A U.S. digital dollar project and foreign central bank digital currency (CBDC) trial programs have emerged against the backdrop of the Covid-19 pandemic and its disruptions of economies and finance worldwide. These initiatives could start the global digital currency revolution that the Libra project attempted to launch in 2019.
Money in the Time of Covid-19
The economic crisis and social distancing practices caused by the Covid-19 pandemic have done in 2020 what the Libra project of social networking giant Facebook could not do in 2019: interest more than a few members of Congress in digital currency.
A growing and bipartisan group of House members has started advocating for the use of digital currency as a mechanism to distribute relief payments. A March 23 bill issued by House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) proposed to create a “digital dollar” for distributing stimulus payments through “digital dollar wallets” maintained by Federal Reserve member banks. A digital dollar and digital dollar wallet were also elements in a bill for a debit card-based payment system proposed by Rep. Rashida Tlaib (D-Mich.) on April 16.
Later in April, a bipartisan group of 11 members of Congress— six Republicans, five Democrats—submitted a letter to the Secretary of the Treasury that encouraged the Treasury Department to utilize innovative blockchain-based payment systems to distribute and track relief payments.
This recent Congressional interest in a national digital currency trails that of a number of foreign governments. While a digital U.S. dollar is no more than a concept, CBDC trial programs in various forms are beginning in several developed nations of the G20. They include France, whose central bank announced an experiment with the use of a digital euro issued for interbank settlements on March 30, and South Korea, whose central bank announced a CBDC pilot program on April 6.
China has made moves toward development of a CBDC that should especially concern Congress and the U.S. executive branch. On April 4, the People’s Bank of China announced that it is moving forward with development of a digital yuan. Media reports in April indicated that trials of the digital yuan had begun in some Chinese cities and banks.
The bipartisan letter to the Secretary of the Treasury brought up China’s plans as a warning, and the digital yuan project should worry U.S. policymakers for multiple reasons. If the project proves successful and the digital yuan becomes widely used both in China and internationally, it could contribute to eroding the dominance of the U.S. dollar as the world’s main reserve currency and medium of trade. Moreover, the digital yuan would bypass mechanisms half a century old that Western finance has been using to track payments, such as the U.S. anti-money laundering (AML) regime (since 1970) and the SWIFT network headquartered in Belgium (since 1973). China’s surveillance state would instead own transaction data. There would be consequences for both the privacy of individuals worldwide and U.S. national security.
Digital Dollar Advocates
The Digital Dollar Project that launched in January aims to encourage U.S. research and public discussion of the concept of a digital dollar. Former Chairman of the Commodity Futures Trading Commission Christopher Giancarlo, nicknamed “Crypto Dad” for his interest in blockchain technology and cryptocurrencies, leads it. Giancarlo has for years advocated introducing a digital dollar, and he has made it his special project after his retirement as CFTC Chairman in May 2019, which he initiated by publishing a farewell letter to the cryptocurrency community.
Giancarlo has not been alone in advocating for a digital dollar from outside of the U.S. government, and private-sector digital dollar advocates crossing over into senior positions in government financial regulatory agencies has already begun. In mid-March, the Office of the Comptroller of the Currency (OCC), the largest U.S. banking regulator, announced Brian Brooks, former chief legal officer of the digital currency exchange Coinbase, as its new Chief Operating Officer and First Deputy Comptroller. Brooks has not only advocated for a digital dollar; he has argued that issuing a digital dollar should be a public-private partnership, not the prerogative of the Federal Reserve.
Brooks’s appointment, effective April 1, was no April Fools Day prank. It is a serious sign that the process of considering a digital dollar has begun—but also that it will be more complicated and will involve more difficult choices than either the crypto community or new converts in Congress have acknowledged.
Giancarlo, Brooks, and other advocates of a digital dollar have varying ideas on how to implement the general concept, and short-term political concerns are likely to influence how policymakers assess those ideas. Giancarlo has had to argue against the digital dollar proposals in the March and April bills responding to the economic crisis of the Covid-19 pandemic, stating, “Something as complex and worthy of the U.S. dollar’s global importance should not be cobbled together in a crisis.”
In 2020 we are likely to be seeing only the beginning of a long process of U.S. authorities figuring out whether a digital dollar will be necessary and how to implement one, with an immediate economic crisis and long-term rivalry with China influencing the process. How this process unfolds in the years to come will significantly influence the evolution of the U.S. financial system.
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