Loretta Mester emphasized that the Federal Reserve has been exploring central bank digital currencies (CBDC) since before the pandemic, noting that its Board of Governors has been “building and testing a range of distributed ledger platforms to understand their potential benefits and tradeoffs.” Loretta is the President of Federal Reserve Bank of Cleveland. In this article, we will be taking a deep dive into digital currencies globally and the pros and cons of this concept.

Digital Dollar for Faster Response For Emergencies

At the 20th anniversary of the Chicago Payments Symposium, Mester, in her speech titled, “Payments and the Pandemic,” addressed the Fed’s shortcomings in its efforts to revive the economy amid the latest crisis. Since March 2020, the Fed has injected a vast amount of money into the economy, increasing its assets from $4.1 trillion to $7 trillion. However, despite the massive scale of the stimuli, significant markers indicate a continued downtrend, as highlighted by negative GDP growth. The annual GDP growth rate of the U.S. for 2020 is -9.1%.

Having a digital dollar would not only be a great alternative to stimulus payments to citizens who need it, but even businesses that need quick assistance that cant be filled fast enough with the traditional financial system. A digital dollar would be ideal and helpful but comes with some serious privacy issues.

Threat to Privacy

A digital dollar would allow the Fed to monitor the activities of its citizens, and also enable the bank to exercise arbitrary control by freezing accounts of individuals. It would also enable the Fed to easily manipulate industries and sectors within the economy due to the fact they have complete control over buying power. For Example, If Jim gets paid $2400 per month in the traditional finance system, he can spend that money anywhere he wants and whenever he wants. If Jim receives that same payment in a Digital Dollar and the economy is in a terrible crash like we have been seeing in 2020, The Fed can program the digital dollar to only be spent in certain sectors such as housing and food… No more partying for Jim! The idea of a digital currency can be seen as a revolutionary technical frontier, but it does come with a price.

On the other hand, A digital dollar could provide many benefits to the world as well. While perhaps it is too early to pass ultimate judgement on the government’s COVID-19 response, it already is clear that the lack of a US digital dollar had a severe negative impact on the ability of the government and Federal Reserve to address the current pandemic. A US-government supported digital dollar (and wallet software) would have been extremely helpful in meeting the goal of rapidly deploying financial assistance to hundreds of millions of American citizens during this crisis. Beyond speed, a US digital dollar would also offer a host of other benefits compared to mailing checks and other payment methods, including

  • Efficiency: Reducing the cost of payment delivery, which may run into the tens of millions with postal costs, etc. for checks.
  • Financial inclusion: Facilitate payment to individuals lacking access to bank accounts or low-cost check-cashing services.
  • Support the most vulnerable: Help ensure payment to some of those most in need who lack a physical mailing address, or those who have relocated recently (eg students).
  • Hygiene: Encouraging digital forms of payment may help reduce the rate of virus transmission as compared to cash and check use.
  • Efficacy: The receipt and use of digital payments can be more easily tracked to ensure individuals have received financial support and solve the significant “lost check” problem.

European Cryptocurrency Regulation

The European Commission is moving to provide more legal clarity and certainty for the cryptocurrency industry in its member states. On Sept. 24, the European Comission officially adopted a new digital finance package including digital finance and retail payments strategies, as well as legislative proposals on crypto assets.  The European Comission said that the new package represents the first time that the authority proposed new legislation on crypto assets. As part of the new legislative proposals, the EC pays special attention to stablecoins — a type of cryptocurrency that pegs value to an external reference like the United States dollar or an algorithm.

According to the authority, the new measures will be crucial in supporting the EU’s economic recovery as it will unlock new ways of channelling funding to Europe’s businesses. “By making rules safer and more digital friendly for consumers, the Commission aims to boost responsible innovation in the EU’s financial sector, especially for highly innovative digital start-ups,” the EC noted. The package is now subject to consideration by the EC’s legislative counterparts, the European Parliament and the European Council.

Money and value as we know it is changing with no doubt in mind. With talks of global economic resets, new monetary policy changes, and new partnerships with blockchain technology companies, the need and creation for a digital currency is almost immanent rather than speculative. A new currency standard would be great for the current economical state of the world, bridging all global economies in a secure, transparent way, but life as we know it would be changed forever.

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