digital currency to outsiders after transacting more than $5 billion in e-renminbi transactions. When Beijing hosts the Winter Olympic Games next year, officials hope to give the rest of the world a taste of their technical prowess.

In contrast, the United States is having problems wrapping up a multi-year investigation on the viability of an e-dollar. In reality, a forthcoming Federal Reserve report on the possibility of a digital currency in the United States will not take a stance on whether the US central bank would, or even should, develop one.

In recent testimony to Congress, Federal Reserve Chair Jerome Powell stated that this document will "launch a significant public consultation on central bank digital currencies..." (The paper's publishing date has been pushed back from July to September.)

The United States, which was once the world leader in digital payments and technical innovation, is now being outperformed by its main global competitor, as well as most of the developed and developing countries.

The Bahamas recently announced the integration of its digital Sand Dollar into a stock exchange, while Australia, Malaysia, Singapore, and South Africa are working on the world's first cross-border central bank digital currency exchange program, which is being led by the Bank for International Settlements (BIS), also known as the central bank of central banks.

El Salvador's recent decision to make bitcoin a legally acknowledged currency, which few believe to have a substantial influence in the payment area, has overshadowed such events. However, outside of the cryptocurrency realm, governments and powerful central banks throughout the world are making tremendous progress in the creation of the digital future of money.

Leadership in this space will have implications for more than just payments: geopolitical ambitions, economic growth, financial inclusion and the very nature of money could all be dictated by who leads the charge and how.

"I don’t think the U.S. is aware there is a race"

According to Hyun Song Shin, economic consultant and co-leader of the Bank for International Settlements' Monetary and Economic Department, digital currencies represent the next step in the "development of the character of money in the digital economy."

The way we pay for products is evolving as more of our world migrates from physical brick-and-mortar to wireless and cloud-based. A central bank digital currency would function similarly to cash, but it would be kept and retrieved digitally rather than being carried in a wallet or deposited into a bank account. Not only might a digital currency backed by the United States make contemporary banking easier, but it may also help defend American worldwide dominance.

Late to the party, the U.S. is “stepping up its research and public engagement” on digital currencies, the Federal Reserve says, including forming working groups on cryptocurrency and other kinds of digital money, and experimenting with technology that would be central to producing a digital dollar. The Fed’s regional Boston branch is overseeing these efforts with the Massachusetts Institute of Technology on what’s known as Project Hamilton.

But the path towards a digital U.S. dollar has met many challenges, skeptics and outright opponents. All while China, and other countries, push forward.

Lagging behind the world

How far behind the United States is it in terms of developing a central bank-issued digital currency (CBDC)? The United States ranks 18th in the world, according to PwC's inaugural CBDC global index, which follows various CBDCs' project status from research through development and manufacturing. Countries like Sweden, South Korea, and China, as well as the Bahamas, Ecuador, the Eastern Caribbean, and Turkey, might benefit from America's possible initiatives.

China has been working on developing a CBDC for nearly a decade, with the government's hyperfocus on preserving control and managing data.

And the U.S. is probably not close to catching up. Analysts like Harvard economics professor Kenneth Rogoff, who study monetary policy and digital currencies, estimate that the U.S. could be at least a decade away from issuing a digital dollar backed by the Fed. In that time, Rogoff argued in an op-ed earlier this year, the modernization of China’s financial markets and reduction or removal of its currency controls “could deal the dollar’s status a painful blow.”

China has already largely moved away from coin and paper currency; Chinese consumers have racked up more than $41 trillion in mobile transactions, according to a recent research paper from the Brookings Institution, with the lion’s share (92%) going through digital payment processors WeChat Pay and Alipay.

“The reason you could say the U.S. is behind in the digital currency race is I don’t think the U.S. is aware there is a race,” Yaya Fanusie, an Adjunct Senior Fellow at the Center for a New American Security, and a former CIA analyst, tells TIME in an interview. “A lot of policymakers are looking at it and concerned…but even with that I just don’t think there’s this sense of urgency because the risk from China is not an immediate threat.”

