The United States is accelerating the digital dollar

US President Joe Biden recently issued an Executive Order sign for the development of the central bank digital currency, a digital dollar. Various government agencies and the US central bank will determine how they can put this currency into circulation. But what is central bank digital currency? And what does this mean for the financial system and the way we pay?

Central bank digital currency is a new form of currency that, like coins and banknotes, is issued by the central bank. It is a centralized monetary system, in which the central bank keeps track of all transactions and therefore has full control. This is fundamentally different from our current monetary system, in which various commercial banks perform these functions together.

According to the IMF, more than 100 countries are already studying or implementing central bank digital currency. China is already experimenting with its digital yuan, while India plans to launch a digital currency in the near future. The Eurozone and Russia are also working on a digital currency. Quite remarkably, the United States lags behind other major economies in this new development. This is why the US government is now putting more pressure on the development of a digital dollar.

Central banks are increasingly speaking positively of CBDCs (Source: BRI)

Why digital central bank money?

Payment systems have changed dramatically over the past ten years. Cash usage is declining, while the share of big tech companies such as Google and Apple in everyday payments is increasing. The popularity of crypto coins is also growing as an alternative electronic payment method. As a result of these changes, central banks control less and less the payment system and the monetary system.

They are trying to regain power with central bank digital currency. It is an alternative to cash, suitable for the digital age. Now consumers can park their money directly at the central bank and are therefore less dependent on commercial banks. In this case, a deposit guarantee scheme is no longer required. It looks like an improvement, but is it a good evolution?

More control

The hallmark of digital central bank money is that all transactions and assets are kept at a central point. It also means that central banks will have a better understanding of the payment system and will therefore have to take on more of the responsibilities that now fall to commercial banks. For example, think of the Know your customer (KYC), which aims to combat money laundering and crime. With central bank digital currency, central banks can determine who has access and who does not. This is not possible with crypto or cash payments.

The central digital currency thus appears as a solution in search of a problem. It competes with the existing infrastructure of commercial banks and, because of its centrality, allows for greater financial repression. Or that financial stability benefits? That’s the question.

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