Towards the end of 2019, the Federal Reserve chair said that they had no plans to issue a digital dollar. At the time, the chair said that issuing a digital dollar to the masses would present several challenges. These challenges included problems with formulating the Fed’s fiscal policy, issues of privacy, and threats to the international dominance of the USD.
How Banking Started
The banking industry started in 17th century London. At the time, goldsmiths would hold sovereign coins and gold reserves for safekeeping. Besides that, they would use their holding to issue loans against their value via transferrable notes while charging interest. With time, it became modern banking. The banks take notes, coins and they issue consumer and business checking accounts. When a bank issues a loan, the money exists in the balances of the checking accounts of the borrowers and depositors at the same time.
Central banks are tasked with protecting the depositors while ensuring the supply of credit by making sure that banks keep a portion of the deposits on reserve. All reserves by banks today are held by central banks.
The modern system is digital and banks maintain electronic ledgers while the masses pay their bills via digital devices. While transactions between customers and businesses occur via a bank ledger, interbank transactions occur via an electronic ledger maintained by the Fed. The interbank transactions are secure, fast, and low cost.
Benefits of a Digital Dollar
The Fed could provide businesses and the masses direct access to its ledger via a digital dollar. To achieve this, they would only need to allow the masses to establish non-interest paying checking accounts at regional banks. By using the blockchain, private transactions could cost virtually nothing, be secure, and extremely fast. Credit card fees would drop and the economy would be more efficient. It’s worth noting that the view of a digital currency has changed since 2019. Early this year, U.S Federal Reserve Governor Announced FedCoin Interest Through A Digital Currency Model. The Federal Reserve is well aware that such move could greatly increase efficiency across the payments market.
Banks could continue to operate by offering interest-bearing certificates of deposits while offering direct loans, which would still be under the purview of the Fed. When a crisis, like the current one, arises, the Fed could inject funds directly into the accounts of users on behalf of the Treasury, which would occur much faster than the current system being run by the IRS. Thus far, it has taken weeks for people to receive their stimulus checks.
Central banks globally are experimenting with a digital fiat currency. Some countries currently running trials are Sweden, Switzerland, and Canada. Several nations in the Caribbean have also tested digital currencies. Thus far, the front-runner in the issuance of a digital currency is China, with the digital Yuan likely to launch this year.
Why a Digital Dollar Would Make a Huge Impact
In the current system, the US only accounts for 8.8% of all global exports. However, it accounts for 40% of all global trade. Additionally, 88% of all foreign exchange transactions take place in the USD. For instance, if you wish to convert Mexican pesos into Japanese Yen, you first purchase USD and then use your USD to buy Yen.
However, this could all change if China manages to launch its digital Yuan. Due to the efficiency, it will offer, it could permanently make the digital Yuan the dominant currency in global trade. At some point, it could be when not if the Fed launches a digital dollar.
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