This spring, as cryptocurrency markets crashed and stablecoins (like Terra LUNA) imploded, a new conversation percolated across the globe and within the US government: the prospect of a US digital dollar.
At least 86 percent of central banks across the globe are actively researching digital currencies, according to a survey by the Bank for International Settlements, a Swiss institution known as “a central bank for central banks.” Nearly one-third are testing currency, and the European Central Bank is aiming for a digital euro by 2025.
But China is winning the digital currency war, jumping far ahead of the United States—in years, in technology implementation, in billions of dollars, in hundreds of millions of actual users in the market, and in manpower. The country has not launched its digital yuan, but it’s already in the pilot stage. The country is working with Brazil, Russia, India, China, and South Africa with plans to issue a “new global reserve currency.” Saudi Arabia, Egypt, and Turkey may join them.
The US Federal Reserve, meanwhile, is only exploring the concept. President Joe Biden did sign an executive order for a national policy for digital assets. The House Financial Services Committee held a hearing on digital currencies, and the Federal Reserve conducted a study on how to develop a US digital dollar.
Suppose China’s digital currency becomes the global standard. In that case, the country could potentially control that infrastructure and have visibility into money flowing well beyond its borders. It would be an unprecedented tool for monitoring people’s behavior and activities regardless of location. China’s momentum could force dramatic change in the international monetary system and drive significant geo-political and trade effects. The SWIFT (Society for Worldwide Interbank Financial Telecommunications) system, which governs transactions across borders between banks, could be obsolete. Some say digital currency could be the biggest change in money since the end of the gold standard. “It would be very destabilizing,” says Dan Young, founder of Ugly Unicorn, a Salt Lake City crypto hedge fund. “It would obviously increase military escalation and higher tensions across the globe.”
It’s far easier for an authoritarian, centralized nation to make decisions and execute them swiftly. Democratic nations require more collaboration, and in the US, that has not been happening. Partisan gridlock makes it tough to get any legislation passed, let alone those that involve complex technology like blockchain. Just look at how federal lawmakers handled the Facebook hearings in 2018, unsure of the social media giant’s business model.
“The digital dollar is not at the top of the food chain for legislators today, and it’s far more complicated than Facebook,” says former CIO at Bank of America and Capital One Financial Tal Elyashiv, who is now co-founder of SPiCE VC, a blockchain venture capital firm.
Creating a digital dollar, Elyashiv says, is a whole other beast that could take years to develop—involving a new blockchain infrastructure, regulatory hoops, strategic and operational decisions, building consensus with industry players, prototyping, and testing. It could also change how payment processors, the US Treasury Department, and the US Central Bank operate.
But wait, you might ask, don’t we already have digital transactions? What’s the difference between paying via PayPal and Venmo and a digital dollar? Or, for that matter, the difference between a digital dollar and cryptocurrency?
The digital dollar, like cryptocurrency, would live on the blockchain, or networks that store data using sophisticated math and software rules that make it tough to manipulate. But unlike cryptocurrency, the Federal Reserve would issue the digital dollar just as it issues physical dollars. It would likely be a private blockchain controlled by the government and prominent financial/payment players, versus a public decentralized network in which every transaction and ledger is stored across thousands of computers and open for anyone who wants to participate in running it. For the past couple of years, crypto investors have put money into algorithmic stablecoins, a cryptocurrency designed to have a relatively stable price by being pegged to a commodity or currency or the supply regulated by an algorithm. But stablecoins have not been exactly stable, and several of them have crashed along with the rest of the crypto market. Investors, for instance, lost billions last spring in Terra LUNA.
The digital dollar might replace some algorithmic stablecoins. A digital dollar, while providing the same ease of use and transfer, will be a less risky asset and backed by a central bank. In the future, cryptocurrency may operate more like financial stock investments, Young says.
For consumers, a digital dollar payment would look the same as how you pay today with a credit card or other online transaction. But on the back end—for payment processors and the government—it would mean a simpler, safer, faster way to send money.
Currently, when you pay via credit card, ApplePay, PayPal, or Venmo, it requires multiple steps to process a transaction. A simple purchase may go from the consumer to PayPal, to a credit card company or bank, then back to the retailer. Each step involves reconciling a separate ledger, adhering to various regulations and processing fees. Digital currency would simplify this, ensuring one ledger, one set of regulations, and fewer errors because it would operate on a more secure single network: the blockchain, which stores data using sophisticated math and software rules that make it tough to manipulate.
“Payments are complicated and require manual processes and intersystem communication,” Elyashiv says. “With this, everyone would know that all regulations and business rules are met, and no additional confirmations would be required.”
Security would also be necessary, and tech companies are already anticipating how their technology could prevent communist intervention into the US digital currency. The US ran into this security risk when 5G was being rolled out. Cell phone providers sought to roll out a network using equipment made by Chinese manufacturer Huawei and the government imposed limits on suppliers.Intel recently released its Blockscale chip, designed for crypto mining, but the technology could potentially be used in the data processing centers used by the Central Bank. In late July, the House of Representatives passed the CHIPS Act, which would offer $52 billion in government incentives for companies that manufactured semiconductor chips in the United States to ensure security from foreign threats.
A US digital dollar would also be the first step in moving away from physical paper money—and would allow the government to collect taxes easier and potentially put a lid on money laundering. “Cash is not at all trackable,” Elyashiv says. “With a digital dollar, they could have more control over the movement of money, making it harder for bad players to move money around.”
But that tracking has raised concern among blockchain purists, who see full decentralization as a core value of blockchain and cryptocurrency.
Centralized control over digital payments works in communist China, but lack of privacy and centralized government control doesn’t necessarily fly with Americans, says Richard Smith, who analyzes financial and crypto risk as CEO of the investing tool RiskSmith. Nonetheless, many crypto platforms still operate with a great deal of centralization.
“What’s the difference between the centralization of Vitalik Buterin [the co-founder of Ethereum] controlling the code versus the US government control?” Smith asks. “I think those are questions the digital currency community hasn’t fully come to terms with.”
In the meantime, regulating cryptocurrency looks to be a bigger priority for the US government than creating the digital dollar. The SEC is investigating the stablecoin project Terraform Labs; the US Senate introduced the Responsible Financial Innovations Act to create standards, protections, and jurisdictional boundaries for crypto; and G7 finance ministers and central bank governors called for the regulation of crypto assets last spring.Cryptocurrency has hit a bear market, and it’s down nearly $2 trillion from its peak in November. According to the Federal Trade Commission, Americans lost more than $1 billion in cryptocurrency scams between 2021 and 2022. One out of every four dollars lost to fraud was paid in cryptocurrency. “A lot of the pain the public is going through right now was exacerbated by the fact that there was no regulation of this industry,” Smith says. “I think it’s a problem that somebody like Terra LUNA can talk about a safe 19 percent yield on digital assets. It’s highly misleading marketing.”
Whatever the future digital dollar looks like, Smith says, it will be important for US officials to address not only safety and privacy—but also how such a move would potentially affect disadvantaged people and exacerbate the nation’s growing wealth gap. “We need to have a deeper and more thoughtful conversation, but that’s tough to do in the shouting match of today’s media environment,” he says.
Regardless, we probably need to get on it quickly. “It’s critical for us to have this infrastructure in place,” Young says.