By: Ashley Docherty, September 21, 2021
As Bitcoins and other cryptocurrencies have grown in popularity, central banks have begun to develop digital currencies, also called CBDCs, to make transactions faster and cheaper for consumers. Countries around the world have raced to created CBDCs in the hopes of making its currencies more enticing as reserve currencies and encouraging to cross-border transactions. While the United States has been slow to take the lead on a digital currency, other countries, most notably China, already have digital currencies in development. Additionally, the European Central Bank has made significant strides in creating a digital euro.
The United States dollar acts as the world’s reserve currency; however, to maintain this status, the United States must act swiftly to create its own central bank digital currency. The benefits of the digital dollar include cheaper transaction costs for consumers, centralized control over digital currencies, lower costs in the creation and distribution of money, potentially less volatility, and greater stability for a currency. In particular, a central bank digital currency may allow the unbanked to join financial systems because a CBDC may eliminate fees and other hurdles. Furthermore, the Federal Reserve Bank and other central banks have grown weary that the creation of cryptocurrencies and now stablecoin may make it difficult for central banks to maintain monetary sovereignty and prevent volatility.
Financial institutions in the United States have already lobbied Congress to prevent the creation of a digital dollar. The banking industry profit from the difference between interest paid to account holders and interest charged for loans as well overdraft and ATM fees. The creation of a central bank digital currency has the potential to cut out the middleman, in this case the financial institution.
Even considering the pushback from financial institutions, central bank digital currencies appear to be the future of monetary policy. Furthermore, the development of a digital dollar enjoys bipartisan support, and therefore, likely to continue. If the United States hopes to maintain its position as the reserve currency, the Federal Reserve Bank should continue its development of the digital dollar.