US digital dollar: will fiat currency ride the crypto wave? | Business and Economy News


The United States dollar ruled for many decades as the world’s leading reserve currency, backed by the full confidence and credit of the United States government and the value of its powerful economy.

But in recent years, the world’s dominant currency of choice has faced a growing array of threats, from its own inefficient financial infrastructure and the introduction of the Chinese e-yuan to the specter of Facebook’s Diem and cryptocurrencies like Bitcoin.

As countries like the Bahamas, China and Sweden test the viability of the central bank’s digital currency (CBDC), U.S. policymakers are taking stock.

Two US-based efforts are exploring the concept of a digital fiat dollar in an era when money is no longer king.

The Massachusetts Institute of Technology (MIT) Digital Currency Initiative is working with the Federal Reserve Bank of Boston on research to initiate the hypothetical currency change in an experiment called Project Hamilton. The Boston Fed chairman said a future “Fedcoin” would mix the functionality of Venmo and Apple Pay.

And the Digital Dollar Project, a collaboration between the nonprofit Digital Dollar Foundation and consulting firm Accenture Plc, is launching five pilots next year. This company hopes to generate public debate and take practical steps towards a CBDC.

“There are a number of reasons central banks around the world are seriously examining the CBDC, including data capture and economic privacy, modernization of the financial system, financial inclusion, precision in delivery. government and monetary policy, ”said Christopher Giancarlo, co-founder of the Digital Dollar Foundation and former US government regulator.

Giancarlo told Al Jazeera that “geopolitical concerns, competition for stablecoins [like Diem] with bank payment systems and leadership in setting standards for the global interoperability of digital currencies ”also motivates the United States.

“The private sector has been exploring the opportunities of digital assets like Bitcoin for over a decade and now the public sector is trying to catch up,” he said.

“Does not need mining blocks”

There is no guarantee that the United States will successfully adopt a digital dollar, Chris Ostrowski, managing director of the UK-based Digital Monetary Institute, told Al Jazeera.

Progressives, libertarians, and business-oriented technologists all have different ideas about what a CBDC should look like, with no agreement on goals, design, or functionality.

Supporters of a digital dollar like Rohan Gray, president of the Modern Money Network and professor at Willamette University College of Law, argue that a whole-of-government approach can advance a coordinated framework with multiple avenues.

A number of U.S. lawmakers have proposed digital wallets to help unbanked and underbanked Americans receive benefits and make payments [File: J Scott Applewhite/AP Photo]

Gray believes US President Joe Biden should work with Congress to find a way to digitize the dollar just as government agencies join forces – at least in theory – to tackle complex issues like the coronavirus pandemic, the economic recovery and climate change.

“We are not talking about one instrument, one platform or one technology, but a whole set of legislative changes,” Gray told Al Jazeera.

Among the suite of controversial solutions being considered by progressives is a proposal by Senator Sherrod Brown, a Democrat from Ohio, to set up a digital “FedAccount” dollar wallet for every American to receive benefits and make payments.

The system would be easily accessible at local banks and would have no cost. This is also tied to a bill co-sponsored by Senators Bernie Sanders and Kirsten Gillibrand for the US Postal Service to provide retail banking services.

A related idea is the Public Banking Act introduced by Representatives Rashida Tlaib and Alexandria Ocasio-Cortez aimed at “making banking a public service, a model proven around the world, to keep money local and reduce costs. costs by eliminating Wall Street middlemen, shareholders and paid executives ”.

Some digital tokens such as Bitcoin rely on energy-sucking Proof of Work (PoW) consensus mechanisms to validate transactions and mint new coins, which involves powering thousands of working computers. unison. [File: Bloomberg]

Gray sees potential ‘eCash’ solutions as a populist tool to tackle inequality and make money more democratic by offering token-based digital currency on stored-value cards, alongside ledger-based technology. accounts where people hold assets directly at the central bank.

Like many left-wing supporters of the digital dollar, Gray argues that blockchain – the technology behind cryptocurrencies – is unnecessary when there is enough centralized trust.

“The blockchain is supposed to be a consensus among a peer group on a common state of affairs, but that’s not the question you’re trying to solve here,” he said, referring to how the cryptographic networks verify transactions. “It doesn’t need mining blocks or proof of work.”

