How long has it been since you used a $50 dollar bill? The growing number of online transactions, bank cards, and increased acceptance of cryptocurrencies has accelerated the debate about the future of conventional currencies. Many, including the US Federal Reserve itself, have begun to question whether the time has come to adopt a digital dollar.
What would a digital dollar look like
Digital currencies, also known as CBDC for its acronym in English, are currencies that are issued and backed by the central banks of the respective countries, so they are considered as legal circulation money.
A digital dollar -or any other CBDC- is a digitally tokenized currency, that is, it has a unique identifier, which allows transactions to be settled instantly, both nationally and internationally.
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An agency, which could be the Fed or another entity, should track the history of each digital dollar transaction, with the goal of verifying the token or identity of the dollar and ensuring the legitimacy of the process.
A digital dollar would not represent major changes for users, but it did require an adjustment in the financial system behind it.
As you may have experienced, most of the transactions you make today are digital, such as paying for your purchases on Amazon or transferring through PayPal to your friend.
However, for this to work, there is a financial framework behind it. Although for you the transaction occurred instantaneously, strictly speaking, there is a short-term loan behind it until the banking entities involved make the transfer in conventional currencies.
With a digital dollar, this would be in real time: everything would be validated through the identifier or token and there would be no need for intermediaries. But despite the benefits, it also comes with risks.
What does the Fed say?
In mid-January 2022, the Fed published a report about the benefits (and drawbacks) of adopting a digital dollar. According to the US central bank, a digital dollar would speed up the electronic payment system, facilitate the delivery of tax benefits and maintain the supremacy of the dollar in the international financial system.
However, he clarified a CBDC is not intended to replace physical money: “The Federal Reserve is committed to ensuring the continued safety and availability of cash and is considering a CBDC as a means to expand secure payment options, not reduce or replace them.” .
In any case, the FED warns of risks in financial stability and in the protection of privacy, as a consequence of the measures to validate transactions and prevent fraud.
“Protecting consumer privacy is critical. However, any CBDC should strike an appropriate balance between safeguarding the privacy rights of consumers and providing the transparency necessary to deter criminal activity.
What happens globally
Although the implementation of CBDCs is in its early stages globally, more than 80 percent of the world’s central banks have considered promoting them.
In 2020, the Bahamas implemented the sand dollar, an equivalent of the local dollar. The turning point came in 2021: China launched tests with the e-CNY or digital yuan and the European Union gave the green light to the next adoption of a digital euro.
The promoters warn that the transactions of the international financial system are already widely digitized, so a digital currency would only endorse this reality.
In addition, they maintain that the payments will be instantaneous, as they do not require the participation of intermediaries.
On the contrary, critics fear that a digital currency would affect the privacy of users, by giving them greater control and access over who they are transacting with and for how much.
What is left then? Although the Fed will receive opinions until May 20, 2022, the agency raised the need for the US Congress to make a final decision.