The rise of private cryptocurrencies motivated the Fed to start considering a digital dollar to be used alongside the traditional paper currency.
The Federal Reserve is taking what may be the first significant step toward launching its own virtual currency, a move that could shake up banks, give millions of low-income Americans access to the financial system and fortify the dollar’s status as the world’s reserve currency.
The idea of creating a fully digital version of the U.S. dollar, which was unthinkable just a few years ago, has gained bipartisan interest from lawmakers as diverse as Sens. Elizabeth Warren (D-Mass.) and John Kennedy (R-La.) because of its potential benefits for consumers who don’t have bank accounts. But it’s also sparking strong pushback from those with the most to lose: banks.
“The United States should not implement a [central bank digital currency] simply because we can or because others are doing so,” the American Bankers Association said in a statement to lawmakers this week. The benefits “are theoretical, difficult to measure, and may be elusive,” while the negative consequences “could be severe,” the group wrote.
The explosive rise of private cryptocurrencies in recent years motivated the Fed to start considering a digital dollar to be used alongside the traditional paper currency. The biggest driver of concern was a Facebook-led effort, launched in 2019, to build a global payments network using crypto technology. Though that effort is now much narrower, it demonstrated how the private sector could, in theory, create a massive currency system outside government control.
Now, central banks around the world have begun exploring the idea of issuing their own digital currencies — a fiat version of a cryptocurrency that would operate more like physical cash — that would have some of the same technological benefits as other cryptocurrencies.
That could provide unwelcome competition for banks by giving depositors another safe place to put their money. A person or a business could keep their digital dollars in a virtual “wallet” and then transfer them directly to someone else without needing to use a bank account. Even if the wallet were operated by a bank, the firm wouldn’t be able to lend out the cash. But unlike other crypto assets like Bitcoin or Ether, it would be directly backed and controlled by the central bank, allowing the monetary authorities to use it, like any other form of the dollar, in its policies to guide interest rates.
The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative are aiming next month to publish the first stage of their work to determine whether a Fed virtual currency would work on a practical level — an open-source license for the most basic piece of infrastructure around creating and moving digital dollars.
But it will likely be up to Congress to ultimately decide whether the central bank should formally pursue such a project, as Fed Chair Jerome Powell has acknowledged. Lawmakers on both sides of the aisle are intrigued, particularly as they eye China’s efforts to build its own central bank digital currency, as well as the global rise of cryptocurrencies, both of which could diminish the dollar’s influence.
Democrats have especially been skeptical about crypto assets because there are fewer consumer protections and the currencies can be used for illicit activity. There are also environmental concerns posed by the sheer amount of electricity used to unlock new units of digital currencies like Bitcoin.
Warren suggested the Fed project could resolve some of those concerns.
“Legitimate digital public money could help drive out bogus digital private money, while improving financial inclusion, efficiency, and the safety of our financial system — if that digital public money is well-designed and efficiently executed,” she said at a hearing on Wednesday, which she convened as chair of the Senate Banking Committee’s economic policy subcommittee.
Other senators highlighted the potential for central bank digital wallets to be used to deliver government aid more directly to people who don’t have bank accounts. A digital dollar could also be designed to have more high-tech benefits of some cryptocurrencies, like facilitating “smart contracts” where a transaction is completed once certain conditions are met.
Neha Narula, who’s leading the effort at MIT to work with the Boston Fed on a central bank digital currency, called the project “a once-in-a-century opportunity to redesign the dollar” in a way that supports innovation much like the internet did.
Still, there are a slew of unanswered policy questions around how a digital dollar would be designed, such as how people would get access to the money, or how much information the government would be able to see about individual transactions. The decision is also tied to a far more controversial policy supported by Democrats like Warren and Senate Banking Chair Sherrod Brown to give regular Americans accounts at the Fed.
“What problem is a central bank digital currency trying to solve? In other words, do we need one? It’s not clear to me yet that we do,” Sen. Pat Toomey (R-Pa.) said. “In my view, turning the Fed into a retail bank is a terrible idea.”
And, “the fact that China is creating a digital currency does not mean it’s inevitable that the yuan would displace the U.S. dollar as the world’s reserve currency,” he said.
For their part, banks fear a Fed-issued digital currency could make it easier for customers to pull out large amounts of deposits and convert them to digital dollars during a crisis — the virtual equivalent of a bank run — putting financial stress on their institutions and making less money available to provide credit for people, businesses and markets.
It could also potentially deprive them of customers, something the lenders say would interfere with lawmakers’ vision of increased financial inclusion.
