Why hasn’t the US fully embraced the digital dollar?
- The US is still ambivalent on a digital dollar, despite President Biden's executive order pushing for research into a potential CBDC.
- Lisa Pollina, Board Member, Atlantic Council of the US, discusses the hurdles to CBDC adoption and contrasts China's embrace of CBDCs with the US's interest in cryptocurrencies.
While many countries worldwide are exploring the potential of Central Bank Digital Currency (CBDC), China continues to expand its e-CNY in the market. China introduced its CBDC to the world at the Olympic Games in February 2022. For its part, the US Federal Reserve is conducting research and strategic planning regarding the potential implementation of CBDCs, spurred on by Biden’s executive order. Despite these efforts, America has yet to make a concrete commitment to adopting a digital dollar.
In the US, the CBDC would be a third form of the US Dollar after paper and coins. CBDCs are considered fiat currencies of a particular nation (or region) that are issued by – and regulated by – the overarching monetary authority of that country. Each CBDC is backed by the government that issued it and is part of the base money supply. The US Constitution determines what Congress can and cannot do to create and weigh money, and the Digital Dollar would be under that legal definition.
I spoke with Lisa Pollina, Board Member, Atlantic Council of the United States, about the hurdles in CBDC adoption, weighing the pros and cons. We also touched on China’s CBDC prevalence versus US interest in cryptocurrencies.
The Atlantic Council, founded in 1961 and headquartered in Washington DC, is a think tank focused on global affairs. It operates sixteen centers worldwide, addressing issues like international security and economic prosperity.
Why hasn’t the US committed to a digital dollar despite Biden’s executive order urging research and development of a potential US CBDC?
Lisa Pollina: In the US, progress toward a digital dollar has been slowed by concerns over issues like privacy, security, and accessibility. As a digital currency administered and backed by the government, for example, all CBDC transactions would theoretically be visible to government entities, potentially violating the civil liberties guaranteed by our Bill of Rights and therefore requiring the US to design a digital dollar in a way that protects users’ data and identity. The distributed ledger technology, or blockchain, rails on which the currency will traverse need to be tested and fortified to prevent cyberattacks and system failures. Accommodations will also be required for the unbanked, those without smartphones or home internet access, and those with limited financial literacy.
Political realities also have hampered adoption. In June 2022, in testimony before the US House Committee on Financial Services, Federal Reserve Chair Jay Powell stated that the Fed would not proceed with developing and issuing a digital dollar without approval and direction from Congress. That is unlikely to happen in the current political environment. Legal and regulatory factors inherent to our decentralized financial system complicate the issue, with the need to address the disparate concerns and responsibilities of the Fed, Treasury, Congress, banks, and the public. Finally, the US dollar is already the dominant global reserve currency, and Washington is reluctant to impose changes that may rock the boat.
What could be the potential pros and cons of a digital dollar?
Lisa Pollina: The positives include faster payments, resistance to fraud and counterfeiting, and access to digital money for the unbanked and financially disadvantaged. Transferring money with a digital system takes 3-5 seconds compared to three days by wire. Digital currencies are fully traceable, encrypted, and therefore more difficult to steal or counterfeit than physical currencies. People currently without bank accounts or those with poor financial records could benefit from easier sending and receiving of money, the ability to build and obtain credit by providing reliable documentation of their income and spending, the ability to build savings by providing a secure and easy way to store their money, and easier access to insurance coverage by furnishing an easy way to pay for insurance premiums.
Ironically, in relation to your prior question, a digital dollar can also play a critical role in preserving the US dollar as the dominant global reserve currency by expediting cross-border payments and ensuring that the US can continue to compete with China and other countries that are developing their own CBDCs.
The negatives include the privacy and data protection issues mentioned earlier, including concerns that a CBDC could enable government surveillance of consumer and business financial transactions without proper protections, along with security risks such as data breaches, denial-of-service, ransomware, and other cyberattacks that could cripple the entire system. Some also have raised concerns that a digital dollar could destabilize the commercial banking system by reducing the demand for bank deposits and lowering banks’ profitability, while others argue that it could be used to launder money, circumvent sanctions, and finance such operations.
