What’s happening
Countries around the world are beginning to experiment with creating their own digital currencies. Similar to popular cryptocurrencies like Bitcoin, these currencies would exist entirely virtually. But unlike Bitcoin, they would be minted and managed under the authority of a nation’s central bank, meaning they would be an official legal tender that could be spent wherever traditional money was accepted.
Last year the Bahamas became the first country to establish what’s known as a central bank digital currency, or CBDC, but interest isn’t limited to only small nations. By one count, 81 countries — representing 90 percent of the world economy — have been exploring creating their own CBDC. China, Japan, Sweden and South Korea have begun trials by minting a limited supply of their digital currencies. The Bank of England and Central Bank of Europe are also preparing their own trials.
The United States is also considering creating a CBDC but is approaching the issue with more caution than many other nations. Federal Reserve Chairman Jerome Powell said earlier this year that exploring digital dollars was a “high priority project.” Last month, however, he emphasized that “it’s more important to do this right than to do it fast.”
Why there’s debate
Advocates for creating digital dollars say the new currency would have all the advantages of cryptocurrencies but none of the drawbacks. In theory, CBDC transitions wouldn’t have to involve private banks, meaning the challenges of access, processing delays and fees could all be eliminated. “I think it could result in faster, safer and cheaper payments,” Treasury Secretary Janet Yellen said. Supporters say digital dollars would allow the government to more easily track fraud, influence financial policy and prevent volatile cryptocurrencies from undermining the economy.
Others say the U.S. has an obligation to join the CBDC market in order to prevent other countries — particularly China — from undermining America’s global economic position and using the currencies as a tool for authoritarian control.
Opponents say digital dollars would create an enormous amount of risk for traditional financial markets, since there’s no way to know how they would affect investor behavior. Many also reject the idea that other countries’ CBDCs would pose any meaningful threat to America’s ability to influence the world economy.
Conservative critics say a CBDC would allow the government too much power to monitor and potentially manipulate private business transactions. Others argue that the potential benefits of digital dollars could be achieved through better regulation of existing cryptocurrencies.
