A new presidential order touches on the matter of a digital dollar, and the Federal Reserve has at last released a promised study on the subject. The Fed reached no conclusion but made clear its openness to the matter; it has left 120 days for comment.
Whatever the Fed or the White House eventually decides, a digital dollar would change little in the conduct of financial affairs—unless, that is, the Fed uses the arrangements to destroy banking as it currently exists. And that's possible, if not especially probable.
At base, digital dollar enthusiasts advance four arguments for it. They claim that a digital currency would make transactions easier and more efficient; that it would protect the dollar’s role as the premier global reserve currency, most especially from China’s digital yuan; that it would alleviate inequity by giving those who are presently “unbanked” an alternative; and that it would counter the ill effects of cryptocurrency adoption.
Against these supposed benefits, two other considerations stand: a digital currency would greatly enhance the government’s surveillance powers, and it could give the government power over the allocation of financial capital throughout the economy. These two considerations may explain why China, seldom in the vanguard of financial innovation, has leaped ahead with its digital currency.
On the first of the arguments in favor of a digital dollar, it's worth noting that today’s dollar has long been digital. Paychecks are deposited directly into entirely digital bank accounts, as are tax refunds and “support checks” from Washington. All large transactions are wired. Paper checks only authorize digital exchanges. People can manage their digital dollar accounts through the internet whenever they choose. Credit and debit cards allow digital exchanges on items large and small, as does an Apple wallet.
While proponents remind the public ominously that about 140 million Chinese people already have digital wallets with the digital yuan, few seem to consider that millions of Americans have long had the practical equivalent of digital dollar wallets.
Similarly, the dollar has well-developed digital arrangements globally. A keystroke can send billions anywhere in the world and simultaneously arrange an exchange to almost any other currency. An official digital arrangement wouldn't make these arrangements any more convenient, easy, or instantaneous.
The digital yuan hardly has an edge. There's more to being a global reserve currency than simply the ease and speed of transactions. At the least, it requires the absence of the kinds of trading restrictions Beijing imposes on the yuan.
Nor is it likely that a digital dollar will create equity for the “unbanked.” Since bank accounts are easy to open and are largely costless, those who refuse them are either wary of the institutions, ignorant of the advantages, or simply live in such a narrow world that paper currency suffices. On the first of these, it's far from apparent that wariness would lift with a government account, while the other two reasons why people remain “unbanked” would exist even with a Fed-administered digital dollar.
A digital dollar would likely increase the appeal of bitcoin and other cryptocurrencies. Aside from the desire to look “cool,” most people use these currencies because they offer anonymity. And since a digital dollar would give the authorities access to every transaction (except perhaps those done with paper currency), its appearance would only increase the appeal of that anonymity.
To be sure, authorities can currently access the already existing digital networks, but legalities make it much less convenient than if a digital dollar left all of those transactions sitting conveniently on a government computer.
The digital dollar also threatens financial disruption. Should a digital dollar gain ascendancy, Americans would presumably move their checking accounts to the new facility, taking from banks the deposit base from which they lend.
In other words, the ability to allocate financial capital would migrate from banks to the Fed, where there would be a much greater risk that politics would intrude on the nation’s economic direction. That might appeal to the more authoritarian sorts in Washington, but otherwise, the political direction of national economic effort has a poor track record.
Even in the absence of questions about surveillance and a government takeover of the nation’s financial resources, it's hard to see how a digital dollar could benefit the lives of Americans or strengthen the dollar’s international role. The concept adds little except to conjure the magic that attaches itself to the word “digital” these days.