U.S.-China | How will Chinese Digital Currency Help the Yuan vs Dollar

The People’s Bank of China (PBOC) started working on its digital currency (CBDC) in 2014. In April, the PBOC introduced pilot programs in four large cities. In July, China’s ride-hailing company said it was working with the PBOC to test the Chinese digital currency on its platform. In August, China’s Commerce Ministry said it would expand the program to Beijing and Hong Kong. The PBOC also indicated the plan to test the digital yuan’s capabilities and risks in cross-border transactions during the 2022 Beijing Winter Olympics. The digital yuan is known as “DC/EP,” or “digital currency/electronic payment.” Users will not require bank accounts. The digital wallet might allow touch payments without the internet. Unlike Bitcoin, it will be highly centralized. And the central bank seeks “controllable anonymity.” The CCP is will more likely use the digital yuan to replace all renminbi in circulation and increase surveillance on Chinese citizens. On August 7, the Treasury sanctioned 11 Chinese Communist Party and Hong Kong officials. And China’s large state-controlled banks are complying because the US dollar currently holds a dominant position. Apparently, the CCP intends to bypass the dollar system. Once complete, Beijing could share the digital currency technology with other countries and ask the Belt and Road participating countries to accept the digital yuan, creating a digital belt and road. A cheaper, faster payment system that avoids US sanctions would be a challenge to the US dollar dominance. According to the BIS, about 50 countries participated in the Central Bank Digital Currencies (CBDC) projects. The Federal Reserve has been researching on the digital dollar. On August 13, Governor Lael Brainard brought up some obstacles. Trust in the CCP has been deteriorating even among belt and road countries. Some have canceled, downsized, or postponed the projects to avoid debt traps. It is hard to say if they’ll adopt the digital yuan. That doesn’t mean ignoring challenges to the USD. Instead of merely catching the digital trends, the US government and the Fed should focus on responsible fiscal and monetary policies that protect the market’s confidence in the USD.

 

Transcript

China’s digital currency (CBDC) being tested has caught the world’s attention. And a Foreign Affairs article painted a picture as such. In 2022, Iran is purchasing critical components for its nuclear and missile programs. The funds come from selling oil to China and Europe. And all transactions are done with the digital yuan that bypasses U.S.-controlled financial systems. America’s ability to sanction its enemies is significantly weakened. In this video, we’ll discuss whether the digital yuan can challenge the USD dominance. What risks will it bring? And how is it different from the current digital payments and cryptocurrencies? The Leader in Large-Scale Testing The People’s Bank of China, China’s central bank, started working on its own digital currency back in 2014. In May 2019, the BBC revealed Facebook was planning to launch its version of cryptocurrency, Libra, by the first quarter of 2020. This motivated the Chinese Communist Party to speed up the digital yuan’s development. And regardless of whether the Libra would be approved by western governments, the CCP wanted to win the race. In April 2020, the central bank introduced a pilot program in four of China’s large cities. And screenshots of the digital wallet mobile app were circulated on the internet showing functions of making and receiving payments. In Suzhou, a large city west of Shanghai, the government employees would start receiving half of their transport subsidies in digital yuan. In July, China’s ride-hailing company, Didi, said it was working with the People's Bank of China to test the digital yuan on its transportation platform. And in mid-August, China’s Commerce Ministry said it would expand the pilot program to regions that include Beijing and Hong Kong. The central bank also indicated the plan to test the digital yuan system’s capabilities and risks in cross-border transactions, which will take place during the 2022 Beijing Winter Olympics. Under the proposed timeline, a digital yuan-based international payment system will start running in about a year and a half. It will likely be the world’s first government-operated digital currency system. As an authoritarian regime, the Chinese Communist Party might not be concerned about violating people’s privacy when pushing for the digital yuan. Once the tests turn out successful, large scale adoptions might complete very quickly. So how will the digital yuan work? “Controllable Anonymity” The digital yuan doesn’t have an official name but is known internally as “DC/EP,” which is just short for “digital currency/electronic payment,” Unlike the current digital payment systems such as Alipay and WeChat Pay, digital yuan users will not require bank accounts. And according to Mu Changchun, the People’s Bank of China official in charge of digital yuan’s development, the digital wallet will allow some form of touch payments where transactions can occur even without the internet. Compared to Bitcoin, which is believed to be decentralized and anonymous, the digital yuan will be highly centralized. Although the central bank claimed the parties to the transactions will be anonymous, in practice, it seeks quote “controllable anonymity.” It will be able to track the users’ purchases. And therefore, the system could help fight money laundering, gambling, and terror financing. The People’s Bank of China has also claimed the digital currency was intended to replace some physical cash in circulation, also known as M0. That was not very convincing. China already has a very high level of cashless rate. According to the central bank’s report, by the end of 2018, 82.39% of China’s adults used digital payments. There are 900 million people that use Alipay. And, in 2019, cash only accounted for 4% of household financial assets versus 24% in the United States. It would be hard to believe all the resources spent are just to erase the 4%. “Actually, replacing the M0 would be just a start. It will not be limited to M0. Instead, it should replace all the currency and maximize the digital currency’s functionality and value. Otherwise, there will be issues with return on investment,” writes Wang Yongli, former vice president of Bank of China. Therefore, the CCP is will more likely use the digital yuan to replace all the renminbi in circulation and increase its surveillance on China’s economy and every Chinese citizen, especially political dissidents. When the central bank can create and issue money digitally, it can seize the citizens’ money with one push of a button. And will the digital yuan help the CCP challenge the US dollar? “The Digital Belt and Road” On August 7th, the U.S. Treasury Department sanctioned 11 Chinese Communist Party and Hong Kong officials. The targets included the director of the CCP’s liaison office in Hong Kong, Luo Huining, and Hong Kong’s chief executive, Carrie Lam. On August 12th, Bloomberg News reported that China’s largest state-controlled banks are taking steps to comply with U.S. sanctions. This might sound surprising to many people. Why would China’s banks do anything against their government by a foreign country’s order? But the reality is the U.S. dollar currently holds a dominant position in global finance. And in 2019, almost 90% of international transactions were conducted in US dollars. The U.S. government can ask all banks that process US dollar payments to stop providing services to those under sanctions. And, apparently, the CCP does not want to be put in such a position. It intends to bypass the dollar payment system. In the state media CGTN’s words, the digital currency provides quote “a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level.” Aditi Kumar and Eric Rosenbach at Harvard Kennedy School, authors of the Foreign Affairs article, believed once the digital yuan is successfully launched in China. Beijing could simply share this technology to countries with the same motives. For example, Iran could adopt the same technology and build a compatible digital currency system. And the trade between the two countries would technically be no longer trackable by the US government. And what might happen when the People's Bank of China does become the first central bank to introduce a digital currency that works? Matthew Graham is the chief executive officer of Sino Global Capital. He predicted quote: “It’s very possible that other countries adopt the China framework, and then a first-mover advantage turns into a strong network effect…This is the best-case scenario for China.” Beijing could ask the Belt and Road Initiative's participating countries to start accepting the digital yuan. And this might include using the digital yuan to make loan payments. It could pay to install infrastructures such as point-of-sale terminals and lower the transaction fees, effectively create a digital belt and road. As Bank of America’s analysts pointed out, Asian countries like Thailand, Singapore, and South Korea are assessing their digital currencies. Those currencies might be integrated with the yuan-based systems and quote “especially if it entails significantly lower transaction costs and real-time transfers.” In fact, the CCP has already been doing that under current systems. On August 3, China waived transaction fees between the yuan and 12 currencies, including the Russian Rouble, the Singapore dollar, the Korean Won, and the Thai Baht. According to the State Administration of Foreign Exchange, this move was to quote: “actively cooperate with the national belt and road development strategy.” A cheaper, faster payment system that can also avoid US sanctions would be viewed as a challenge to the US dollar’s dominance. Then what should the United States do about it? Obstacles to The Digital Dollar The People’s Bank of China is not the only central bank working on the digital currency. According to the Bank for International Settlement, about 50 countries participated in the Central Bank Digital Currencies projects in 2019. Michael Casey at CoinDesk believes there is a lot at stake. “A China victory in the digital currency race would have profound negative effects for the U.S., and Western capitalism generally,” he said. "If the U.S. doesn’t catch up soon, it’s going to lose.” Kumar and Rosenbach suggested the United States develop the dollar version of digital currency. And they hope it will quote: "combine the strength and stability of the US dollar with the convenience and efficiency of digital technology." The Federal Reserve has indeed been conducting research and tests on hypothetical digital dollars. But, on August 13, Governor Lael Brainard brought up some significant obstacles to having a digital dollar. Among them was whether the Fed can build a digital currency system that can resist cyberattacks. And another would be to settle the legal question of whether the over 100-year old Federal Reserve Act allows issuance of digital currency at all. On top of those, we should expect to see pushbacks from Americans who value privacy and limited government surveillance. It seems a lot of debate will take place before the Fed receives a go-ahead. And the chance the Fed will roll out a digital dollar before the digital yuan would be minimal. The Future of the Dollar “Remember that credit is money.” This was a quote by Benjamin Franklin. And it revealed the essence of modern currencies. Since 1971 when President Richard Nixon declared that the dollar was no longer convertible to gold, we lived in a world with only fiat currencies backed by the faith in their respective governments and economies. More importantly, a fiat currency's fundamentals depend on whether a country has checks and balances, the rule of law, and a market-driven exchange rate. The CCP provides none of those. Therefore, in reality, the Chinese yuan has very low credibility. And although China is the second largest economy, the yuan’s usage falls behind the EURO, the Japanese Yen, and the British Pound. The trust in the CCP has been deteriorating even among belt and road countries. Some of them have canceled, downsized, or postponed the projects to avoid potential debt traps. It is hard to say whether they will gladly adopt a digital yuan issued under the CCP’s control. But that doesn’t mean we can ignore challenges faced by the US dollar. We believe in the long run, the dollar's dominance will have to be secured by the US economy's strength, not the other way around. Therefore, instead of merely catching the digital currency trends, the US government and the Federal Reserve should focus on introducing responsible fiscal and monetary policies that protect the market’s confidence in the dollar. How much international acceptance do you think the digital yuan will receive? Leave your comments below. Thank you for watching Unseen Fortunes. If you enjoyed our content, please click like, subscribe, and share. We’ll see you next time!