Not only is the United States lagging behind in the establishment of a CBDC, but we are also lagging behind the rest of the world in terms of digital payments in general.

Kenya, for example, has nearly completely digitized its economy thanks to the MPESA digital currency and payment system, which allows for free and near-instantaneous transactions. The Unified Payments Interface (UPI) in India allows users to send money between bank accounts immediately and for free. The PIX system in Brazil allows consumers and businesses to transfer money in as little as 10 seconds.

Rather than commercial banks or other private firms, all of these initiatives function via and are controlled by the nations' central banks.

What’s holding the U.S. back?

Critics argue CBDCs are simply a solution in search of a problem and potentially harmful. Many see support from the banking sector as vital to the success of a digital U.S. dollar, however commercial banks in the U.S. have taken a largely adversarial stance.

“The proposed benefits of CBDCs to international competitiveness and financial inclusion are theoretical, difficult to measure and may be elusive,” the American Bankers Association said in a statement at a recent congressional hearing on digital currencies. “While the negative consequences for monetary policy, financial stability, financial intermediation, the payments system, and the customers and communities that banks serve could be severe.”

The Bank Policy Institute, which represents the country's largest banks, has gone so far as to claim that neither the Federal Reserve nor the United States Treasury has the constitutional right to establish a digital currency.

Experts suggest that while commercial banks dominate the US financial system to the point that unwinding them would be theoretically impossible, they would also be a formidable enemy. Nomi Prins, a former managing director at Goldman Sachs, says banks have definitely read the writing on the wall.

“Banks are centralized middlemen with respect to financial transactions,” Prins, author of Collusion: How Central Bankers Rigged The World, tells TIME. “The more popular cryptocurrency or digital currency becomes, the fewer profits the banking system can reap from traditional services and verification methods that allow them to hold, take or use their customers’ money, and the more financial power they stand to lose as a result.”

Because of the banks' influence, even innovative financial systems like PayPal, Venmo, and Zelle function via the banking system rather than without it.

Because of their pre-existing regulatory guardrails and capacity to transfer money, central bankers have generally decided that commercial banks are a crucial component of a prospective CBDC ecosystem.

Top Fed officials, including Vice Chair for Supervision Randal Quarles, have joined the banking sector in claiming that a digital currency "may represent serious and real hazards" and that the possible advantages "are uncertain."

In a recent lecture titled "CBDC: A Solution in Search of a Challenge?" Fed Governor Christopher Waller remarked in August that he was "skeptical that a Federal Reserve CBDC will solve any fundamental problem confronting the US payment system."

Furthermore, there is no central authority in the United States that has direct jurisdiction or accountability for any of this.

The Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Trade Commission, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Financial Stability Oversight Council, the Federal Financial Institutions Examination Council, and the Office of Financial Research, in addition to the Fed, would all have a stake in the development of a digital currency backed by the central bank.

“The U.S. has an active congressional debate, which is beneficial and very important,” Federal Reserve Governor Lael Brainard tells TIME in an interview. “But the U.S. also has a diffusion of regulatory responsibility with no single payments regulator at the federal level, which is not as helpful. That diffusion of responsibility is part of what creates the lags that our system is working through.”

None of this exists in China where the Chinese Communist Party oversees the central bank, commercial banks and their regulators and is unconcerned with privacy.

How a downgraded dollar could hamstring U.S. influence

An American CBDC could have lasting geopolitical impact and curb a longstanding international effort to reduce reliance on the mighty U.S. dollar.

“Why we should care about this is that the U.S. financial system is not intrinsically dominant,” Fanusie says. “Other countries, both allies and adversaries, are sincerely interested in finding ways to decrease their dependence on the dollar.”

With the U.S. dollar as the world’s reserve and primary funding currency, the U.S. can restrict access to funding from financial markets, limit countries’ ability to sell their natural resources and hinder or block individuals’ access to the banking sector.

“Other countries, both allies and adversaries, are sincerely interested in finding ways to decrease their dependence on the dollar”

While the dollar's dominance has irritated most of the globe for decades, there has been no acceptable successor for the United States, with its vast economy, sophisticated financial system, and global reach.

