Talal Abu-Ghazaleh
It seems that the USA is finally giving the idea of developing the digital dollar the attention it deserves. On March 9, Biden signed an executive order requiring the government to assess the risks and benefits of developing a digital dollar. He has asked the Treasury Department, the Commerce Department and other agencies to develop a report of the future of money and the role of digital currencies in this.
This comes as a result of the explosive growth of cryptocurrencies which has surpassed $3 trillion US dollars, which could pose a threat to the US dollar as the reserve currency underpinning world financial markets. This could also affect US competitiveness as well as its national security. Understanding the cryptocurrency world including its opportunities and risks is essential as digital assets are affecting how people access banking, improving financial inclusion through digital technology.
The US government needs to understand digital currencies in light of the volatile, unregulated environment in which they currently operate and how they can develop something which is better regulated. This exercise will also allow the US administration to understand the infrastructure that is needed to ensure the proper development and smooth introduction of a digital dollar with all the necessary check and balances in place. Such a decision needs to be taken with care as the implications of moving in this direction are profound for the stability of international monetary systems that currently rely on the US dollar.
Having a digital dollar that is properly managed and controlled makes sense, allowing faster, more accurate transactions to take place, which also helps to address inefficiencies in the current US payment system. Technology leads to greater efficiency, better transparency and faster processing, which is essential in a world that is already well on its digital journey.
I fear though that the rate of progress developing a digital dollar is far too slow compared to counterparts across the world. If the US government takes too long to develop the digital dollar, this entire industry could move to other financial centers that have the needed digital currency infrastructures in place.
Trials of China’s digital yuan (e-CNY) started in October 2020, with the Chinese Central Bank – The Peoples Bank of China (PBOC) – piloting the digital currency. The European Central Bank has been tinkering with the idea of a digital euro since July 2021, reporting that it needs two years to investigate what this might look like.
The Federal Reserve’s desire to create a digital dollar is still many years away with work very much in the preliminary research phase. Although the Federal Reserve released a paper in January 2022 about the pros and cons of adopting a digital dollar, the ultimate decision regarding adoption lies with the US congress. With many intra party divides, it seems there is no consensus for the development of a digital dollar. This adds to an already divided political climate in the US.
Even with Biden’s executive order for a comprehensive report, it will take years to develop and pilot a viable product, by which time the USA will be way behind the curve which will further threaten its position as a global leader.