 

Why the coming recession could force the Federal Reserve to swap greenbacks for digital dollars

Paper bank notes are being upgraded for a digital future around the world

The Federal Reserve has never been more famous than it is today. It drew praise, and ire, for its handling of the financial crisis a decade ago, and the extraordinary measures it took subsequently to stimulate the U.S. economy have made it an important driver of financial markets. Meanwhile, President Trump has made its chairman, Jerome Powell, a household name by frequently criticizing the central bank’s policies on Twitter and to the press.

A movement, meanwhile, has been brewing among economists, financial-services professionals and central bankers to encourage a rethinking of the technology of currency — those paper notes we carry in our wallets — with an eye toward issuing a digital currency. Some argue that could give central banks the tools necessary to break free of chronic disinflation and persistently low or negative interest rates, while providing Americans a risk-free means to transact in a world where digital commerce constitutes a growing share of the economy.

“The debate isn’t about whether we need [a digital currency],” Michael Bordo, an economist at Rutgers University and a fellow at the Hoover Institution, the public-policy think tank at Stanford University, told MarketWatch. “It’s about how you do it.”

Americans already use digital currency for most of their purchases. In 2018, they used physical dollars for just 26% of transactions, versus 62% with digital currency, which includes credit cards, debit cards and bank transfers, according to the Fed.

A central-bank digital currency could work much like the mostly bank-issued digital money Americans use today, with some key differences. First, it would be backed by the full faith and credit of the United States government and, therefore, risk-free. The local bank that manages your savings account could fail at any time and the dollars in your account (beyond those insured by the FDIC) would disappear. A Fed “e-dollar” would persist as long as the U.S. government does.

More important, an e-dollar could pay interest. The idea that cash should pay interest dates back to monetary economist Milton Friedman, who argued in 1969 that the most efficient monetary system would be one in which cash bears interest equal to that of short-term government bonds, to encourage greater use of the dollar.

In good times, earning interest on your e-dollars would simply make everyone a little richer, but in times of crisis it could also be used to institute negative interest rates, essentially a tax on holding cash. Such a policy would likely strike Americans as governmental overreach, but, Bordo argued, the alternative is worse.

Central bank ammunition

The current economic expansion is the longest in U.S. history, but warning signs of a recession abound, including slowing economic growth and the recent inversion of the yield curve for U.S. government debt. In response, the Fed reduced interest rates in July and hinted at more cuts to come. But economists worry that the Fed will not have enough ammunition to fight the next downturn, as the central bank has typically had to cut rates by at least five percentage points to stimulate the economy following a recession.

