US digital dollar: Will Fiat currency ride the crypto wave? | Business and Economic News

The U.S. dollar has dominated the world’s major reserve currency for decades, guaranteeing the full faith and credit of the U.S. government and the value of its powerful economy.

But in recent years, the world’s most widely chosen currency unit has faced increasing threats as its ineffective financial infrastructure begins. Chinese e-yuan of mamura Facebook’s Diem and Cryptocurrencies like Bitcoin.

So as countries like the Bahamas, China and Sweden test the viability of the central bank’s digital currency (CBDC), U.S. policymakers are taking stock.

Two U.S.-based efforts are exploring the concept of digital fiat dollars in times when money is no longer king.

The Massachusetts Institute of Technology (MIT) Digital Currency Initiative is working with the Federal Reserve Bank of Boston to initiate a hypothetical currency exchange in an experiment invented by the Hamilton project. The president of the Boston Fed said a future “Fedcoin” would confuse the features of Venmo and Apple Pay.

The Digital Dollar Project is a collaboration between the nonprofit Digital Dollar Foundation and Accenture Plc Consulting launching five pilots next year. The company hopes to generate public debate and take practical steps towards a CBDC.

“There are several reasons that central banks around the world take the CBDC seriously, including data capture and economic privacy, modernization of the financial system, financial inclusion, accuracy in implementing government benefits, and monetary policy,” said Christopher Giancarlo. Founder of the Digital Dollar Foundation and former U.S. government regulator.

Giancarlo told Al Jazeera that “geopolitical concerns, stablecoin competition [like Diem] with banking payment systems and leadership in setting standards for the interoperability of the global digital currency ”are also motivating the US.

“The private sector has been exploring digital asset options like Bitcoin for a decade and is now trying to reclaim the public sector,” he said.

‘No mining block required’

There is no guarantee that the US will accept the digital dollar successfully, Chris Ostrowski, director general of the UK’s Digital Monetary Institute, told Al Jazeera.

Progressives, libertarians, and business-oriented technologists have different ideas about what a CBDC should look like without agreeing on goals, design, or functionality.

Advocates for the digital dollar like Rohan Gray, president of the Modern Money Network and a professor at Willamette University College of Law, argue that the whole government’s vision can move forward in a coordinated multi-faceted framework.

Gray believes U.S. President Joe Biden should work with Congress to pave the way for the digitalization of the dollar, as government agencies combine forces – at least in theory – to tackle complex issues such as the coronavirus pandemic, economic recovery and climate change.

“We’re not talking about a tool, platform or technology, but about a whole set of legislative changes,” Gray told Al Jazeera.

Among the controversial solutions planned by the progressives is a proposal by Sen. Sherrod Brown, an Democrat from Ohio, to establish a digital portfolio of “FedAccount” dollars so that every American can receive benefits and make payments.

The system would be easily accessible at local banks and has no fees. This also binds the bill sponsored by Senators Bernie Sanders and Kirsten Gillibrand to provide U.S. postal services to retail banks.

Related to this is the Public Banking Act introduced by representatives Rashida Tlaib and Alexandria Ocasio-Cortez and “the bank is recognized as a public service, a globally proven model to keep money in place and reduce costs on Wall Street intermediaries, shareholders and paid executives.”

Some digital tokens like Bitcoin are proof of work to absorb energy (PoW) based on consensus mechanisms to validate transactions and invent new coins, which involves turning on thousands of computers working together. [File: Bloomberg]

Gray sees possible “eCash” solutions as a populist tool to fight inequality and make money more democratic by offering token-based digital currency on stored value cards, parallel to library technology based on accounts held directly by central bank assets.

Like many on the left side of the digital dollar, Gray says blockchain – the technology behind cryptocurrency – is not necessary when trust is centralized enough.

“Blockchain is supposed to be a friendship between a bunch of classmates around a common situation, but that’s not the question you’re trying to solve here,” he said, about how crypto networks verify transactions. “This doesn’t require mining blocks or proof of work.”

