Impact and risks from the digital USD

 US President Joe Biden has ordered the federal government to consider creating a digital dollar, a move that has the potential to reshape the way money is moved and used around the world.

So what are the impacts and risks from this coin?

It will still be the currency issued by the Federal Reserve (Fed), like all US banknotes and coins in use today, but in digital form, accessible to everyone, not just financial institutions.

Unlike money that is deposited into a bank account or spent through apps like Venmo and Apple Pay, it will be registered in the Fed's accounts, not at the bank.

At the same time, the digital USD will have the same value as paper money of the same face value – a distinction from cryptocurrencies that currently have highly volatile valuations.

Key questions remain unanswered, such as whether the digital USD is based on blockchain technology like bitcoin, or linked to some kind of payment card.

Mr. Biden is asking agencies, including the Treasury Department, to look into various issues on the subject.

If the Government decides to go ahead with this project, it could take us “a few years” before we can use the digital USD, as the authorities will have to figure out which technology to use - Darrell Duffie, a cryptocurrency expert at Stanford University, said.

It will reduce or even eliminate transaction fees as transactions will no longer go through banks, bank cards or commission-per-payment apps.

Advocates say it will help the unbanked (now about 5% of households in the US), and could make it easier for the government to pay benefits.

However, there are risks such as a system crash or a cyber attack, and there are also privacy questions, since the Government could theoretically access all transactions.

The banking system could also be weakened because banks now use customer deposits to lend to others. With digital USD, they can have less money to use at their disposal.

Meanwhile, international money transfers, which are often slow and expensive, can be greatly reduced.

A validation task that took 2 days to complete can now be done in 1 hour, said Marc Chandler, forex specialist at brokerage Bannockburn.

For Chandler, the geopolitical role of the current dollar will not be affected by the advent of a digital version.

He noted the digital dollar would represent “a natural evolution rather than a revolution”, and recalled more than $6.5 trillion being exchanged electronically every day in the foreign exchange market. .

Even if China launches a large-scale digital renminbi as being discussed, he does not think it will change China's role in the world economy as "there will always be questions of trust, transparency and market depth”.

However, for expert Duffie, if the US government wants to continue to benefit from the dollar's dominant position in the reserves of central banks and international payments, the US government must be cautious.

“The US needs to make sure it stays at the forefront of international forums that discuss how to set standards for cross-border payments for digital currencies,” he said.

Other countries, from the euro area to India, have been working on projects to create digital versions of their own coins but “there is no evidence to market it. The first campus will offer any material or substantial advantage,” said Jamiel Sheikh, founder of CBDC Think Tank.

Conversely, failure due to unintended consequences, like fewer users or other problems, can undermine trust in an issuer, he noted.

"The overwhelming dominance of the dollar makes it possible for the US to feel it doesn't need to learn from other countries," agrees Professor Eswar Prasad of Cornell University.

Duffie thinks that if designed properly, the digital USD could be more preferred for domestic transactions than other cryptocurrencies.

As for international transfers, however, he "is skeptical that big central banks like the Fed or the ECB, China or Japan, will give central bank accounts to people all over the world."

By doing so, the US could destroy the monetary systems of small countries because people there may prefer to use digital dollars rather than their local currencies, he noted.

(According to IBTimes)

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