The Fed may be forced to restart its program of “quantitative easing,” or the purchase of long-term government debt to push down long-term interest rates, though there is growing concern that this is an ineffective tool. Take a look at Japan, which has been mired in a decades-long economic malaise. Interest rates have been stuck near zero for almost 20 years. Despite a massive program of government bond buying that has led to the Bank of Japan’s owning more than 40% of all Japanese government debt, it has still suffered four recessions over the past 20 years.

The eurozone hasn’t fared much better despite imposing negative interest rates on large banks, as it’s suffered two recessions since the financial crisis.

Bordo said the problem with negative rates in Europe and Japan is that, without a central-bank digital currency held by the public at large, those rates can only be imposed on banks, which hurts banks’ ability to lend and does little to encourage the magnitude of spending needed to jolt economies back to normal levels of growth.

The U.S. economy could soon face the same situation, Bordo said. “We could be in a situation like Japan,” he said. “The way things are going in the world, where growth is slowing and deflationary pressures persist, we’re probably headed in that direction.”

How would it work?

The Federal Reserve already issues digital dollars, but only banks can use them. They’re called “bank reserves,” and this form of digital currency received a great deal of attention over the past decade for its role in the Fed’s quantitative-easing program, with the Fed buying government bonds from banks and giving them newly created digital bank reserves in return. Banks can settle debts among themselves using this digital currency, but it never circulates in the consumer banking system.

One way the Fed could implement the e-dollar is by simply allowing any American to open an account at the Federal Reserve, where other forms of money, like a check from an employer or a deposit at a private bank, could be exchanged in e-dollars.

“The only way we can transact with central-bank money today is to use reserve notes, but digital payments are now the norm,” said Ousmène Jacques Mandeng, an economist at the London School of Economics who spent much of the past two decades working for financial institutions including Credit Suisse and UBS. “If you wanted to buy something on Amazon, you can’t pay with central-bank money. Shouldn’t central banks say that our money can be used in this environment? It’s a very practical issue of public choice.”

Meanwhile, an e-dollar system could be engineered so that payments are nearly instantaneous and costless, Mandeng said. This would be a major upgrade for many Americans, who now pay hefty fees for wire transfers. Newer payment services such as Venmo and Google Wallet, meanwhile, rely on automated clearing house, or ACH, exchanges that often take days to process money transfers.

A concern among economists is that personal Fed banking accounts could erode private banks’ profitability and, therefore, reduce the flow of credit they provide to businesses and consumers. Others argue that banks would simply change their business models, and could attract deposits by offering higher interest rates than cash would bear, or by offering discounts on loans and other services for customers who maintain a certain balance.

But given the risk that an e-dollar could significantly harm the banking system, proponents of a central-bank digital currency say the safest approach would be to allow supervised commercial banks to offer specially designated accounts for it.

While regional Fed banks have produced research that points to significant economic benefits from a central-bank digital currency, the Federal Reserve Board of Governors declined to comment for this story. In addition, the board’s public comments have revealed a skepticism on the potential benefits to consumers. In a May 2018 speech, Fed Gov. Lael Brainard said “there is no compelling demonstrated need for Fed-issued digital currency,” because consumers and businesses can use private digital currency already.

Meanwhile, the Fed announced a plan Aug. 5 to develop a service called FedNow to allow banks and fintech companies to offer real-time money transfers, which will create stiffer competition for the ACH system run by the bank-owned Clearing House Payments Co., thus undercutting one argument for a central-bank digital currency.

Fighting monopoly power

For some central banks around the world, neither convenience nor better implementation of monetary policy is the primary reason for considering the issuance of digital currency. The Swedish Riksbank, for instance, is most concerned with the rapid decline in cash usage in its domestic economy, which has been much more pronounced than in the United States. The nominal value of cash in circulation in Sweden has fallen 50% over the past decade, and cash now accounts for only 13% of Swedes’ purchases, according to Hanna Armelius, senior adviser at the Riksbank.

The decline, she said, threatens to create a negative feedback loop — as fewer Swedes prefer cash, more merchants will decline it as payment — and the Riksbank does not want to find itself in a situation in which the public has no access to the central bank’s currency.

“At the Riksbank we would like it if [nondigital] cash continues to be in use, but we have to be prepared that the marginalization of cash will continue,” she said. As private digital money plays a greater role in the economy, “we could end up in a situation where one or two companies become so dominant that they can extract monopoly rents.”

Todd Keister, a visiting scholar at the Federal Reserve Bank of Philadelphia, echoed that concern. “Monopoly power concerns are important,” when thinking about central-bank digital currency, he said. “There is a natural monopoly in payment networks. What’s to stop Visa V, -2.05% and Mastercard MA, -2.56% from raising their fees? Enabling an alternative for transacting digitally is really important.”

A wake-up call for many central bankers has been Facebook Inc.’s FB, -2.88% proposed cryptocurrency, Libra. Given Facebook’s scale — it claims nearly 2.5 billion users worldwide — a successful rollout of its own digital currency could give it unprecedented power over the global economy.

Cash usage in the United States is nowhere near as low as in Sweden, but studies suggest that it is declining, from 31% of all transactions in 2016 to 26% in 2018, with cash use most predominant in small transactions. Only 6% of purchases of more than $100 were made with cash last year, according to the Federal Reserve.

There is anecdotal evidence, meanwhile, that businesses are increasingly refusing to accept cash. State and local governments have been combating this trend with legislation forcing stores to accepting payment in cash out of fairness to the roughly 15 million Americans who don’t have access to debit cards or other digital forms of money. Proponents of the e-dollar say it could offer a cheap, safe means for poorer Americans to transact in digital money while also giving businesses the freedom to refuse paper money if they find it cumbersome.

Alan Blinder, former vice chairman of the Federal Reserve Board of Governors, said in an interview with MarketWatch that maintaining a public role in currency, and constraining the monopoly power of potential issuers of digital money and current players in the payment space, is a reason for the Fed to start taking the issue seriously now. “In paper currency, the Fed has a legal monopoly — nobody else is allowed to do it,” he said. “It’s called ‘counterfeiting.’ ”

Blinder added that the Fed hasn’t, and won’t, take the same approach to digital currency, but he said it could prevent monopoly power in the space by “coming in with its own competition,” and issuing a digital currency that would serve as a “public option” in the marketplace of digital money.

