Quantitative Easing

The Fed must move cautiously on the path to a digital dollar


Everyone is talking about digital currencies. Pundits, policymakers and business leaders are springing from the promise – or worrying about the uncertainties – of these intangible electronic dollars, and for good reason. This exciting technology holds great promise.

But the risks associated with these currencies are tangible and real.

While public attention has mostly focused on the volatility of cryptocurrencies like Bitcoin, conversations about central bank digital currencies are increasingly heating up in Washington.

A CBDC is a digital form of a country’s currency, issued and managed directly by a country’s central bank. According to the Bank for International Settlements, 86% of the world’s central banks are exploring CBDCs, with more than one in 10 currently engaged in pilot projects. In June alone, Congress held four major hearings on digital currencies, and the Federal Reserve announced it will release a report on CBDCs this fall.

On a superficial level, the rationale for adopting a CBDC seems obvious. After all, America’s home payment system is already digital. Anyone who’s shopped with a credit card, paid bills online, or used an app to pay a babysitter knows this. Money flows digitally all the time, and the secure, interconnected and ubiquitous systems it flows through innovates and improves every day.

As the Fed itself has acknowledged, however, with a CBDC, it is essential to act with caution to ensure that no inadvertent action does more harm than good. For example, if customers hold their CBDCs outside of banks, the loss of capital could affect the ability of banks to lend money. So, depending on how it’s structured, a CBDC might actually make it more difficult for consumers and small businesses to obtain loans.

The need to do no harm is particularly acute because the existing payments system, as noted by Fed Chairman Jerome Powell, is “already secure, effective, vibrant and efficient”. In this system, new products and services are constantly introduced to facilitate consumer participation. eCash, for example, allows cash consumers to make purchases online. DailyPay allows employees, many of whom live paycheck to paycheck, to get their hourly wages earlier than their regular paychecks. Prepaid products, through which millions of people already receive government benefits, allow consumers to conduct their daily financial transactions without a bank account. And peer-to-peer services offer consumers an ever-expanding way to receive, hold, and spend money.

The question becomes: what is the problem that policymakers are trying to solve with a CBDC?

Some have cited China’s race to develop the digital yuan as a compelling reason to create an American CBDC, but this concern is overstated. The dollar is the world’s reserve currency due to the size and strength of the US economy, and the introduction of CBDCs by other countries does not change that. Domestically, innovation is already bringing new products and services that allow for broader participation in the financial system, and it is not at all clear that the introduction of a CBDC would significantly accelerate this trajectory.

None of this suggests that we shouldn’t be exploring how a digital dollar might work in practice and how it might advance the national interest. Depending on the design, CBDCs could introduce choice and efficiency gains, with potentially attractive possibilities in wholesale and cross-border contexts. Indeed, in my organization, the Electronic Transactions Association, we have developed seven principles which we believe should guide the exploration of a potential CBDC. These principles aim to ensure that we take full advantage of the existing system, which already makes digital transactions possible for all Americans, while continuing to ensure consumer protection.

However, we have to be clear about what we are trying to do.

Whatever is offered must be the best solution to the problem, and it cannot unintentionally inject problems that outweigh the positives. As Fed Chairman Powell said in May: “We think it’s more important to do it right than to be the first, and doing it right means that we are not just looking at the potential benefits of doing it right. ‘a CBDC, but also the potential risks, and also recognize the important trade-offs that must be carefully considered. We agree.

Our existing “safe, effective, dynamic and efficient” system is already a victory for American consumers and businesses. Let us ensure that any fundamental changes to this system, including a potential CBDC, actually promote financial inclusion, offer the same unparalleled protections as the current system, and do not stifle innovation, weaken acceptance. or does not undermine the sophisticated and interconnected payment infrastructure that has been developed over decades.


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