The Gulf Time Newspaper One of the finest business newspapers in the UAE brought to you by our professional writers and editors.
The Federal Reserve last month released a report about how the US might update its currency for an “age of digital transformation.†While the long overdue assessment doesn’t reach a conclusion on whether a new digital dollar would be a good idea, the way it breaks down the issues repeatedly confuses the interests of the financial sector with those of the American public. This country needs a digital dollar that serves ordinary households and businesses, not banks and financial technology companies looking to set up new tollgates on highways of American commerce.
The Fed loses sight of the public interest in a number of ways. It insists that private firms should have a role in providing any new federal digital dollar. It also expresses “concerns†that a digital dollar might lure people and businesses away from bank deposits, which would be costly for banks. To avoid this, the Fed suggests designing the digital dollar to be “less attractive†— for example, by not paying any interest.
The Fed’s skewed analysis comes after a year of unusually rapid developments in money. In 2021, cryptocurrency mania went mainstream. The outstanding value of Tether, a cryptocurrency “stablecoin†designed to trade at par with cash, topped $70 billion. US startup Circle’s USD Coin neared $50 billion. Meanwhile, PayPal Holdings Inc.’s more traditional Venmo app siphoned more business away from America’s banks.
Abroad, some governments responded with their own alternatives. China and the Bahamas both introduced “central bank digital currencies†as public options for digital money. China’s version allows its users to make transactions instantly on their phones using an app with no risk of default and no fees.
In the US, private commercial banks, savings associations and credit unions enjoy a legal monopoly on digital money known as “deposits.†Taken as a whole, their offerings are lackluster. US bank payments are among the slowest in the developed world; it can take days to transfer deposit account money. Fees are high, occasionally extortionate. And the percentage of the population without a bank account is worse than Canada, France, Germany, Japan, Italy,
Singapore, Spain and even Iran.
Fed officials airbrush this problem in their report. They also put their thumb on the scale when it comes to imagining our monetary future. According to the Fed, a public option for digital money probably should be watered down: provided through existing financial institutions, with balances capped and no interest paid. These features would intentionally discourage people from using the public digital dollar and protect profit margins of the financial sector — but it’s hard to see how the public would benefit from that.
—Bloomberg