The next evolution in monetary policy

This is not the first moment in American history when there was debate over whether public or private institutions should be the primary currency issuers. The Constitution grants the federal government a monopoly on issuing coined currency and to define the national monetary unit, which Congress named the “dollar” in 1792. But transacting in gold and silver coins is cumbersome and expensive, and so paper currency, issued by a variety of state-chartered banks, and the federally chartered Bank of the United States, quickly became the young republic’s primary medium of exchange.

Following the dissolution of the Second Bank of the United States in 1837, a system of “free banking” developed, whereby entrepreneurs were allowed to launch banks with relative ease, as long as they met a certain standards set by the states. The system was not ideal for interstate commerce, as businesses had to keep track of the market values of the many notes in circulation, some of which were counterfeit or issued by failed or insolvent banks.

Rutgers economist Bordo said there are parallels between today’s Wild West of digital currencies — in which increasingly popular debit and credit cards exist alongside cryptocurrencies such as bitcoin and etherium — and this past era of free banking in America, a period marked by frequent financial crises and bank failures. The U.S. economy suffered from high transaction costs inherent in an economy marked by currency competition.

That system fell apart during the Civil War, with Congress passing legislation in 1864 that enabled the Treasury Department to issue paper currency, not convertible to gold or silver, that was deemed legal tender for debts public and private. The law was necessary to help finance the Union’s war effort and set in motion a series of statutes that ended state-chartered banks and created a national banking system, wherein federally chartered banks distributed U.S. dollars backed by gold. U.S. dollars wouldn’t be directly issued by the government until the Federal Reserve System was established in 1914, to create a single institution to manage the money supply and oversee the banking system.

The trend of more control over paper currency by the U.S. Treasury and Federal Reserve increased the efficiency of the U.S. economy and boosted growth, and many economists expect that a central-bank digital currency would do the same. John Barrdear and Michael Kumhof, research economists at the Bank of England, estimated that the introduction of central-bank digital currency could increase the size of a given economy by 3% “due to reductions in real interest rates, in distortionary tax rates, and in monetary transaction costs.”

Supercharging blockchain innovation

Though central-bank digital currency as envisioned by most prominent researchers would not be a cryptocurrency, believers in blockchain technology see central-bank digital currencies helping to unleash its potential.

There has been considerable hype around the idea of using blockchain to “tokenize” such illiquid assets as real estate, fine art and gemstones and allow investors around the world to trade slices of these assets with the same ease as they trade stocks and bonds today.

“If you accept tokenization is going to be important, then these ecosystems, like all other financial market infrastructures, will ideally have access to central bank currency for financial settlements,” said the London School of Economics’ Mandeng.

“Central banks should be technology-neutral,” he added. “If [the Fed] allows banks to settle their transactions in central-bank money, why shouldn’t individuals who trade in tokenized assets have the same access to this risk-free currency?”

Will the e-dollar see the light of day?

While the Federal Reserve is unlikely to issue e-dollars anytime soon, it will surely be watching digital-currency experiments undertaken by central banks around the world.

The National Bank of Cambodia is issuing its own blockchain-based digital currency to make its underdeveloped banking and payment system more efficient. The currency will be usable both on private mobile payment applications and commercial bank accounts, giving its underbanked population access to safer and more secure forms of payment. The Bank of Canada, the Bank of England and Norway’s Norges Bank have also been seriously studying the issue. Sweden appears closest to adopting its digital currency, the e-krona, after its parliament set up a formal inquiry into the question.

The Riksbank’s Armelius told MarketWatch that the disappearance of cash, and potential associated problems, “has been a political issue for years now,” and estimated that the process of implementing an e-krona “will take years, not decades.”

Meanwhile, Bank of England Gov. Mark Carney proposed in a speech on Aug. 23 at the Kansas City Fed’s annual summit in Jackson Hole, Wyo., that central bankers around the globe could coordinate to issue a digital “Synthetic Hegemonic Currency” to replace the dollar as the world’s reserve currency. He suggested that such a tool could eliminate problems that have resulted from the U.S. dollar’s serving that purpose, from erratic capital flows in emerging-market economies to an overvaluation of the greenback that can suppress American exports.

As for the e-dollar, Blinder, the former Fed vice chairman, argued that the U.S. central bank has the power to implement a digital currency via authority already granted it by Congress. But, he added, it’s unlikely to make such a move absent broader political consensus.

What may bring about this consensus is another question, and Bordo of Rutgers pointed to U.S. history as providing a potential answer. He said that big shifts in currency policy have typically occurred “when the politics line up” due to some sort of crisis. The system of free banking was ended only because of the exigencies of the Civil War, and the Federal Reserve System was created from the wreckage of the 1907 financial crisis.

As economic storm clouds gather over the United States, and as the Federal Reserve appears to lack the ammunition to save the country from the sort of prolonged malaise that has overtaken other wealthy economies, it’s possible that the next crisis-driven revolution in monetary policy is at hand.

“What makes the politics line up is the next recession,” Bordo said. “When they find that the tools they have aren’t working, then the arguments will start to be listened to.”

Programmable Digital Currencies Are Coming – Here’s What That Means

On Aug. 13, a top official confirmed that the U.S. Federal Reserve is preparing for a digital currency.

Lael Brainard, a member of the Federal Reserve Board of Governors since 2014, told an audience last week that the Federal Reserve was experimenting with “a hypothetical digital dollar for research purposes,” according to Bloomberg.

Brainard also said the Federal Reserve was partnered with research teams from the Boston Federal Reserve and the Massachusetts Institute of Technology (MIT) in a “multi-year effort to build and test a hypothetical digital currency oriented to central bank uses.”

The challenges for a “digital dollar” include security and privacy concerns for a technology that would reach hundreds of millions of people and could easily see billions of transactions per day.

This Fed-enabled digital dollar will also be designed with an ability to bypass the banking system.

Imagine a network of consumer digital wallets — perhaps associated with a government ID, like a social security number — with an ability to receive digital dollar deposits directly from the central bank, or conversely to have digital dollars taken out.

Bypassing the banks would be game-changing on multiple fronts.

In terms of distributing stimulus or emergency funds, the U.S. government and Federal Reserve would have a level of fine-tuned control like never before. Payments could be sorted out by income level, employment status, geographical location, or any number of other things.

Digital dollars would likely also be programmable in and of themselves, allowing for instant tax payments at the point of sale. Tax refunds and rebates could be instant, too.

And attempts to purchase a restricted item — like, say, a firearm without proper background clearance — could be automatically denied.

