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Why the Fed Is Considering a Digital Dollar | WSJ - YouTube
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- [Narrator] The Federal
Reserve might want
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to fix your wallet
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by turning it from this into this.
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(phone beeping)
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Though your wallet is still
designed for dollar bills,
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Americans have been using cash
to buy things less and less
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over the years.
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(till dinging)
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That's part of why the Fed
is considering digitizing
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the US dollar, giving
people money they can access
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on their phone and bypassing
electronic payments
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that can be slow and
costly for businesses.
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Some see this as a necessary upgrade
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to the US financial
system but others worry
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it could potentially
upend commercial banking.
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- There's some very, very
difficult questions to answer
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but I think we, and we are
engaged in a serious program
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to understand both the technology
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and the policy issues.
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- [Narrator] A central bank
digital currency, or CBDC,
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is exactly what it sounds like,
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a purely digital form of
a country's money issued
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by its central bank that
people can use just like cash.
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It's true that cards
and apps already allow
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for electronic payment
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but behind the scenes,
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these financial transactions
involve several steps,
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settling payments over
a patchwork of systems.
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- The plumbing of the system
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is still based on a cash system.
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- [Narrator] Josh Lipsky is the director
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of the Atlantic Council's
GeoEconomics Center
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and says the US financial system
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is still pretty old school
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when it comes to moving money around.
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- It's based on banks talking to banks,
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saying hey, I need you
to transfer this to me.
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We've updated some of that over the years
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but actually, if you were to look back,
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a lot of it dates back
to the 1950s and before.
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And that's not a great way to
run a modern global economy.
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- [Narrator] After a debit card is swiped,
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the transaction can flow
through several entities,
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including point-of-sale systems,
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payment networks like Visa and Mastercard,
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your bank and the merchant's bank.
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The system can take up to three days
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to move money between accounts
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and often comes with transaction fees
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that can weigh heavily
on small businesses,
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who experts say may have to pass the cost
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onto customers or put
restrictions on card usage.
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These extra costs can limit their revenues
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and customer base.
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CBDCs could bypass this system,
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allowing digital money to flow directly
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between two people,
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in the same way you hand
over cash at the register.
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One method the Fed is considering
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is issuing digital wallets
to Americans directly
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or through commercial banks
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or other financial service providers.
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The digital dollars themselves
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would be no more than computer code,
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possibly stored on a
central ledger at the Fed
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or on a distributed ledger,
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like many cryptocurrencies.
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When you use your wallet
to pay for something,
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the Fed would take the digital
cash out of your wallet
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and deposit it into the merchant's,
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simplifying the process
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and doing it without fees.
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These could be done
through an app on a phone
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or for those without smartphones,
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an SMS text message or debit card.
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Besides frictionless payments,
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a digital dollar could help
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the 8.4 million unbanked households
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who don't have a debit or credit card
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and can get left behind
in a cashless world.
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For example, instead of mailing checks,
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the government can deposit your tax refund
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or stimulus payments directly
into your Fed wallet,
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making the money available immediately.
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(till dinging)
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Proponents also say CBDCs offer
a much more effective tool
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for central banks to
enact monetary policy.
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Right now the Fed
influences interest rates
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across the entire economy
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by setting borrowing rates
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between banks, known as
the Federal Funds Rate.
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But this is often a fraught process
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that doesn't always produce
the desired results.
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- The Fed sets this benchmark rate
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and other private banks
are supposed to cue off it
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and then your mortgage is
supposed to cue off it.
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Does that really work?
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How much time does it take?
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And the answer that
economists will tell you
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is it works but there're
probably more efficient ways
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to transfer monetary policy.
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- [Narrator] Economists believe
that if the Federal Reserve
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were to assign interest rates
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to the money stored in digital wallets,
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it would be much more effective
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at influencing economic decision making
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at the household level.
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According to a January survey,
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60% of central banks around the world
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are currently experimenting with CBDCs.
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The Bahamas was the first country
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to release a digital currency,
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called the Sand Dollar in October 2020.
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And China has been developing
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and testing a digital version of the yuan
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but there are questions
about how a digital currency
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would work in the US.
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- Legitimate digital public money
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could help drive out bogus
digital private money.
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It could help improve financial inclusion,
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efficiency and the safety
of our financial system
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if that digital public
money is well designed
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and efficiently executed,
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which are two very big ifs.
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- [Narrator] The recent
rise of cryptocurrencies
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like Bitcoin and private currencies
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like Facebook's Diem
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have spurred central banks
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to explore CBDCs in an
effort to keep pace.
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Experts say these alternative
currencies expose the risk
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of money and payments circulating
outside the watchful eyes
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of central banks.
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- This is a blind spot for them
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because when they're
setting monetary policy,
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they like to know how much
money is in circulation,
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broadly how that money is being used
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and so that helps them
understand the macroeconomics
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and the fundamentals of the economy
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at any given time.
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- [Narrator] But by keeping
up with new competitors,
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CBDCs could threaten to leave
traditional banking behind.
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- So if the Fed were to become a bank
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in the traditional sense,
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and actually issue people money
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and hold people's money directly,
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then you might hold less money
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in your Bank of America app
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and that would cut into
their business model.
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So they have to think about
how digital currencies
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affect their business.
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- [Narrator] Because of these issues,
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the Federal Reserve is
still studying the scope
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and structure of how a
digital dollar would work
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and how it could be integrated
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into the current banking system.
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- The Fed doesn't wanna start dealing
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with 300 million customers overnight.
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They're not equipped to do that.
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So you don't wanna call up the Fed
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at midnight and say I forget my password.
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This is not something the Fed
wants to be doing or can do.
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So they need to think
about who to work with
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to deliver digital dollars.
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- [Narrator] The Fed would also have
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to tackle privacy concerns
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over how anonymous digital
dollar payments should be
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and whether the money should be restricted
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to specific transactions
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or programmed to expire
after a certain time period
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to encourage spending.
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It plans to release a discussion paper
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on the benefits and risks
of a dollar this summer
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and has said it would move forward
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without support from Congress.
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Many experts say the Fed will need
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to figure out a digital dollar
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to keep up with the pace
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of a rapidly changing global economy.
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What that looks like remains to be seen
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but it could mean using this a lot less.
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