While some worry about America falling behind, banks want the Federal Reserve to stay away from digital dollars.
China is competing for more than just medals at the Winter Olympics in Beijing this month. It’s also quietly trying to define the future of money.
Although attendees can pay vendors for food and souvenirs with a Visa or cash, they also have the option of holding up a phone, scanning a barcode, and paying with the “e-CNY,” or electronic yuan, one of the only so-called central bank digital currencies offered by a major economy.
Inside the Main Media Centre before the start of the games, Cai Qianyi, a 42-year-old media professional, used his Android phone to purchase roast chicken and broccoli. “This is very convenient,” Cai says. “Compared to carrying cash, this way I avoid touching currency notes.”
To many consumers, paying with a phone may seem a bit mundane. Who hasn’t made a purchase that way? Yet to lawmakers around the world and some central bankers, China’s trial run looks like an early victory in what some call a digital space race among countries to create an electronic form of bank notes.
Experts say digital currency could give Beijing a wealth of real-time transaction data and tools to enact policy and expand its surveillance methods through direct access to its citizens’ digital wallets.
And though the e-CNY is still in its early stages—transactions as of the end of 2021 totaled the equivalent $14 billion—setting standards for digital cash could eventually be a way for China to flex its geopolitical muscle.
“The People’s Bank of China is trying to facilitate a new order for global payments,” says Yaya Fanusie, a former CIA analyst who is now a fellow at the Center for a New American Security, a think tank focused on foreign affairs and national defense.
In the U.S., a combination of anxiety about China and excitement about digital currencies’ possibilities has stoked interest from lawmakers in both parties.
The Federal Reserve has also been studying the idea. While the difference between using electronic currency and, say, Apple Pay or Zelle, is subtle, a full-fledged central bank digital currency (CBDC) would still be something quite new.
Most of the money you deal with never lives in the form of paper bills. Instead, it’s part of the banking system’s complex web of credit—the money in your checking account is literally a loan you’ve made to your bank.
A CBDC is more like its paper counterpart. Depending on the technology, it might be an electronic token or an account fully backed by the government’s central bank, so there’d be no reason to worry about a bank failure or to need deposit insurance.
In theory, you could receive, save, and transfer a CBDC without having a bank account, cutting out layers of intermediaries.
The new form of money could be cheaper than minting physical coins or printing bank notes and should be harder to counterfeit. Digital currency proponents think a CBDC could also be faster and cheaper to transmit, particularly for international payments, which today go through multiple banks.
Ohio Democratic Senator Sherrod Brown, who chairs the Senate Banking Committee, has said a CBDC could provide access to digital payments to Americans underserved by traditional banks.
Or consider how CBDCs might have worked during the pandemic. Instead of last March’s $1,400 stimulus payments in some cases taking weeks to hit a bank account via direct deposit—or longer for people receiving paper checks or prepaid debit cards in the mail—a virtual dollar could appear in a consumer’s digital wallet within hours, says Josh Lipsky, who heads the GeoEconomics Center at the Atlantic Council, a Washington-based think tank.
“It’s a faster, cheaper, and safer way of transmitting money between people and between the government and citizens,” Lipsky says.
Among policymakers, there’s also some fear of missing out: If the U.S. doesn’t offer a digital currency of its own, perhaps people will get more comfortable with alternatives to the dollar. Few currencies can match advantages the dollar has, from America’s stable economy to its deep capital markets.
But a proliferation of other countries’ CBDCs might one day make it easier to send money across borders without touching the U.S. banking system and potentially being caught by U.S. sanctions.
And then there are all the private cryptocurrencies people are already using, which could make it harder for central banks to manage policy and ensure financial stability if they were more widely adopted.
But for all the fanfare around CBDCs, some central bankers have been deeply skeptical. As late as 2019, many world governments had all but rejected moving forward with their own CBDCs.