In many ways, programmable digital money would be a fantasy come true for economists. This is because economists believe economies are driven by human behavior, and human behavior is driven by incentives, and all kinds of incentives could be built into digital money.

Imagine, for example, a maximum limit on the loan-to-value (LTV) ratio of home mortgages, designed to prevent future housing bubbles.

If such limits were programmed into the digital currency, as a form of “smart contract,” the transaction would not go through for a loan amount deemed too large.

Economists, political leaders, and central bank officials could then use the “smart contract” feature of digital dollars to tweak or massage incentives in all sorts of ways.

For example, fossil fuel use might be embedded with a higher VAT (value-added tax) surcharge than green energy use. Buying sugary cereal might create a small debit, whereas buying broccoli creates a small credit. And so on.

In addition to the above, all transactions would be instantly available for review, or easily aggregated into “big data” analysis patterns. This would give the Federal Reserve unprecedented new levels of visibility into the current state of the economy.

With programmable digital currency, and the ability to adjust lending parameters and other incentives via smart contracts, it could even become possible for the Fed to enact different versions of monetary policy for one part of the country versus another. In the Western states where inflation is running hot, the Fed could have tighter policy; in the Southeast where the economy is more stagnant, the Fed could have looser policy instead. And all conditions could be monitored, and modeled, in real time.

Programmable digital currency would also be a kind of monetary panopticon, spying on everything you do by way of transaction data. The use of digital wallets, and accounts linked to a government ID, would thus further tighten any government’s grip on its citizens.

All of this explains why digital currency is absolutely coming, not just for the United States, but for all industrialized countries. The hypothetical power, visibility, and control inherent in such a tool will prove impossible to resist.

This is why central banks everywhere are either running in-depth experiments, launching full-fledged digital currency initiatives, or even preparing to fine-tune and scale a prototype digital currency as rapidly as possible. China is well ahead of the game in this regard.

The rise of central bank digital currencies, or CBDCs for short, will not be a stumbling block for Bitcoin. In fact, it will likely be the opposite. The prevalence of CBDCs will make Bitcoin all the more desirable as a non-state-controlled alternative.

The coming digital dollar, call it the “smart dollar,” will be far more versatile and powerful than the old dumb dollar. The smart dollar will have encoded instructions as to where it can go and what it can do — and those instructions will be upgraded by policymakers in real time.

But a smart dollar will still be a fiat dollar, meaning, the Federal Reserve will maintain the ability to create trillions of new ones any time it chooses. That means the same old supply and demand issues — and the trouble of too much supply — will be as big a problem as ever.

Bitcoin, meanwhile, will remain “outside the system” to the extent no central bank, or any other form of centralized authority, will be able to control it. And Bitcoin will remain permanently limited in supply, due to built-in mathematical rules.

In many ways, the dawning of CBDCs — like the coming digital dollar — will be a good thing. In various other ways, however, a central-bank-issued digital currency will range from nuisance to nightmare.

Bitcoin is likely to be a welcome alternative, and a natural vehicle for saving and storing wealth — via the routine sweeping of assets into BTC — whereas a local CBDC used in day-to-day transactions might be kept on hand in smaller amounts, as a form of petty cash.

By Justice Clark Litle for TradeSmith.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

China to Expand Testing of a Digital Currency

HONG KONG—China’s Commerce Ministry said it would expand a pilot program for its digital currency to include a number of large cities, advancing a pioneering initiative by a major central bank to launch an electronic payment system.

The digital currency pilot program will cover much of China’s most prosperous regions, the Commerce Ministry said Friday: the capital Beijing and nearby Tianjin and Hebei province in the north; the Yangtze River Delta to the south; and, along China’s wealthy southern coast, Guangdong province and the neighboring cities of Hong Kong and Macau.

Cities in the country’s poorer central and western regions that meet certain requirements will also roll out trials of the digital currency, the ministry said, adding that testing efforts were being led by the People’s Bank of China, the country’s central bank.

There was no timeline for when the expanded pilot programs would begin, though the Commerce Ministry said in a broader statement outlining service sector initiatives—including the digital currency—that the policy design should be completed by the end of 2020.

Earlier this year, the central bank launched a pilot for the digital currency in the cities of Shenzhen, Suzhou, Chengdu and Xiong’an, a satellite city of Beijing—in part, it said, to prepare for the 2022 Winter Olympics in Beijing.

If the new currency, known by its internal shorthand “DC/EP,” or “digital currency/electronic payment,” is rolled out to the public, it would be the first electronic payment system launched by a major central bank. The PBOC has said that the digital currency now being tested shares features with cryptocurrencies like bitcoin and Facebook Inc.’s Libra, but it will be designed to handle transactions more quickly, making it feasible for wider adoption in China.

Shifting to a government-run digital payment system would help combat money laundering, gambling and terrorism financing, the PBOC has said. The intention is to replace some of China’s monetary base—cash in circulation—but the central bank has said the new currency won’t replace other aspects of the country’s money supply.

Efforts to start testing the fledgling currency have ramped up this year, with Chinese ride-hailing giant Didi Chuxing Technology Co. saying last month it was working with the central bank to test the digital currency on its transportation platform.

Didi, which dominates China’s ride-hailing market, said it entered into a strategic partnership with the bank’s Digital Currency Research Institute to carry out research and test the application of the new currency, without elaborating.

In Suzhou, where the central bank has conducted internal tests of the new currency, some civil servants have received a portion of their salary in the new currency. Screenshots of the new currency’s wallet app, made by Agricultural Bank of China Ltd., have circulated widely online, showing a variety of functions, including allowing savers to track transactions of the new currency and link the wallet to their existing bank accounts.

Chinese officials say consumers, who are accustomed to paying for even small items at convenience stores with their smartphones, are ready to embrace a digital currency that shares features with the current system of smartphone payments. The PBOC has been doing research into a digital currency since 2014.

In Friday’s statement, the Commerce Ministry said the government’s efforts to encourage innovation, such as broader use of the digital currency and artificial intelligence, are aimed at moving China into higher-value industries and upgrading the country’s economy.

Forbes: U.S. Moves Closer To Digital Dollar

 

On June 30th, 2020, the Senate Banking Committee held a hearing on the future of the digital dollar. The pressures to create a digital USD are mounting as China recently began testing its own digital currency – the DCEP, which will be included in popular applications like WeChat and AliPay. Of particular concern is widespread adoption of a digital yuan in emerging markets and in international trade.