While CBDC transactions offer benefits, how are cybersecurity issues such as data protection, espionage, and financial stability addressed?
Lisa Pollina: The same protocols necessary for bank deposits, trading, and transacting would be needed here, enhanced by the blockchain.
Mary Erdoes, the head of JP Morgan’s Asset and Wealth Management division, noted to a shocked audience at the recent World Economic Forum in Davos, Switzerland, that JP Morgan employs over 62,000 technologists and spends over $15 billion annually to thwart attempts by foreign state and private sector hackers from penetrating their system. That is just one bank on the global financial services landscape.
Recruiting, vetting, and deploying such skilled trained workers to protect the development and institutionalization of a digital dollar will require significantly greater resources. This recruitment and development will add to the time it takes to safely and securely deploy a CBDC for the American people.
Could it be that China sees more potential in CBDCs than in cryptocurrencies, while the situation is reversed in the US?
Lisa Pollina: It’s certainly true that a digital currency administered by a central bank is more attractive than a cryptocurrency for an authoritarian state like China that wants to maintain control over monetary policy, can track transactions, and share information with China’s Communist Party if needed. Cryptocurrencies are not issued by the state or controlled by a central authority and are therefore less appealing to China, which in fact bans all cryptocurrency transactions.
The issue of which is preferable in the US is murkier. On one hand, cryptocurrencies offer more privacy and anonymity than CBDCs, provide opportunities for innovation that are appealing in our entrepreneurial environment, and are potentially more secure than a CBDC with cryptography and consensus mechanisms written into each blockchain’s code. On the other hand, they are subject to market fluctuations, require considerable technical literacy, and lack the regulatory protections of a CBDC.
A digital dollar would provide benefits such as more stability and ease of use but also come with the privacy, security, and other risks mentioned earlier. There are pros and cons on both sides.
Why do you think a digital dollar is inevitable?
Lisa Pollina: I would hate to arrive at O’Hare one day and see a sign that says “Welcome to the United States of America. We only have analog currency.”
That would mean that we would not only lag behind the 11 countries that already have launched CBDCs but the 64 other countries currently in advanced stages of exploration, including India and Brazil (planning to launch this year) and Australia, Thailand, and Russia (continuing pilot testing).
Most importantly, failure to adopt a digital dollar would threaten the status of the US dollar as the world’s reserve currency. As we all know, that status is critically important to our economy, including providing lower borrowing costs and enabling the imposition of financial sanctions, as well as to our influence over the global financial system.
The major challenge clearly comes from China’s digital yuan. President Xi Jinping has explicitly stated that digital currency can “create new competitive advantages” for his country. The hope on China’s side is that its e-CNY will enable the country to bypass international payment systems such as SWIFT, avoid the impact of US sanctions and tariffs, and enhance the country’s economic and political influence.
Clearly, the US has an interest in preventing these scenarios. Adopting a digital dollar will help us maintain our economic and technological leadership and cement our reserve status. To do otherwise would have massive negative impacts on our economy and our status as a world leader.
How can recent developments in this regard impact business relations between the US and China?
Lisa Pollina: As indicated above, experts believe that one of China’s goals in adopting a digital yuan is to challenge the dominance of the US dollar in global finance. Most analysts believe the success of the initiative is unlikely, given factors ranging from the size and liquidity of US debt markets to the flexibility of the dollar’s exchange rate. However, the Atlantic Council has noted that the emergence of China-led cross-border initiatives may create alternate currency blocs with the potential to weaken the primacy of the dollar in global finance and trade by creating other options.
Meanwhile, there are broad implications for international business as well as international relations. China’s e-CNY could help the country expand its digital footprint and influence through its Belt and Road Initiative and Digital Silk Road, two global infrastructure projects intended to improve trade and connectivity across Asia, Africa, Europe, and Latin America. It also could use the digital yuan to further alliances with countries that are under US sanctions such as North Korea, Iran, and Venezuela.
These are significant concerns. In the words of the Atlantic Council, “China’s domestic motivations of greater control and surveillance are intertwined with its global ambitions, and the consequences will be dire in the absence of a competing, privacy-preserving, dollar-enabling payments infrastructure.”