The Impact of a New Digital Dollar on the US Financial System

The Biden administration is investigating the possibility of issuing a government-issued digital money. The ramifications would be huge.

President Joe Biden signed an executive order that may lead to the creation of a digital currency in the United States.

"Research and development efforts into the potential design and deployment possibilities of a United States CBDC [Central Bank Digital Currency] are of the utmost importance to my Administration," the executive order stated. "These efforts should include assessments of potential benefits and risks for consumers, investors, and businesses; financial stability and systemic risk; payment systems; national security; human rights; financial inclusion and equity; and the actions required to launch a United States CBDC if it is deemed to be in the national interest."

According to Biden's order, a US-issued digital currency could "support efficient and low-cost transactions, particularly for cross-border funds transfers and payments, and to foster greater access to the financial system, with fewer of the risks posed by private sector-administered digital assets" like bitcoin and other cryptocurrencies. However, there are "possible dangers and drawbacks to consider," according to Biden, who asked federal agencies to create a study evaluating the ramifications within six months. According to the White House, over 100 countries are already "exploring or piloting" CBDCs.

Biden also directed government departments to draft policies for handling existing cryptocurrencies. "The rise in digital assets presents an opportunity to strengthen American leadership in the global financial system and at the technological frontier," according to the White House, "but it also has significant implications for consumer protection, financial stability, national security, and climate risk." "Encourages regulators to maintain adequate control and safeguard against any systemic financial risks posed by digital assets," according to Biden's order.

"Negative climate impacts and environmental pollution... may result from some bitcoin mining," according to Biden's order. With a digital money issued by a central bank, mining would be unnecessary.

Bitcoin was up 8% on Wednesday, and other cryptocurrencies were up as well, according to CNBC, as Biden's order "looked to take a favorable posture toward the industry." In a call with reporters on Tuesday, a Biden administration official highlighted that bitcoin's price "began the pandemic at $7,300, peaked at roughly $68,000 before coming back down to about $39,000."

What Is a Digital Currency Central Bank?

A Central Bank Digital Currency, according to the Federal Reserve, is "usually described as a digital liability of a central bank that is publicly available to the general public." That contrasts with the two types of central bank money currently in use in the United States: "physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve," according to a Federal Reserve FAQ.

"While Americans have long held money in digital form—for example, in bank accounts, payment apps, or online transactions—a CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not a commercial bank," according to the Federal Reserve. "A CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk," because it would be a Federal Reserve obligation.

In some aspects, a digital currency created by the United States would be comparable to stablecoins, which are backed by the dollar. CBDCs would be issued by the Federal Reserve, which is a significant change.

The Federal Reserve says it hasn't decided whether to pursue a digital currency, but says one "could provide households and businesses with a convenient, electronic form of central bank money, with the safety and liquidity that entails; give entrepreneurs a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments); and expand consumer access to the financial system."

The Federal Reserve also states, "The Federal Reserve does not intend to proceed with the issuing of a CBDC without explicit backing from the executive branch and Congress, ideally in the form of a formal authorizing law."

A CBDC in the United States would not be able to replace cash or paper money. The Federal Reserve stated, "The Federal Reserve is dedicated to ensuring the continued safety and availability of cash, and is contemplating a CBDC as a tool to expand secure payment options, not to eliminate or replace them."

"The consequences of potentially issuing a digital currency are enormous," senior Biden administration officials told reporters. Officials stressed, though, that they plan to "keep the dollar's primacy in global financial markets and the global economy."

Surveillance Can Be Used With Digital Currency

A central bank's digital currency can be used as a tool for government surveillance and control of citizens' financial transactions. This has been an issue with China's digital money, which is still in its early phases of implementation. "With digital yuan, the CCP [Chinese Communist Party] will have direct control over and access to the financial life of individuals, without the need to strong-arm intermediate financial companies," wrote Akram Keram, a China expert at the National Endowment for Democracy, last year. The government could easily suspend the digital wallets of dissidents and human rights campaigners in a digital-yuan-consumed society."

According to the Federal Reserve, any digital currency issued in the United States "would need to strike an appropriate balance between ensuring customers' privacy rights and providing the openness required to prevent illegal behaviour." The Federal Reserve suggested an intermediary approach in which "the private sector would supply accounts or digital wallets to enable the management of CBDC holdings and payments," allowing "the use of the private sector's existing privacy and identity-management frameworks."

In a paper published in January 2022, the Federal Reserve revealed more details on a future digital money.

Biden is looking for feedback

The secretary of the Treasury, in collaboration with the secretary of state, attorney general, secretary of commerce, secretary of homeland security, director of the Office of Management and Budget, and director of national intelligence, is to produce the report that Biden has requested.

The report is supposed to look into the effects of a digital currency on economic growth, stability, and "financial inclusion"; the relationship between a US-issued digital currency and private-sector-managed digital assets; "the future of sovereign and privately produced money globally and implications for our financial system and democracy"; and "the extent to which foreign CBDCs could displace existing currencies and alter the payment system in the United States."

The executive order directs the Federal Reserve to "examine the appropriate structure of a US CBDC" and to prepare a strategic plan "that evaluates the essential stages and requirements for the prospective implementation and launch of a US CBDC." Biden also wants the Fed to look into how a CBDC "might enhance or impede monetary policy's ability to function effectively as a crucial macroeconomic stabilization tool." Biden also requested an assessment from federal agencies on whether Congress would need to make legislative changes before the United States could issue a digital currency.

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