The idea of a dollar-backed digital currency gained mainstream media attention last year during the Libra congress hearings, where Facebook introduced a new type of digital unit backed by a basket of currencies and commodities.

Although David Marcus insisted that Libra users will not have to put their trust in Facebook and that Libra was a decentralized currency, regulators weren’t buying it and expressed concern over the long-term threat to the traditional financial system. On July 9, 2019, regulators requested a moratorium on the project.

In December, Libra released a new roadmap, proposing several digital-fiat currencies deriving their values from the USD, British Pound, Swiss Franc and others, thus creating an efficiency layer on top of the current financial system. Users would be able to access these digital currencies through a wallet installed on their phone, and potentially through WhatsApp chat and Facebook Messenger.

Distribution issues of the $1200 COVID stimulus checks, created new momentum for the digital dollar (and a more efficient financial distribution machine). It is no secret that many are still waiting for their stimulus checks, while $1.4 billion in stimulus was sent to dead people.

Most recently, Congresswomen Rashida Tlaib (D-Mich.) and Pramila Jayapal (D-Wash.) introduced a new stimulus proposal of $2,000 per month to residents through the Automatic BOOST to Communities Act (ABC Act). Under the ABC Act, Congress would authorize the Federal Reserve to create “FedAccounts,” or “Digital Dollar Account Wallets,” which would allow U.S. residents and business to access financial services through an app on their phone.

Building on this momentum, the Senate Banking Committee continued the discussion of the digital dollar yesterday.

Some highlights from the hearing include:

  • Senator Tom Cotton (R-Ark.) stated, “The U.S. needs a digital dollar…The U.S. dollar has to keep earning that place in the global payments system. It has to be better than bitcoin … it has to be better than a digital yuan.”
  • Chairman Mike Crapo (R-Idaho) expressed concerns of regulator oversight for stable-coins.
  • Charles Cascarilla of Paxos testified advocating for stable-coins, stating that they address the “antiquated plumbing” of our financial system as well as financial inclusion. “Blockchain based stable-coins allow everyone access”.
  • Nakita Cuttino, visiting assistant professor of law at Duke University, discussed the friction in the current payday cycle and the rising demand for costly advanced-payment apps which could be resolved with digital currencies. “In the absence of public policy addressing open access payments and real-time payments, low-income and moderate-income Americans will continue to have limited resources needed, whether by traditional fringe services like payday loans or some novel fringe service.”
  • Former CFTC Chairman Chris Giancarlo and head of the Digital Dollar Project, emphasized the “social and national” benefits such as increased speed, lower costs and issues of financial inclusion. “Darwin said the most adaptable survive. And I think that is true when we transition to a new architecture. To adapt to it, will help bring benefits to the society at large.”

It is unclear how soon the digital dollar will come into existence, although increasing competition from China may be the push U.S. regulators needed.

WSJ: The Coming Currency War: Digital Money vs. the Dollar

The future of money might be a digital version of the cash that’s already in people’s wallets—potentially upending the currency system that the world has known for many decades.

Such a future, of course, might be a disappointment to many libertarians and tech-savvy investors who are pinning their hopes (and in some cases their money) on private cryptocurrencies such as bitcoin.

Instead, central bankers and governments—the entities that cryptocurrencies’ backers hoped to render obsolete—are increasingly warming to the idea of “digitizing” their own national currencies. That is, they would issue money that would exist only virtually, without a paper or coin equivalent, and be universally accepted as a form of payment.

Central banks such as the Federal Reserve in essence already issue digital money, via the commercial banks that have accounts with them. Commercial banks then lend money electronically to households and businesses, and enable customers to make and receive payments digitally without exchanging cash. But a central-bank digital currency would be a leap beyond that.

Instead of working only through commercial banks, central banks might issue digital currency directly to the public that could be used as legal tender in the same way cash is today.

How it might work remains unclear, but countries are experimenting with it, and the implications could be profound for everything from commerce to interest rates to privacy. For instance, right now, most financial transactions—whether paying a credit-card bill or mortgage, sending money to a relative, or buying something online—involve settling payments over a patchwork of systems, meaning money can take two or three days to move between accounts.

A national digital currency managed on a single network could allow money to change hands almost instantly. Most bitcoin transactions, for instance, settle within 10 minutes. With a digital currency, transactions could happen in real time, and fees would be lower or nonexistent.

What’s more, putting the central bank in charge of a digital currency could undermine the role that commercial banks play. It would open the door to politically thorny questions such as what the Fed should do with the new electronic deposits it would hold from consumers, including whether it should pay interest on them or make loans.

In addition, national digital currencies could make it harder for private cryptocurrencies to catch on. Because government e-cash would be operated, backed and controlled directly by central banks, it likely would be viewed as more reliable than privately created cryptocurrencies, which operate on decentralized networks of users and fluctuate wildly in value.

Perhaps most significantly, a world of competing national digital currencies could set up a new kind of currency war. The U.S. dollar has been the world’s dominant currency since the 1920s. But if national digital currencies allow for faster, cheaper money transfers across borders, viable , embraced by nations and monetary officials concerned about the dollar’s outsize influence on the global economy.

Technological developments provide the potential for such a world to emerge,” Mark Carney, the governor of the Bank of England, said in an August speech at the Federal Reserve’s annual symposium in Jackson Hole, Wyo. He highlighted the risks of the current dollar-dominant system, and sketched out an alternative where a new digital currency backed by a large group of nations, or even multiple currencies, vied with the dollar.

Sweeping change

Mr. Carney’s speech came at a time when currencies around the world are falling to multiyear lows against the U.S. dollar, and after authorities in the U.S. and abroad said they would closely scrutinize an effort by Facebook Inc. to launch a cryptocurrency pegged to multiple sovereign currencies. But the current rancor only highlights what are long-term changes in the global economy.

The speech also was the most pointed sign yet that the revolution ushered in by bitcoin nearly 11 years ago is taking root. Mr. Carney and Christine Lagarde, the incoming president of the European Central Bank, have both talked about the advent of digital currencies. France, which opposes Facebook’s project, says a “public digital currency” along the lines of what Mr. Carney proposed should be considered. Central banks in Sweden, Canada, Switzerland and the Eastern Caribbean have experimented with or are exploring the technology.

The one that might beat them all to the punch is the People’s Bank of China. The PBOC is expected to launch a digital version of China’s national currency, the yuan, later this year or early in 2020. If it does, it would be the first major global currency to become digitized.

