The Coming Digital Dollar

The Coming Digital Dollar

For decades, the concept of a cashless society was the domain of conspiracy theorists.

But now talk of taking the dollar to an exclusively digital platform is getting more serious consideration.

Is it our next step? And are there important considerations before we take it?

We’re Already Cashless

It was at one time impossible to imagine a world without cash. But gradually, consumers were happy to adopt the convenience of checks, credit cards and payment apps. Now it is the exception to use actual cash, especially for larger transactions.

An interesting case in point is Carl B., who lives in hurricane country and regularly withdraws a reserve of cash whenever it looks like a storm is coming in. Everyone in his community does the same because if the power goes out, the credit or debit card won’t do you much good.

Carl was surprised that in the wake of coronavirus panic buying, his cash reserve doesn’t carry the same weight. The power is working fine, but many people don’t trust cash — it may carry the virus.

While it is not conclusively proven that cash is a disease vector, the Chinese government burned and replaced a massive amount of cash. And other nations are irradiating theirs.

Will COVID-19 Kill Cash?

The coronavirus may turn the tide toward a completely digital monetary system in the United States and elsewhere. People are coming to see this crisis as more than the short-term inconvenience many anticipated at first.

In fact, it may stretch beyond to several cold and flu seasons, making more people hesitant to use physical money.

As Lawrence Wintermeyer writes inForbes:

It is not a global financial crisis. It is a global health crisis creating a global financial crisis, and a social crisis of unfathomable comprehension.1

Change is being thrust upon us whether or not we are prepared for it.

Wintermeyer goes on to point out that it is imperative that governments mobilize digital assets to get money to people faster in the midst of this crisis.

Because while some may get direct payments, others are stuck waiting for a check in the mail.

Another factor behind the growing acceptance of a digital dollar is the growing awareness and adoption of other digital currencies such as Bitcoin and Ethereum. Blockchains have been established, creating a template for a system that can function beyond traditional banks.

Younger generations have embraced the model and no longer need to feel the cash in their hands to appreciate its value.

Digital Dollar Coming Soon?

The digital dollar made the mainstream news in March, as a provision concerning it was initially included in the coronavirus emergency stimulus package. The proposal called for the digital dollar concept to be enacted in order for emergency payments to go directly to consumers and businesses — not to banks.

This is just the vote of legitimacy that proponents of digital currency were looking for.

Comments Vipin Bharathan, chair of the Hyperledger identity working group:

That’s a significant step, and I argue that such crisis situations always produce new ideas, and acceptance of new ideas, that will live on long after the coronavirus has burned through the world.2

While the legislation would go on to pass without the digital dollar language included in the finished package, the proverbial cat is out of the bag.

One concern that some point to is that a digital dollar issued by the U.S. central bank, sometimes referred to as central bank digital currency (CBDC), would eliminate the advantage of the bankless blockchain exchange that is inherent in cryptocurrencies. By definition, a bank is at the center of this exchange.

Others point to lowering interest rates and possible impending negative interest rates as a problematic issue.

Instead of being paid interest for savings kept in banks, consumers face the possibility of owing interest to the banks themselves that house their digital savings, without the luxury of withdrawing cash and keeping it in a safe. This already happened in nations like Japan when interest rates dipped below zero.

The Chinese have reportedly been at work on their own CBDC for years, causing many to question the draconian potential of such a system. In a nation of social credit scores and penalties for not pulling the party line, what becomes of citizens’ CBDC when they have run afoul of the powers that be?

In the meantime, the Bank of France has launched experimental projects to test the waters for its own CBDC, a digital euro. The Bahamas and Sweden are also reportedly doing the same.

The head of the U.S. Federal Reserve, Jerome Powell, notes that there are several issues to be ironed out before a CBDC can be operational.

Miranda Wood, editor for Ledger Insights, asks:

“Would the CBDC pay interest? Would there be limits on supply? How would the central bank deal with liquidity from the private sector?”3

Additionally, Wood asks, would the Federal Reserve be required to keep a running log of payment data? This is not done for cash transactions and would become a significant undertaking.3

Further, it would expose private transactions to unprecedented oversight and even potential hacking.

Many think  a digital dollar or CBDC may be more problematic than it’s worth. Perhaps consumers and businesses alike are not quite ready for it and the incremental demise of cash as we know it. But the unknown new world we will embark on post- coronavirus has moved the dial undeniably closer to this potential.

The idea is receiving more mainstream discussion and attention, and the coronavirus emergency stimulus legislation will not be the last we hear of it.

With purpose,

Dr. Patrick Gentempo

Patrick Gentempo