In May of that year, the Financial Stability Board, which helps coordinate financial policy for the world’s biggest economies, published a report saying that central banks had identified the risks of creating CBDCs but hadn’t identified significant benefits.
The report also said that digital currencies in general weren’t a threat to financial stability. “The upshot of that review was that they just weren’t important,” says Randal Quarles, who chaired the FSB at the time and until December was on the Fed Board of Governors. “They were novelty items—the financial equivalent of Chia pets.”
Less than two months later, a consortium of tech companies including Facebook and major payments systems such as PayPal and Visa announced that they were developing a digital coin, called Libra. Soon thereafter, the Chinese government said it would accelerate its efforts to develop its digital currency.
The two announcements hit the U.S. Congress and global financial policymakers like a thunderclap. “Suddenly the central banks of the world and especially the finance ministries of the world just lost their minds and said, ‘We have to get ahead of this. We have to be the ones issuing central bank digital currencies,’” says Quarles, who’s now chairman of private equity firm Cynosure Group.
The Libra project, since renamed Diem, almost immediately ran into a regulatory backlash, and its leaders in January said the project would shut down. But its impact lasted.
According to the Atlantic Council, 87 countries were exploring a CBDC as of December, with 14, including China, in the pilot stage and nine, including Nigeria, having fully launched.
In January the Fed released a 35-page discussion paper outlining some risks and advantages it saw in a CBDC, asking for feedback by May. On the plus side, the central bank said a digital dollar could speed cross-border payments and make it easier to use the dollar in new technology.
On the other hand, the Fed said the option of holding a safe digital currency could drain money from banks and raise the cost of credit. “A widely available CBDC would serve as a close—or, in the case of an interest-bearing CBDC, near-perfect—substitute for commercial bank money,” the Fed wrote.
It said this risk might be controlled by limiting the amount of digital dollars users can hold or by the central bank not paying interest on them, so people would still have an incentive to use conventional bank accounts.
The Fed also said it would be best if people accessed digital dollars through private intermediaries, such as companies offering electronic wallets.
Some lawmakers have expressed concern that the Fed’s digital dollar could give the government too much of a window into Americans’ everyday transactions.
In January, at the Senate Banking Committee’s confirmation hearing for Lael Brainard to become Fed vice chair, Wyoming Republican Cynthia Lummis said that China’s digital yuan allowed “the Communist Party of China to surveil the uses of its central bank digital currency.” Brainard said that the Fed was looking for direction from Congress and that “privacy protections are very important in any kind of approach that might be taken.”
Opponents of the idea of a digital dollar are trying to slow it down or even kill it. The Bank Policy Institute, a trade association for lenders, described the potential for a CBDC as a “larger policy change for our society than practically any legislation in living memory.”
The banks may find an unlikely ally in the cryptocurrency industry. In lieu of an official U.S. digital dollar, private companies such as Circle Internet Financial Ltd. have created their own versions, called stablecoins, that have more than $179 billion in circulation and are supposed to be backed by dollar-denominated assets held in reserve.
Although such coins are largely used for speculating in other cryptocurrencies, industry executives aspire for them to be used in everyday payments. Like a CBDC would, stablecoins already compete with banks for deposits, though they can’t offer anything like the safety of central-bank backing.
In fact, top U.S. financial watchdogs have said they are concerned about stablecoins’ vulnerability to virtual bank runs and have urged Congress to pass laws regulating them.
To stablecoin companies, a U.S. CBDC could be a tough competitor. They’re out making the case that they’ve already achieved many of the things a digital dollar would accomplish.
“People often talk about, ‘Should we build something? What should we do?’ There’s a lot there already,” said Circle Chief Executive Officer Jeremy Allaire on a podcast in late January.
His company in February went on an advertising blitz, buying prominent ads in the Wall Street Journal, the Washington Post, and other publications pointing to the risks of the Fed or others moving forward on digital money.
—With Sarah Chen and Yujing Liu. Read full story on Bloomberg