What’s the Deal with the Digital Dollar?

Digital dollars have again catapulted into the limelight. Folks at the Federal Reserve (Fed) have released a study. The authors reach no conclusions but indicate clearly that the Fed is open to the idea. The document stipulates 120 days for comment. Clearly, Fed nominee Lael Brainard likes the idea. She stated recently that she could not “wrap [her] head around” the United States not having one. In some respects, all the fuss is much ado about little.  Most Americans would not notice one way or the other, unless the Fed uses the arrangements to destroy banking as it currently exists, and that is possible if not especially probable.

At base, those who favor adopting a digital dollar rely on four arguments: One, they claim that a digital currency would make transactions easier and more efficient. Two, a digital arrangement, they contend, would protect the dollar’s role as the premier global reserve currency, especially because China has already launched a digital yuan. Three, a digital dollar would help make society more equitable by giving those presently “unbanked” an alternative. Four, proponents argue that a digital dollar would counter the ill effects of crypto-currency adoption.

Against these supposed benefits are two matters that proponents seem hardly to note: One, a digital currency would greatly enhance the government’s surveillance powers. Two, a thorough adoption of a digital system could give the government power over the allocation of financial capital throughout the economy. These two considerations may explain why China, seldom in the vanguard of financial innovation, as leapt ahead with its digital currency.

Before turning to these two, more sinister aspects of the matter, it is worth noting that the dollar has long been digital, albeit in private not government arrangements.  Except in those few transactions where paper money changes hands, all business and financial dealing is digital.  Paychecks are deposited directly into accounts that are accounted for and managed digitally. Tax refunds and “support checks” from Washington are often handled in the same way. All large transactions are wired, a digital exchange from one digital accounting to another. Even a paper check moves no money but simply authorizes a digital exchange. People can manage their digital dollar accounts through the internet whenever they choose, seven days a week, 24 hours a day. Credit and debit cards allow digital exchanges on items large and small, as does an Apple wallet. If, as proponents point out with some urgency, some 140 million Chinese already have digital wallets for the new digital yuan, they should ask how many millions of Americans have long had digital dollar wallets of various descriptions.

There is a perfect parallel here for the dollar’s international role. Some seem to think that the digital yuan will supplant the dollar because of convenience. But digital arrangements have long allowed this convenience for the dollar. With the click of a “send” key, billions can move around the world in dollars, in yen, in euros, sterling, whatever, and secure an exchange into other currencies. With a dollar-based account, a person can walk up to an ATM machine anywhere in the world, access his or her digital account, authorize and digitally execute a currency transaction, and receive the proceeds in a different currency on the spot. An official digital arrangement would not make this anymore convenient, easy, or instantaneous. The digital yuan adds little to these already existing arrangements, especially since Beijing refuses to lift trading restrictions on the yuan. Besides, there is more to being a global reserve currency than simply the ease and speed of transactions. At the very least, it would require that China lift its trading restrictions.

The argument for helping the “unbanked” raises questions.  Since bank accounts are easy to open and largely costless, those who refuse them are either wary of the institutions, ignorant of the advantages, or simply live in such a narrow world that paper currency suffices. On the first of these, it is far from apparent that wariness would lift with a government account. Some might feel more secure with the government. Others might be even more suspicious. The other two reasons why people remain “unbanked” would exist even with a Fed administered digital dollar.  Of course, Washington could “help” by simply mandating that these people maintain an account or making it impossible for them to do even the simplest transactions until they comply.

Nor would a digital dollar help with managing the adoption of crypto currencies. It would, in fact, be counterproductive.  Existing arrangements already make dollar-based transactions more convenient and probably secure than with any with a crypto currency. Certainly, dollar arrangements support many more types of transactions than do crypto currencies. Meanwhile the digital currency would greatly increase crypto’s one great appeal: anonymity.  Since a digital dollar would give the authorities access to every transaction, except perhaps those done with paper currency, those who want to hide things from the authorities would be more eager than ever to use cryptos. To be sure, the authorities now can access the already existing digital networks, but legalities make it much less convenient than if a digital dollar left all those transactions sitting conveniently on a government computer. Maybe this surveillance capability is what draws Professor Brainard to the idea. No doubt it appeals to the IRS and the NSA.

There is also the threat of financial disruption. Should a digital dollar gain ascendancy, Americans would presumably move their checking accounts to the new facility. With that migration, the deposit base that allows banks to lend would also move to the digital facility, moving to the Fed the power banks presently have to allocate financial capital. It is an open question whether the Fed has greater of lesser ability than the banks to assess what has economic merit, in other words what the public wants. It is nonetheless beside the point. The risk is that the Fed is more susceptible to political pressure than banks are currently, leading one to conclude that the digital currency would effectively move decisions on the nation’s allocation of financial capital from the economic judgement of private actors into the political arena, and the political direction of national economic effort does not have a good track record.

Even aside from questions of surveillance or government direction of the nation’s financial resources, it is hard to see how a digital dollar could benefit the lives of Americans beyond what already exists or strengthen the dollar’s international role. The concept adds little except the magic that attaches these days to the word, “digital.”