The Fed, like other central banks, is developing its digital currency. The motivations for developing these currencies are varied. These currencies may share common assumptions and characteristics, yet each will be unique in its own way. Let’s take a look at how a digital dollar would work and what motivates the Fed to develop one.
The Fed and the payment system
Cash is slowly disappearing and so are transactions with it. In 2010, more than half of transactions were cash, and 10 years later, only 28% were cash transactions. Then the pandemic hit and cash transactions declined even further. However, the digitisation of payments has its pitfalls – slow transactions and fees that slow down the whole payment process. For this reason, the Fed began to consider a digital currency that would work in the same way as cash. It would be free of fees and would make the digital economy faster, more efficient and more accessible.
The digital payment system currently relies on the private sector. This is comprised of banks, payment processors and card issuers. So even today, it can easily happen, for example, that you overdraw your bank account, because payments can take several days to process. What is missing is a public option without fees, delays and hassle.
The digital dollar
Last summer, after years of internal research, the Fed partnered with the Massachusetts Institute of Technology. The goal was to understand the capabilities and limitations of the CBDC. The results are expected to be published in late summer, so this will be the next step before deciding whether or not to introduce a new currency.
Neha Narula, head of the Hamilton project (a collaboration between the Fed and the Massachusetts Institute of Technology) said that the digital dollar offers an opportunity to redesign payment systems in the U.S. from the ground up, and he sees the CBDC opportunity as revolutionary, describing it as a platform for innovation.
The question remains, however, whether digital currencies should be run in the same way as cryptocurrencies. It is clear from the name of the central currencies that they will not behave that way and it will be purely up to the people whether they prefer a state-issued currency or whether they want to become their own bank.