China is pursuing a long-term goal of expanding its financial markets while also internationalizing its currency. Both aim to undermine the United States' capacity to enforce its will through economic actions such as sanctions by allowing China and its allies to do so.

Being the first big economy to launch a digital currency, according to Fanusie, is "part of China's geopolitical objectives."

The renminbi, on the other hand, will not become the world's reserve currency anytime soon. However, by being at the forefront of CBDC development, China has positioned itself in a position to lead the establishment and implementation of global norms and regulations for digital currencies.

“While America led the global revolution in payments half a century ago with magnetic striped credit and debit cards, China is leading the new revolution in digital payments,” writes Brookings’ economic studies fellow Aaron Klein.

Why should central banks offer digital currencies?

Digital currencies, such as cryptocurrencies and "stablecoins," have sprung like weeds during the last decade. Some claim to be as safe as dollars, yet they are backed by dubious assets. Regulators are concerned that in a crisis, their value may vary rapidly or perhaps vanish entirely.

The fact that central banks, which are responsible for the printing and circulation of coins and paper money, are now issuing digital currencies is in part a reaction to this private sector activity, which is "accelerated by the potential encroachment of private digital currencies, and the need to preserve the role of money as a public good," according to Shin.

“The status quo is not an option"

A digital currency issued by the United States, in particular, might assist ordinary people. Shin adds that it might improve financial inclusion and address weaknesses in present payment systems, citing findings from a recent BIS research.

Transferring money between bank accounts in the United States, even those held by the same individual, might take days. When crossing foreign borders, the process might take considerably longer. Similarly, credit and debit card transactions take days to settle and incur hefty fees for businesses, which are occasionally passed on to customers.

CBDCs might provide universal banking access and help distribute wages and government payments more swiftly, decreasing the need for costly bank workarounds like check cashing and payday loans.

Championing CBDCs

Brainard has been pushing the Fed to move on a digital currency for years, but there was little urgency from others at the Fed or in Congress. Companies developing their own currencies, consumers investing in cryptocurrency and the COVID-19 pandemic making paper notes anathema to many Americans changed that.

Before COVID-19, Facebook’s Libra project (now known as Diem) showed lawmakers and central bankers the potential for a private company to step in and fill the void by effectively minting its own currency that could be spent by users around the world.

“The status quo is not an option,” Diem co-creator David Marcus said at the International Monetary Fund’s 2019 fall meeting. “Whether it’s Libra or something else, the world is going to change in a profound way.”

Brainard, for one, has taken notice.

“My own thinking is that stablecoins and related private sector initiatives are moving very rapidly, which makes it incumbent on us to move more rapidly,” she tells TIME. “That is why I have been pushing to advance outreach, cross-border engagement, and policy and technology research for several years now.”

So-called stablecoins — unregulated digital currencies created by private companies that purport to represent dollars but are completely unregulated — have become a significant worry for lawmakers and shown the importance of considering tying currency to a central bank.

“It’s getting harder and harder for community banks to compete for new customers when big tech companies can afford to spend billions on marketing and technology,” Sen. Sherrod Brown, who chairs the Senate Banking Committee, tells TIME. “But many of these new ‘fintech’ products don’t come with the consumer protections, federal backing or customer service and relationships with the community that small banks and credit unions provide.”

During a hearing on digital currencies in June, Sen. Elizabeth Warren, the ranking member of the Subcommittee on Financial Institutions and Consumer Protection, compared stablecoins to worthless “wildcat notes” that were issued by speculators in the 19th century.

At that session, her expert, Lev Menand, an Academic Fellow and Lecturer in Law at Columbia Law School, went even farther, calling stablecoins "hazardous to both its users and the larger financial system."

The United States is confronting a world in which it may not dominate or even lead the world's payment systems, with private corporations pushing further into the digital currency area, competitor governments vying for leadership, and a public shifting away from physical cash.

That would make money's future appear extremely different from what it has been in the past.

Follow us on Google News