It may one day be with decentralized cryptography and CBDC. In any case, private Bitcoin has accelerated the conversation by partially replacing paper notes and metal coins about the latter.

‘Advantages and risks’

Whether a digital dollar is ultimately based on the blockchain or influenced by the principles behind cryptocurrency, U.S. policymakers across all lines appear united in trying to see that they are not left behind – in a competitive global race – to digitize the green dollar.

Many see the U.S. economy as a pioneer in the internet and fintech sectors and fear that Beijing will eventually pivot the limited ones. home setting for his CBDC to the well-known Alipay and WeChat payment systems, which are already the main parts of Asia.

Overall, despite concerns about illegal finance and money laundering, U.S. officials are critical of the Chinese model of surveillance and the effects of collecting consumer data.

U.S. Federal Reserve Chairman Jerome Powell and U.S. Treasury Secretary Janet Yellen have both expressed growing support for the digital dollar, although remarks made by users about a complete lack of anonymity have raised doubts, especially for Conservative lawmakers.

Some libertarian members of the U.S. House of Representatives are keen on cryptocurrencies, but big governments are down. At a hearing on the Financial Technology Task Force on June 15, Republican congressman Warren Davidson of Ohio suggested that officials remain in the “learning phase” of the digital dollar.

He said the current financial infrastructure is “already secure, efficient, dynamic and effective” and said the US needs to do digitalisation “for the right reasons, not just to put pressure on ourselves”.

Federal Reserve Chairman Jerome Powell has noted growing support for the digital dollar [File:  Graeme Jennings/Pool via Reuters]

Davidson’s first critique is of “good money” – a concern that digital dollars can erode stability and prosperity. But he also warned that they should not stray from the “unauthorized” aspects of money that allow privacy in parity transactions.

He told Al Jazeera that the digital dollar should be created “as a non-control tool and instead as a repository of values ​​and means of exchange.”

Patrick McHenry, a Republican in the House Financial Services Committee, called for an in-depth study of the “benefits and risks,” and the Fed agreed with its commitment to “do well”. [rather] than before ”.

Other Republicans are focused on the potential inflation of “printing” too much money or focusing on public sector mistakes that commercial banks are already trying to repeat. Moreover, from a cybersecurity perspective, keeping the brokerage bank in place can isolate the Fed.

“Convenient money supplement”

A consensus could be reached with Wall Street and financial technology companies around the 21st Century Dollar Act, a bilateral bill that would require the U.S. Secretary of the Treasury to update the status quo on dollar dominance and CBDC development progress.

80% of central banks are actively studying the concept of CBDC, including the European Central Bank and the Bank of England, which recently released articles on the subject.

Last October, the Bahamas released the “sand dollar,” the first national launch by a central bank of the technology. In April, the Central Bank of the Eastern Caribbean introduced its DCash. And the Bank of Jamaica plans to introduce digital currency next year.

The Jamaican program uses Ireland-based eCurrency Mint Inc. as a technology provider. Miles Au Yeung, the market leader for the company, suggests that the US can do the same.

He told Al Jazeera that only the Treasury and the Federal Reserve should have the power to produce, issue and distribute this new form of legal license.

“Any CBDC should be able to operate within the existing payment rails of the financial system, including bank accounts, applications and payment cards, while expanding to other innovative ways to store smartphones, QR codes and digital objects,” Yeung said.

“Digital currency needs to achieve an immediate and definitive settlement,” he added, saying it should be scaled “massively with minimal energy consumption”.

In the Bahamas, the local company NZIA Ltd introduced a new digital currency, which senior consultant John Kim described to Al Jazeera as “the most mature and advanced system of its kind”, and stressed that the CBDC they built was a “convenient complement to money”.

While Jamaica’s CBDC is not based on the blockchain, Kim says the Bahamas model is a hybrid of the “best of both worlds” that combines blockchain and centralized systems, adding that it is taking a “wait and see” approach to the US dollar.

“When re-imagining a national infrastructure that has a critical role,” he said, “readiness is as important as willpower.”