Decentralized crypto and the CBDC could one day coexist. But in any case, private Bitcoin has accelerated the conversation on the latter partially replacing paper banknotes and metal coins.

“Benefits and risks”

Whether a digital dollar ultimately rests on the blockchain or is simply influenced by the principles of cryptocurrency, U.S. policymakers of all stripes seem largely united in a desire not to be seen as being out of step. lagging behind – in a competitive global race – to digitize the greenback.

Many see a U.S. economy that has historically been a pioneer in the internet and fintech industries, and fear that Beijing may eventually move from a limited nationwide implementation of its CBDC to a substitute for the popular Alipay and WeChat payment systems. which already dominate much of Asia.

Overall, despite concerns about illicit financing and money laundering, U.S. officials criticize the implications of the Chinese model for monitoring and collecting consumer data.

U.S. Federal Reserve Chairman Jerome Powell and U.S. Treasury Secretary Janet Yellen both signaled growing support for the digital dollar, though their remarks about the lack of complete user anonymity have highlighted concerns. doubts, especially for conservative lawmakers.

Some libertarian members of the US House of Representatives are bullish on cryptocurrency but bearish on big government. In a June 15 hearing of the FinTech Task Force, Row Republican Warren Davidson, Congressman from Ohio, suggested officials were still in a “learning phase” for a dollar. digital.

He described the current financial infrastructure as “already secure, effective, vibrant and efficient” and said the United States should pursue digitization “for the right reasons, not just to pressure us”.

Federal Reserve Chairman Jerome Powell reported growing support for a digital dollar [File:  Graeme Jennings/Pool via Reuters]

Davidson’s main criticism is about “healthy money” – the fear that digital dollars could potentially erode stability and prosperity. But he also cautions not to stray from the “unauthorized” aspects of cash that allow confidentiality of peer-to-peer transactions.

He told Al Jazeera that the digital dollar should be created “not as a tool of control but rather as a store of value and a medium of exchange”.

Patrick McHenry, the Republican ranked on the House Committee on Financial Services, called for an in-depth study of both the “benefits and the risks”, agreeing with the Fed’s commitment to “get it right [rather] than to be the first ”.

Other Republicans focus on the inflationary potential of “printing” too much money, or on the pitfalls of the public sector trying to replicate what commercial banks are already doing. Moreover, from a cybersecurity perspective, keeping the intermediary banks could isolate the Fed.

“Convenient addition to cash”

A consensus could emerge with Wall Street and fintech companies around the 21st Century Dollar Act, a bipartisan bill requiring the Secretary of the US Treasury to release updates on dollar dominance and progress in the development of the CBDC.

Some 80% of central banks are actively reviewing the concept of CBDCs, including the European Central Bank and the Bank of England, which have recently published articles on the subject.

Last October, the Bahamas rolled out the sand dollar, the first national launch by a central bank of such technology. In April, the Eastern Caribbean Central Bank unveiled its DCash. And the Bank of Jamaica plans to introduce digital currency next year.

The Jamaican program uses Ireland-based eCurrency Mint Inc as the technology provider. The company’s market manager, Miles Au Yeung, suggests the United States could do the same.

He told Al Jazeera that only the Treasury and the Federal Reserve should have the power to produce, issue and distribute this new form of legal tender.

“Any CBDC must be able to operate within the existing payment rails of the financial system, including bank accounts, apps and payment cards, while extending to smartphones, QR codes and other innovative ways to store. digital objects, ”Yeung said.

“The digital currency must allow an instant and final settlement”, he added, affirming that it should be able to evolve “massively with minimal energy consumption”.

In the Bahamas, local company NZIA Ltd implemented the new digital currency, which Attorney General John Kim described to Al Jazeera as “the most mature and advanced system of its kind,” noting that the CBDC qu ‘they built is a “practical addition to the money”.

Although Jamaica’s CBDC is not blockchain-based, the Bahamian model is a “best of both worlds” hybrid that combines blockchain and centralized systems, Kim said, adding that he is adopting a “wait and watch” approach for the digital US dollar.

“In re-imagining any mission-critical national infrastructure,” he said, “preparation is just as important as will. “

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