“While it is true that deposit accounts are often the first step towards inclusion, the benefits of a long-term banking relationship go well beyond a deposit account,” the ABA said in its statement. “The same is not true of a [central bank digital currency] account with the Federal Reserve, which would not grow into a lending or investing relationship.”
The Bank Policy Institute, which represents large banks, has also argued that many of the benefits of a digital dollar are “mutually exclusive (because they are predicated on different program designs) or effectively non-existent (because the program design that produces them comes with costs that are for other reasons unbearable).”
“The decision on whether to adopt a central bank digital currency in the United States is appropriately a long way off,” BPI President and CEO Greg Baer said. “There are also complex and serious costs that will need to be considered.”
But many lawmakers think it’s worth the effort to look into it.
“The Federal Reserve should continue to explore a digital [currency]; nearly every other country is doing that,” Sen. Bill Hagerty (R-Tenn.) said at the hearing, citing the risk for the U.S. to lose its ability to deploy economic sanctions as effectively with decreased usage of the dollar.
“The US has imposed sanctions on the chief prosecutor of the international criminal court, Fatou Bensouda, in the latest of a series of unilateral and radical foreign policy moves.
Announcing the sanctions, the secretary of state, Mike Pompeo, did not give any specific reasons for the move other than to say the ICC “continues to target Americans” and that Bensouda was “materially assisting” that alleged effort.
He also announced sanctions against Phakiso Mochochoko, the ICC’s director of jurisdiction, complementary and cooperation division.
The US Treasury issued a statement saying Bensouda and Mochochoko had been deemed “specially designated nationals”, grouping them alongside terrorists and narcotics traffickers, blocking their assets and prohibited US citizens from having any dealings with them.”
Erdogan is no friend to America. He’s a dictator with strange ideas, not unlike Nicolás Maduro.
Turkish citizens are wildly optimistic about the invasion of Syria that began Oct. 9. President Recep Tayyip Erdogan’s decision finds broad support within Turkey, including from all the major opposition parties except the pro-Kurdish People’s Democratic Party. The incursion is understood domestically not only as a measure to protect the country from the Kurdish forces Mr. Erdogan calls “terrorists,” but also to affirm Turkey’s status as a power; Ankara no longer must bow to the wishes of Washington, Berlin or Moscow.
Then there’s the pessimistic view, the one I share. The invasion damages Turkey internationally: Western and Arab governments have condemned the military operation, as have the Russian, Iranian, Indian and Chinese governments. Volkswagen paused a planned investment in Turkey, and other companies may follow suit. Congress is weighing economic sanctions. Italy, France and Germany have suspended arms sales. Tensions are heightening between Turks and Kurds in Germany, and will likely rise within Turkey as well.
Though northern Syria’s open terrain is favorable to regular forces, Turkey’s huge army may not do so well on the battlefield. Mr. Erdogan has purged the officer corps several times in recent years for domestic political reasons. Even if initially routed, the Syrian Kurdish forces could regroup to mount a costly insurgency against the Turkish occupation. Turkey has many regional enemies eager to trip it up. Like many prior wars begun in a flush of jubilation—recall the British youth joyfully enlisting in 1914, confident of returning victorious within weeks—this one may end ingloriously.
Should the military operation go badly, responsibility for the failure will fall squarely on Mr. Erdogan’s shoulders. A brilliant politician and Turkey’s most consequential leader since Atatürk, Mr. Erdogan has repudiated Atatürk’s legacy of socialism, secularism and avoiding foreign military adventures. Instead, for years he oversaw a capitalist economic boom, and he still rules with an Islamist sensibility and a neo-Ottoman approach to foreign policy. In the nearly 17 years since his party first took Parliament, he has transformed Turkey.
But like other masters of domestic politics— Saddam Hussein comes to mind—Mr. Erdogan wrongly assumes that the cunning and aggression that brought him political success internally will also work internationally. This explains his unleashing thugs on the streets of Washington, abducting Turkish citizens accused of coup plotting from multiple countries, attempting to smuggle dual-use materials to Gaza, illegally drilling for natural gas in Cypriot waters, and shooting down a Russian jet fighter, among other bellicose actions.
Mr. Erdogan’s foreign-policy ineptitude has alienated other governments.
- Europeans seethe when he threatens to send 3.6 million displaced Syrians their way.
- Israelis despise him for a vitriolic anti-Zionism that compares them to Nazis.
