China’s, Facebook’s plans spur interest in a digital US dollar
Federal Reserve chairman says Fed and other major central banks are looking at government-backed digital currencies; lawmakers on both sides of aisle sound alarm
A year ago the concept of a digital U.S. dollar was considered a fringe idea by some in the government, but the unveiling of Facebook’s proposed cryptocurrency and China’s plans for its own digital currency have officials rethinking that stance.
The reversal is clear from statements by Federal Reserve Chairman Jerome Powell, who told Congress last month that every major central bank around the world, including the Fed, is looking closely at government-backed digital currencies, even though the Fed hasn’t yet decided on a course of action.
In response to questions from lawmakers, Powell said the central bank is monitoring the rollout of China’s digital currency, which some fear could hurt U.S. competitiveness abroad and threaten the dollar’s nearly 80-year reign as the world’s reference currency.
Rep. Bill Foster, a Democrat from Illinois, is among lawmakers on both sides of the aisle raising alarms.
“As the technology moves on, we’re going to need to either modernize what it means to be the U.S. dollar or face the possibility that the dollar will be superseded as the medium of currency,” Foster told CQ Roll Call in an interview.
Not truly digital
While ordinary people already deal with money in the digital realm — with online banking, internet payments and other innovations pushing cash toward irrelevance — the U.S. banking system still relies on multiple antiquated payment systems that mean dollars aren’t truly digital.
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When a customer pays a retailer by credit or debit card, for example, the customer likely experiences the transaction as instantaneous. That’s not the case for the retailer, who must wait for a bank or credit card company to vet the transaction and deliver the funds. That requires time and often a surcharge.
China and Sweden are developing digital versions of their currencies that would resolve those issues. In these systems, the digital currency itself acts like a trusted third party, removing the need for intermediaries.
China’s digital currency is also concerning in part because of scale, Foster said.
“I think that the thing that really smoked everyone out of the bushes on this was the Facebook Libra project, because everyone understood the scale Facebook could bring to a digital currency,” he said. China could match that scale.
Adoption of a digital yuan in other countries could be driven by China’s Belt and Road Initiative, a 2013 strategy to improve trade routes in more than 60 other countries, which could make it easier to roll out the currency in those countries, Foster said. Foster is a member of the House Financial Services Committee and leads its Task Force on Artificial Intelligence.
“All of a sudden it has a lot of people on high alert, because that would give the Chinese government visibility into the payments in each of those countries, which has real national security implications,” he said.
Building a dollar rival
Perianne Boring, president of the Chamber of Digital Commerce, said China has definitely set its sights on the U.S. dollar. Her organization, which lobbies on behalf of the blockchain industry, obtained and analyzed Chinese patents filed in conjunction with the digital currency, which China calls a “Digital Currency Electronic Payment.”
“China is absolutely building an alternative to the U.S. dollar,” Boring told CQ Roll Call, based on a review of the patents. “China is making huge investments in their digital currency platform, which is one of the most prolific we have seen to date.”
The patents also revealed how the digital currency will be integrated into China’s existing banking infrastructure. Users may not even know they’re interacting with a digital currency, Boring said, pointing out that mobile payment apps such as Alipay and WeChat Pay make China already close to cashless.
Consumers and retailers using the currency won’t be able to access each other’s transaction histories, providing what’s known in the crypto industry as “pseudonymity.” However, Chinese regulators will be able to track all transaction information, including users’ identities and location of the currency, Boring said.
David Treat, senior managing director and global blockchain lead at Accenture, is part of a push to establish a central bank digital currency in the United States. Accenture is a partner on the Digital Dollar Project, a think tank launched this year by former Commodity Futures Trading Commission Chairman Christopher Giancarlo and other former agency officials. The consulting firm is also building the pilot program for Sweden’s digital currency, e-krona.
A digital dollar would mean savings and convenience for small businesses, consumers making cross-border payments, and capital market transactions, which incur costs and face delays tied to clearing and settling payments, he said.
The convenience of a foreign central bank digital currency rolled out at scale could pose a threat to the U.S. dollar internationally, Treat told CQ Roll Call.
He likened the innovations to what happened with the Spanish dollar, which was accepted as legal currency in the U.S. until 1857. The Spanish Empire’s coin, considered the first international currency, was used across Europe, Asia and the Americas from the 17th to 19th centuries.
That dominance was driven in part by the functional superiority of the coin, which was higher in silver and lighter than other currencies, a useful attribute in economies dominated by the shipping industry, Treat said. Adding to its functionality, the coin could be divided into eight parts, earning it the moniker “pieces of eight.”
“It was the last time we had a functional advancement in physical currency,” he said. “The country that offers the easiest, most functional, most useful form of currency will start to dominate trade and will have a very legitimate run at being a reserve currency.”
The dollar’s supremacy faces a similar threat from China’s digital currency, Treat said. “If something was more functional and operated better in our ever-increasingly digital world, I don’t think you can ignore it.”
Treat noted that the transition away from the dollar toward China’s currency, if it occurred, would likely take place over a period of years, rather than months.
Need for innovation
Rep. French Hill, a Republican from Arkansas, said he agrees that the U.S. payment systems must innovate, likely by including blockchain, to maintain the country’s competitive edge abroad. Digital dollar and payment innovations more broadly should be a “strategic priority” for the Fed and Treasury, he told CQ Roll Call.
However, Hill said he’s “skeptical” that China’s plans will be successful in the immediate future.
Hill serves with Foster on House Financial Services and joined the Democrat last year in a letter to Powell seeking answers on the Fed’s activity around a digital dollar, which he calls a strategic priority. He’s also a member of the Task Force on Financial Technology.
“It’s easier said than done,” he said of the adoption of China’s digital currency in other countries and replacement of the dollar as a major reserve currency. “You’re talking about dislodging an installed base all over the world. I don’t think that happens overnight.”