The idea of a Central Bank Digital Currency (“CBDC”) or “Digital Dollar” in the U.S. is nothing new. Yet for many Americans, they are hearing about it for the first time. Not only are they hearing about it for the first time, but they are being told there is a possibility that a digital dollar will be created in order to help deliver payments amid the Covid-19 pandemic. That is a lot of information in a short amount of time. The question now is — what is the Digital Dollar, why now and more importantly, are we ready?
For many observers, the prospect of the U.S. issuing a Digital Dollar seems reactionary rather than concrete and decisive action. As recent as 2019, the U.S. faced a large amount of external pressure to digitize the dollar. Let’s take a look at some of these external pressure points below.
Libra Makes the First Move
Since 2017, Facebook has been working on what would later be known as Libra — a digital currency running on a permissioned blockchain. By the time the news broke in mid-2019 that Facebook had intended to create a digital currency, the Senate Banking Committee was scrambling. On July 16, 2019, the Senate Banking Committee held a hearing regarding Libra and Calibra. Calibra is a subsidiary of Facebook which was established with the purpose of building financial services on top of the Libra blockchain.
The head of Calibra at Facebook, David Marcus, appeared before policymakers to advocate for the project. One of the most poignant remarks made during David Marcus’ testimony was regarding the chilling effect on blockchain innovation:
“I believe that if America does not lead innovation in the digital currency and payments area, others will. If we fail to act, we could soon see a digital currency controlled by others whose values are dramatically different.”
— David Marcus, Head of Calibra at Facebook.
In essence, what that statement alluded to was that a foreign country would likely develop a digital currency that would usurp the U.S. dollar’s standing in the global marketplace. Ironically, those were the exact concerns that policymakers had with Libra. Legislators stated that allowing Calibra to proceed unchecked would result in major disruptions to global finance, raise issues concerning money laundering, but more importantly, compete with the U.S. dollar.
In the end, what this presented to U.S. regulators was the biggest threat to the status quo to date. It was not a vision promised in a whitepaper, or discussed on a forum, or in the mission statement of a tech-startup company’s website — it was one of the world’s largest companies becoming one of the largest players in the financial markets overnight. It was clear that the main mission for policymakers at this stage was maintaining control. Occurring simultaneously, on the other side of the world, China had already begun ramping up its efforts to release their Central Bank Digital Currency.
China Begins Implementing Their Digital Currency
Digital payments in China are not a new phenomenon. While China has been developing its own CBDC for the last six years, its use of digital payments has grown exponentially year after year. In 2019, in a report issued by JP Morgan, we can see that China accounts for over 52% of digital payments in the region, which is expected to grow to 60% by 2021. What is evident here is that there is a large amount of China’s population being comfortable handling a majority of everyday payments via apps on their phone or over web-based applications.
While these digital payments in China have become second-nature, China’s central bank has been ramping up its efforts to release a digital currency since the announcement of Libra. The digital yuan, as it has been referred to, will function in nearly the same way as its paper-based counterpart. The digital yuan will be tied to the country’s regular currency with all transactions being monitored by the central bank of China. While all transactions will appear on a digital ledger, China’s digital yuan does not coincide with the ideals of blockchain technology such as decentralization, financial freedom and anonymity.
Recently, China’s central bank has started to run pilot programs for digital currency electronic payments in 4 major cities: Chengdu, Shenzhen, Suzhou and Xiong’an. Users that are currently using the digital yuan have reported that making payments and using the accompanying wallet is very similar to using similar platforms such as Alipay and WeChat Pay.
During this initial pilot period, users are able to make payments at coffee shops, retailers, theaters and bookstores just to name a few. After the initial pilot program, the widespread release of the program will not only be used for everyday payments but also for distributing salaries for municipal employees. While the digital wallet and its functions may look similar to users, there will be some differences. In the pilot program, low-value transactions can still go through when both parties are offline. In addition, the tokens will be distributed by the four major financial institutions in China along with state-approved fintech companies.
The effects of the Covid-19 pandemic have also accelerated plans to roll out the digital cash electronic payment program. This is most likely due to the fear of handling physical cash on a daily basis. However, it is worth noting that while external factors have played a role in speeding up the implementation of a CBDC in China, the fact remains that they have an incredibly large segment of the population which is perfectly comfortable making payments in this manner. This in combination with Libra, has created two large sources of external pressure that are bearing down on policymakers in the U.S. The final pressure point we are examining today is the effect of the Covid-19 pandemic in the U.S. and how it is shaping policy discussions pertaining to the Digital Dollar.
A Global Pandemic Leaves Policymakers Scrambling
In the midst of a global pandemic, one of the greatest policy decisions the U.S. is trying to make is whether it will move towards the creation of a Digital Dollar. While the discussions centering around creating a CBDC in the U.S. have been largely absent since the Libra hearings in mid-2019, analysts suspect that we aren’t seeing the discussions due to logistical reasons.
While some U.S. citizens received stimulus payments in mid-April, there are millions who have yet to receive their deposits via paper checks or direct deposit. These problems reveal that the U.S. lacked the infrastructure to issue these payments to the people who needed them most in an expedient manner. The discussion to introduce a CBDC into the CARES Act did not make it into the final iteration of the bill, however, the proposals set forth opened up a possibility of a larger discussion in the near future.
The Banking for All Act (S.3571) was introduced into the Senate on March 23, 2020. This Act allows for the creating of a digital wallet and a digital dollar that would be accessible to all U.S. Citizens. The pertinent sections of the ACT say that all Federal reserve banks shall provide:
Debit cards, online account access, automatic bill-pay, mobile banking, customer service and other services as the Board of Governors of the Federal Reserve System determines appropriate in the public interest, provided that digital dollar wallets shall not include overdraft coverage.“
— Banking for All Act, Section 5(c)(2)
At the time of writing, the Act has not gained any further traction and has a 1% chance of being passed. Whether this bill receives strong support or not, at least the discussions are taking place. As time passes on, the U.S. will likely begin to lose hegemony to China in terms of the global dominance of the U.S. dollar. A solution is needed sooner rather than later.