The benefits of digitization could be myriad. In addition to faster and cheaper money transfers across borders, a survey conducted by the International Monetary Fund found that central banks are looking at benefits like lower costs, more efficient monetary policy, blunting competition from bitcoin and its peers, and offering a risk-free payment network to the public.

Currency Comparison

The total market capitalization of bitcoin, the most popular form of digital currency, has grown dramatically since its creation in 2009, but still lags far behind the total value of U.S. dollars in circulation.

U.S. cash in circulation continues to grow apace, as seen in the expansion of M1, a basic money supply gauge that measures funds that are readily available for spending, including checking accounts that pay interest and those that don’t, and currency.

The result could be a sweeping change in the international financial system, affecting, among other things, how nations trade.

The country that is first to introduce a digital currency that is more easily stored and used abroad than its physical counterpart will have “a first-mover advantage to greater currency use, though not necessarily to reserve currency use,” says Tommaso Mancini Griffoli, deputy division chief of the IMF’s central bank operations division.

The increasing interest in national digital currencies dovetails with a changing marketplace. Developing nations increasingly make up a larger percentage of global gross domestic product while the U.S. share shrinks.

The dollar’s hegemony made sense after World War II, when the U.S. accounted for 28% of global exports. Now, the figure is just 8.8%, according to the IMF. Yet the dollar still dominates international trade. Around 40% of world trade is invoiced in dollars, roughly four times the U.S. share of world trade, according to data from Gita Gopinath, a Harvard University professor who is now the IMF’s chief economist. And the dollar is used in 88% of all foreign-exchange trades world-wide, according to the Bank for International Settlements.

The dollar isn’t going to lose its position overnight, Mr. Carney said at the August gathering. But bankers should be thinking about a post-dollar world now, he added, rather than waiting for the next crisis to force change.

The dollar’s status as the lingua franca of international business provides benefits: Companies in places like Argentina can export goods to Turkey, and get paid in dollars. Because those dollars are deposited in local banks, they can be lent to companies. In fact, because there are so many dollar deposits, it’s actually cheaper for overseas businesses to borrow in the U.S. currency, creating a feedback loop that maintains the greenback’s pre-eminence.

But as Mr. Carney noted last month, this convenience has a downside: When the dollar appreciates, debt denominated in dollars becomes more expensive for foreign businesses. At the same time, the price of those countries’ imports rises, which can feed inflation.

Because of the dollar’s status and the fact that economies are more interconnected than ever, dozens of countries are essentially beholden to U.S. fiscal and monetary policy. Fluctuations in the dollar’s value feed through credit markets, causing surges and withdrawals of capital that can cause financial crises in emerging markets.

“U.S. developments have significant spillovers onto both the trade performance and financial conditions of countries with even relatively limited direct exposure to the U.S. economy,” Mr. Carney said.

One countermeasure to that dynamic could be a “synthetic hegemonic currency,” as Mr. Carney called it, a fancier term for a global public cryptocurrency. The currency he proposed would be based on a basket of reliable currencies, including the dollar and China’s renminbi.

Facing pressure

Not all policy makers like the idea of a global digital currency to rival the dollar.

The U.S. has been wary about the growth of cryptocurrencies. Federal Reserve Chairman Jerome Powell said this month that consumers have many payment options already. Moreover, he added, the cybersecurity risks involved with a digital currency are “quite daunting,” pointing out that if hackers gained access to the system, they could siphon off money from the electronic vault.

But the growth of online payments—from cryptocurrencies to Apple Pay and Venmo—raises the question of when the Fed will give people the same electronic access to cash that it gives banks, which earn interest on funds they deposit with the central bank.

Facebook’s proposal for a cryptocurrency, dubbed Libra, underscores how Silicon Valley is pressuring central banks to adapt. Unlike other private cryptocurrencies, Facebook already has a network—two billion users on social networks that double as marketplaces—to support the consumer demand that would drive use of a private currency.

“Central-bank digital currency, even if it were created by major countries, would likely have far fewer users and would not spread over this social-media platform,” says Tobias Adrian, director of the monetary and capital markets department at the IMF. “So there is something that intrinsically could be more disruptive about proposals such as Libra.”

That also makes it a potential threat to the Fed, which needs to control the money supply to modulate inflation and stimulate the economy.

No central bank wants the currency to be something it doesn’t control,” says Jeremy Stein, a Harvard University economics professor who served as a Fed governor from 2012 to 2014. “In the extreme, if everything in the world is priced in Libra and not in dollars, the U.S. cannot set monetary policy—because setting interest rates in dollars, who cares?”

At the least, central-bank digital cash might raise interest rates. In a world where everyday consumers had accounts at the Fed or their country’s central bank, the supply of bank deposits would shrink, according to a November 2018 paper by economists at the IMF. Banks would have to pay more to attract deposits, and they might not be able to pass on those costs by raising interest rates on loans.

That wouldn’t be good for banks, Mr. Powell said in his news conference this month, underscoring how nervous the Fed is about upsetting the balance between the central bank and private business.

One way to reduce this threat: Central banks could have digital wallets for everyday people, but they wouldn’t pay interest on the balance. Another avenue: Consumers could hold digital cash only at their bank, leaving central banks as remote from everyday savers as they are today.

Still, the growth of digital payment services is forcing central banks to explore these new technologies, says David Chaum, a cryptographer who himself built one of the first digital-money systems, called DigiCash, in the 1990s, and today is working on another one, called Elixxir.

Central banks will have no choice but to make sure the new monetary infrastructure is secure, he says, adding: “What if that system breaks down? Are people going to be able to buy bread?”

Testing ground

In China, where mobile money apps like Alipay are ubiquitous, much of domestic commerce already has moved into the digital world. That might be one reason the People’s Bank of China appears to be moving faster than other central banks to digitize its currency, the renminbi. The bank hasn’t publicly commented on the timing, but stories from the state-run China Daily, among others, suggest the digital renminbi could be unveiled this year or next.

The renminbi would be a significant testing ground. Its use in world markets has increased over the past decade, and China has surpassed the U.S. to become the world’s leading trading nation.

For the Chinese, digitizing the renminbi is a way to get out from under the U.S.’s thumb, says Eswar Prasad, an economics professor at Cornell University and former head of the IMF’s China Division. China’s goal isn’t necessarily to overthrow the dollar, he says. But they want to give their allies an alternative to the dollar and create a system that couldn’t be disrupted by the U.S.

“Would the Chinese like to be less vulnerable to American sanctions? Happier if they didn’t have to use the dollar for their imports and exports? The answer to that is unambiguously yes,” he says.

