The Future of US Finance: Will There Be a Digital Dollar?

The potential creation of a US central bank digital currency (CBDC), also known as a digital dollar, has been a topic of discussion for a while now. However, recent comments from Nellie Liang, the undersecretary for domestic finance at the Treasury, suggest that this digital currency could soon become a reality.

According to her, the US Treasury is actively engaging in technological development to prepare for the creation of a digital dollar, which is pending Congressional approval. In this article, we'll explain what the idea behind the digital dollar is and provide you with insights into what its launch could mean for the future of US finance.

What Exactly Is a Digital Dollar?

The concept of a digital dollar has been discussed for several years but gained renewed attention in 2020 during the COVID-19 pandemic as a way to distribute government stimulus payments more efficiently. Some proposals for a digital dollar involve the creation of a new payment system, while others would use existing payment infrastructure to facilitate such transactions.

Although a CBDC could potentially be a step toward a cash-free US economy, it’s important to note that the current goal of the digital dollar is to complement current payment forms rather than replace them.

The Potential Pros and Cons of the Digital Dollar

The idea of a digital dollar being introduced has a lot of supporters due to its multiple benefits, including:

• Increased efficiency. The digital dollar has the potential to increase efficiency in financial transactions by reducing the time and costs associated with handling physical cash and processing paper checks.
• Financial Inclusion. The US CBDC could increase financial inclusion for unbanked and underbanked individuals who may not have access to traditional banking services.
• Enhanced security. Digital currency is likely to involve enhanced security features, such as encryption and biometric authentication, which could reduce the risk of fraud and counterfeiting.
• Improved monetary policy. The digital dollar could provide US policymakers with greater control over the money supply, allowing them to implement the monetary policy more effectively.
• Increased transparency. The CBDC could potentially increase transparency in financial transactions by providing real-time data on payments and enabling more accurate tracking of funds.

However, as with any form of payment the prospect of implementing the digital dollar also has potential downsides, namely:

• Privacy concerns. The digital dollar could raise privacy concerns if it requires individuals to disclose personal information in order to use it, as it would have t potentially be used to monitor individuals' financial transactions.
• Cybersecurity risks. The digital dollar could be vulnerable to cyber attacks, which could compromise the security and stability of the financial system.
• Disruption of the existing system. The introduction of a digital dollar could potentially disrupt the existing financial system and could lead to unintended consequences such as market volatility and economic instability. It may also cause challenges for traditional financial institutions and disrupt their business models.
• Adoption challenges. The adoption of a CBDC may face resistance from those US residents who are not comfortable with digital currencies or who prefer physical cash. This could slow down the widespread adoption and usage of the digital dollar.
• Legal and regulatory concerns. The introduction of a digital dollar may require significant changes to existing laws and regulations, which may raise concerns regarding its implementation and use.

Overall, the introduction of a digital dollar has the potential to bring about significant benefits to the US economy, yet it also poses several risks and concerns that must be carefully considered and addressed before implementation.

The Current State of the Digital Dollar Initiative

While there is still no digital dollar in circulation as of April 2023, there has been a lot of discussion and research dedicated to this topic.

For instance, in May 2021, the US Federal Reserve announced that it would be conducting research on a CBDC, which could potentially take the form of a digital dollar. The Fed has stated that it is exploring the benefits and risks of a CBDC, and is consulting with stakeholders from the financial industry, academia, and consumer groups.

Besides, several bills have been introduced in the US Congress that call for the development of a digital dollar. The proposed bills seek to establish a digital dollar as a form of legal tender and to create a framework for its issuance and regulation.

There are also several private sector initiatives underway to develop this CBDC solution. For example, the Digital Dollar Foundation is a non-profit organization that is working to advance the development of a digital dollar by conducting research, education, and advocacy efforts.

Summing Up: When to Expect the Digital Dollar to Go Live?

What’s more, after its hypothetical launch, the digital dollar is expected to have a gradual introduction, with limited usage initially, possibly starting with international settlements before being made more widely available. For instance, if the CBDC is adopted, its use in retail consumer settings may come at later stages.