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A Digital Dollar: Is it Coming?


A Digital Dollar: Is it Coming?


Following a growing interest in cryptocurrency, the US Federal Reserve is looking at creating a US digital dollar, but the likelihood of it being implemented soon remains slim.


– A central bank digital currency is still many years away but is being studied widely so that it would benefit the US financial system
– Congress will likely play a major role in the creation of a CBDC, but with little understanding of the issue, it is unlikely that they will roll out legislation any time soon
– The longer the US takes to consider creating a CBDC, the more likely the US will lose its dominant role in the global financial system, especially as the Chinese digital dollar becomes stronger


In late January, the US Federal Reserve Bank released a much-anticipated paper weighing in on the prospect of a central bank digital currency (CBDC). The notion of creating a CBDC has come to the fore as cryptocurrencies have become popular among the public. Even though digital forms of money have been widely popular among Americans (bank accounts, payment apps, online transactions) a CBDC would differ because it would be a liability of the Federal Reserve, not of a commercial bank. The significance of this could change the domestic money market as well as the future of money. It could lead to the availability of digital currencies, crypto, and other digital payments systems, and in turn, could cause the demise of physical cash.

Following the report, the Federal Reserve did not commit to a firm stance on creating a CBDC, saying it first aims to engage with experts and lawmakers on the topic. Still, the report made it clear why a digital currency would benefit the country and serve as a better method for spending than decentralized cryptocurrencies have as they have grown in popularity over the past few years. While cryptocurrency enthusiasts are excited to see that government entities are paying attention to digital currencies, if a CBDC is introduced, it would be the first implementation by Congress on this topic.


Cryptocurrencies have surged in popularity partly due to their use in real-time, speedy payments. A CBDC could offer the same utility. However, the main difference between a cryptocurrency and a CBDC is that cryptocurrencies are stored on a decentralized blockchain network. Comparatively, CBDCs would be stored and issued using a centralized network.

In addition to the explosion of cryptocurrencies, the USD is currently the only global reserve currency, and therefore the Federal Reserve is exploring avenues in which it can maintain its dominance over the global financial system. The exploration of a digital dollar by Washington has come at a time when US economic power is facing strong competition from China. To this point, China is currently leading the race in rolling out a digital currency. This is important because Beijing is at the forefront of establishing the protocols of the digital currency sphere, putting pressure on the primacy of the US Dollar (USD).

Partly spurred by this looming competition, the Federal Reserve has started to move on this issue. It is doing so at a slow pace, however, taking time to consider the issues around infrastructure, security and legislation. The Federal Reserve has made clear that rather than race to beat its competitors, it will patiently weigh its options.

Any action taken to create a CBDC would also need approval from lawmakers. Congress has not been moving much faster on issues around cryptocurrencies, but this does not mean that movements have not been made. In 2016, the Congressional Blockchain Caucus was created to establish a government platform that could study the effects of blockchain technology and whether there was a role for Congress to play in its development.

To date, the Caucus has had difficulty implementing meaningful legislation. One day after Federal Reserve Chair Jerome Powell sat in front of a Senate Banking Committee, and following the release of the Federal Reserve report, Congressman and Blockchain Caucus member Tom Emmer introduced a bill that would have prohibited the Federal Reserve from issuing a digital currency if passed. During this hearing, Rep. Emmer asked whether an introduction of a CBDC would preclude well-regulated, privately issued stable coins alongside it, to which Powell replied, “No.” On the other hand, Democrat Senator Sherrod Brown introduced a bill — the “Banking for All Act” — that would have required the Federal Reserve to make digital currency accounts available to all should the creation of a CBDC move forward.


Considering the technological trends and the wider financial and political developments around digital currencies, a digital USD is likely to be implemented. However, as the Federal Reserve is still assessing the implications of a CBDC, the creation of a digital dollar is still years away. Still, an understanding of the benefits of a US CBDC is worth examining.

A US-based CBDC will likely speed up cross-border payment systems, which are currently slow and expensive. As a result, it can be expected that there will be greater international cooperation between governments with digital currencies. Such cooperation will be necessary to access payment system frameworks between countries.

Additionally, a digital dollar may also reduce the barriers to financial inclusion and decrease transaction costs, which is appealing to many low-income households. This would presumably reduce reliance on commercial banks, giving consumers more options in how they manage their money. This reality would be beneficial for those who are excluded from the financial system due to poor credit scores or lack of funds.

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There are also some risks associated with a US digital currency implementation. Of particular concern is the possibility that CBDCs, particularly interest-bearing CBDCs, could generate instability in the US financial system. It has been posited that interest-bearing CBDC accounts could reduce the number of bank deposits being made, cutting off a stable source of funding that the banks rely on to increase capital. This in turn could hinder the ability of these banks to provide lending services, increasing the costs to borrowers, and lowering the availability of credit. The likelihood of this scenario, however, is slim. Risk-averse financial regulators — often wholly focused on strengthening the resilience of the financial system — are resistant to this kind of change.

In the international space, the Chinese digital yuan will likely become stronger while the US Government debates how the development of a digital currency would take place. Roughly 20 million people are already using a digital yuan wallet in China, with over 70.7 million transactions totaling RMB 34.5 billion ($5.3 billion) having already occurred. This number will only grow larger as digital currencies offer ways for government central banks to deal directly with citizens.

On the domestic front, US legislators currently have little experience dealing with or understanding digital currencies. Because of this, Congress will likely continue to move very slowly in introducing measures around cryptocurrencies, especially since the findings of the Federal Reserve’s report demonstrated that creating the right digital currency was more important than rolling out one quickly.

Relatedly, while the Blockchain Caucus has grown, it has had difficulty implementing meaningful legislation. In response to the release of the Federal Reserve report, the Caucus reintroduced a bill aimed at alleviating tax burdens on cryptocurrency users who must now report their small gains. The bill, known as the Virtual Currency Tax Fairness Act, will likely not pass, but it is noteworthy that the Caucus continues to grow and become more active as digital currencies evolve. For now, the Caucus is filled with many cryptocurrency enthusiasts, but moving forward, partisanship will likely continue to play a role in legislation creation as more pro-cryptocurrency members join the group.

In conclusion, the introduction of a CBDC would be a significant innovation, changing the way that Americans interact with digital money. But the likelihood of a CBDC becoming available is still far away, as legislators have very little understanding of how to deal with it. As nations like China have already rolled out their digital currencies, the United States can be expected to introduce a digital dollar in the medium- to long-term in an effort to maintain its position in the global financial system. Overall, the United States is far behind in exploring what impact CBDCs would have on its financial system, but the release of this report is a step forward in understanding that impact.

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