China‘s digital currency would differ significantly from the bitcoin model, with the central bank keeping control of the money supply and tracking users’ identities.

The people and companies behind private cryptocurrencies believe their assets will still have value even if countries move to digitize their national currencies. People around the world won’t want to give up the anonymity and privacy associated with cryptocurrency, they say, even if they are pushed into using solely electronic forms of cash.

“What you end up with is a situation where the government has potentially perfect surveillance into all the financial flows in the entire economy,” says Travis Scher, vice president of investments at Digital Currency Group, owner of the digital-currency trading firm Genesis Trading. “In a world where a country like China issues its own digital currency and tries to move the entire economy onto that, it actually will increase demand for cryptocurrencies and digital currencies that are more private and create the potential for more autonomy.”

Whatever happens, it could be chaotic, the Bank of England’s Mr. Carney warned in Jackson Hole. When the dollar overtook sterling as the world’s dominant reserve currency in the early 20th century, the backdrop was economic upheaval and a world war that decimated Europe.

“History teaches that the transition to a new global reserve currency may not proceed smoothly,” he said.

Bloomberg: Two Ex-Fed Officials Have a Faster Way to Distribute Money in Recession

Julia Coronado and Simon Potter say recession insurance bonds could activate payments and bypass political wrangling in a crisis.

The coronavirus pandemic that shut down economies around the globe showed how crucial—and difficult—it is to get money swiftly to people who need it most in a crisis. Former central bank officials Simon Potter, who led the Federal Reserve Bank of New York’s markets group, and Julia Coronado, who spent eight years as an economist for the Fed’s Board of Governors, are among the innovators brainstorming solutions. They propose creating a monetary tool that they call recession insurance bonds, which draw on some of the advances in digital payments. Coronado, president and founder of MacroPolicy Perspectives LLC, and Potter, nonresident senior fellow at the Peterson Institute for International Economics, spoke with Bloomberg Markets to explain their idea.

JULIA CORONADO: Congress would grant the Federal Reserve an additional tool for providing support—say, a percent of GDP [in a lump sum that would be divided equally and distributed] to households in a recession. Recession insurance bonds would be zero-coupon securities, a contingent asset of households that would basically lie in wait. The trigger could be reaching the zero lower bound on interest rates or, as economist Claudia Sahm has proposed, a 0.5 percentage point increase in the unemployment rate. The Fed would then activate the securities and deposit the funds digitally in households’ apps.

And so instead of these gyrations we’ve been going through to get money to households, it would happen instantaneously.

SIMON POTTER: It took Congress too long to get money to people, and it’s too clunky. We need a separate infrastructure. The Fed could buy the bonds quickly without going to the private market. On March 15 they could have said interest rates are now at zero, we’re activating X amount of the bonds, and we’ll be tracking the unemployment rate—if it increases above this level, we’ll buy more.

The bonds will be on the asset side of the Fed’s balance sheet; the digital dollars in people’s accounts will be on the liability side.

BM: Aside from speed, what are the main advantages of this approach?

JC: It’s the most efficient from a macroeconomic standpoint in supporting spending and confidence. The fear of unemployment acts as an accelerant on a recession. There’s a shock—people are losing their jobs or worry about losing their jobs. They get very risk-averse. [By] getting money to consumers you can limit the depth and duration of a recession.

And you could actually generate real inflation. It could be beneficial for not only avoiding negative rates but creating a more healthy interest-rate market, a more healthy yield curve.

BM: What are the origins of the idea?

JC: The Bank of England has proposals for digital currency. And a number of people have talked about the need for monetary financing—the idea that the interest-rate tool is simply less effective in lower growth, slower credit growth economies. Helicopter money [making direct payments to the public] goes back to Milton Friedman, but Ben Bernanke revisited it.

Some people proposed doing that through financing fiscal stimulus. We think going directly to consumers is more efficient than wading through that sticky fiscal process.

BM: This policy could be complementary to Treasury stimulus?

JC: It’s not a replacement for fiscal policy. It makes sense from a fiscal perspective, for example, to authorize unemployment insurance benefits for people who lose their jobs and other assistance for medical-care providers in the current situation.

SP: The central bank is not elected. It cannot make allocation decisions about fiscal transfers. It’s now being pushed to make allocation decisions around credit with the Treasury, because we believe this situation is so unique that the private sector cannot make those decisions itself.

The simplest way to do this would be a lump sum. Not in the way Congress did it. We’d take the bluntness of monetary policy and say anyone who’s eligible should get the same amount of bonds.

Fiscal controls could use the same infrastructure. The imperative to invest in it is high. Nearly all Treasury payments at some point touch the Fed because it’s the Treasury’s bank. The digital payment providers—called interface providers in the Bank of England proposal—would manage these accounts and link them to the Fed and Treasury.

BM: What are the objections from the Fed, and other challenges?

SP: The reaction from some of my former colleagues a while ago to the notion of helicopter money was not the most embracing. Some of those concerns have disappeared.

The two objections were related to the switch of deposits in normal times from the traditional banking system into digital accounts and the extra stress in crisis times as people want to get safe. An account with the central bank is safe because the central bank can always print money to honor that claim. A private bank can’t do that because their asset side has all kinds of credit on it. What we’ve created is a narrow bank-type model [narrow banks only take deposits and invest them in the safest assets] that’s small and fit for purpose, with a cap of $10,000 [per person].

JC: One challenge is making it profitable for digital providers. We want strict limitations on the fees so we’re reaching people that are underbanked, but we also want a public-private partnership with a diversity of competitors jumping into this market.

Privacy is just as important, because one thing that might induce them is access to people’s data. As the Fed, are you blessing that, and what structure do you put around that?

SP: We’ll all have to deal with deep questions of privacy in the digital world. One of the issues Congress had in passing the Cares Act is identifying who’s got mainly tip income, who doesn’t have sick days. If society wanted, you could use large datasets to direct fiscal transfers to those people. But that’s a job for Congress.

BM: Have you seen similar trials elsewhere?

SP: Sweden is a leader in thinking about this in part because they had a large decline in cash use. China is testing versions of digital currency. Fintech firms in the U.S. are interested in this—there’s a stable coin version of our proposal.

There’s easily sufficient innovation within the U.S. to do this. How to do it in a way that’s well regulated and serving the public purpose is something the Fed should focus on over the next few years. It would be a key accomplishment of the Fed and Treasury to get this infrastructure in place.