US President Joe Biden has ordered the federal government to consider creating a digital dollar, a move that could reshape the way money is moved and used around the world.
Before his order results in a virtual greenback, there will be many major impacts – and risks – to consider first.
Here are some key questions:
What form would a digital dollar take?
It would still be a dollar issued by the U.S. Federal Reserve central bank, like all U.S. notes and coins in use today, but in a digital form accessible to everyone, not just financial institutions.
Unlike money deposited in a bank account or spent through apps like Venmo and Apple Pay, it would be saved in Federal Reserve accounts, not a bank.
At the same time, the digital dollar would be worth the same as its paper counterpart, a divergence from cryptocurrencies which currently have highly volatile valuations.
Key questions remain unanswered, such as whether a digital dollar would be based on blockchain technology like bitcoin or tied to some kind of payment card.
Biden is asking agencies, including the Treasury Department, to consider various questions on the subject.
If the government decides to go ahead, it could take “a number of years” before we can use a digital dollar – authorities will have to explore what technology to use, for example, says currency expert Darrell Duffie digital at Stanford University in California. .
Why launch a digital dollar
This would reduce or even eliminate transaction fees since exchanges would no longer go through banks, bank cards or applications that charge commissions on each payment.
Proponents say it would help people without bank accounts, about 5% of households in the United States, and could make it easier for the government to pay benefits.
There are risks like system failure or a cyberattack, and there are also questions about privacy, as the government could theoretically have access to all transactions.
The banking system could also be compromised as banks are currently using customer deposits to lend to others, and with a digital dollar they could have less money at their disposal.
How will global finance be affected?
International transfers, which are often slow and expensive to make, could be greatly facilitated.
A trade that currently takes two days to clear could be done in an hour, said Marc Chandler, foreign exchange expert for brokerage Bannockburn.
For Chandler, the geopolitical role of the US dollar would not be upset by the introduction of the digital version.
A digital dollar would represent “a natural evolution rather than a revolution,” he noted, recalling that more than $6.5 trillion is already traded electronically every day in the forex market.
Even if China launches a large-scale digital yuan, as is being discussed, he said he doesn’t think it will change China’s role in the global economy because “there will always be questions confidence, transparency, market depth”.
For Stanford’s Duffie, however, if the United States is to continue to benefit from the dollar’s status as the dominant currency in central bank reserves and international payments, it is essential that the government exercise caution.
“The United States is going to have to make sure it remains in a leadership position in international forums that discuss standards for standardizing cross-border payments for digital currencies,” he said.
Can the United States catch up?
Other countries are already working on digital versions of their own currencies, from the Eurozone to India, but “there is no evidence to suggest that being first to market offers significant advantages or materials,” said Jamiel Sheikh, Founder of CBDC Think Tank.
On the contrary, failure due to unintended consequences, low usage or other issues can undermine trust in the issuing institution, he noted.
“The overwhelming dominance of the dollar gives the United States the luxury of learning from… other countries,” acknowledged Eswar Prasad, a professor at Cornell University.
Could the crypto world be turned upside down?
If properly designed, a digital dollar might be more preferable for home use than a cryptocurrency, Duffie said.
For international transfers, however, he said he was “skeptical that major central banks like the Fed or the ECB, China or Japan, will give central bank accounts to people around the world.”
If the United States did so, he noted, it could destroy the monetary system of small countries whose inhabitants would prefer to use the digital dollar rather than the local currency.
by Juliette Michel