- Egypt’s president hates Mr. Erdogan’s backing of the Muslim Brotherhood. Mr. Erdogan’s abject apologies haven’t compensated for
- shooting down the Russian jet
- China hasn’t forgotten Mr. Erdogan’s accusing it of genocide against the Uighurs, despite his silence now.
When the candidate from Mr. Erdogan’s AKP party twice lost the Istanbul mayor’s race this year, most analysts saw this as a “political earthquake” and a “stunning blow” to Mr. Erdogan, but he remains as dominant and dangerous as ever. A ruthless ideologue, his continued rule could bring to Turkey the
- political repression,
- economic collapse,
- hunger and
- mass emigration
that plague Nicolás Maduro’s Venezuela.
I worry about this terrible outcome because Mr. Erdogan has consolidated power over Turkey’s institutions:
- the military, the
- intelligence services, the
- police, the
- judiciary, the
- banks, the
- media, the
- election board, the
- mosques and the
- educational system.
He has supported the private security company Sadat, which some analysts consider a “shadow” or “private” army. Academics who signed a 2016 petition critical of Mr. Erdogan’s policies toward the Kurds have lost their jobs, faced criminal charges and even been jailed. Mr. Erdogan’s hare-brained theory that high interest rates cause, rather than cure, high inflation has recently done great damage to the economy. The 1,150-room palace he had built symbolizes his grandiosity and ambition.
In short, Mr. Erdogan is a dictator with strange ideas, wild ambitions and no restraints. The invasion of Syria has made a domestic and regional tragedy the most likely outcome.
How can the outside world prevent catastrophe? By terminating its disgraceful indulgence of Mr. Erdogan. Donald Trump is only the latest politician to fall for his mysterious charms— George W. Bush, Barack Obama and Angela Merkel, among others, preceded him. Mr. Erdogan deserves punishment, not rewards, for his outrageous behavior. His heading a North Atlantic Treaty Organization member country should raise, not lower, the bar.
President Trump’s Iran policy over the weekend was both erratic and masterful. Doves and isolationists, panicked by what they see as the administration’s inexorable drift toward war, rejoiced when Mr. Trump announced that a military strike had been called back. Hawks criticized him for an Obama-like climb-down, but the announcement of cyberattacks and tightening sanctions helped smooth ruffled feathers.
The result? Mr. Trump more than ever dominates U.S. Iran policy; contending political factions within the administration and outside it must jockey for his support. And the more he talks and tweets about Iran, the less clear anyone is about his ultimate intentions.
None of this should be surprising. Consistently inconsistent on issues from trade with China and immigration from Mexico to Venezuela and North Korea and now Iran, Mr. Trump has been by turns more hawkish than any of his predecessors and dovish enough to thrill Sen. Rand Paul.
This president is first and foremost a showman. From his early real-estate days in 1970s New York through his time in reality television and into his third career in politics, Mr. Trump has understood and shrewdly deployed the power of fame. He has turned American politics into the Donald Trump Show, with the country and the world fixated on his every move, speculating feverishly about what will come next. Whether threatening on Twitter to rain down destruction from the sky, reining in the dogs of war at the last minute, or stage-managing high-stakes summit meetings, he is producing episodes of the most compelling reality show the world has ever seen.
Whether this helps or hurts American foreign policy is another question, but to turn intractable foreign-policy problems like North Korea’s nuclear program into fodder for the Trump publicity machine represents a triumph of marketing ingenuity if not of national strategy. Unresolved foreign-policy crises normally weigh on a president’s popularity; in Mr. Trump’s case, they become plotlines that provide drama and suspense. When Kim Jong Un gives him lemons, Mr. Trump sets up a lemonade stand.
The president’s critics continue to dismiss him as a cable-TV-obsessed, narcissistic know-nothing even as he dominates American and world politics. What they miss is that Mr. Trump not only possesses an instinctive ability to dominate media coverage; he is also a keen judge of power. The fashionable neighborhoods of Los Angeles are filled with world-famous celebrities who yearn for political power; Hollywood hates him so virulently in part because, like Ronald Reagan, Mr. Trump has transcended show business and transformed celebrity power into the real thing.
The key to the president’s Iran policy is that his nose for power tells him Iran is weaker and the U.S. stronger than the foreign-policy establishment believes. President Obama’s nuclear deal, from Mr. Trump’s perspective, was the result of a successful Iranian con game executed by clever Islamic Republic negotiators who ran circles around John Kerry. What Mr. Trump wants is a deal with Iran that matches his sense of the relative power of the two countries.
In pursuit of this goal he is combining two sets of strategies. At the level of public diplomacy he is engaging in his standard mix of dazzle and spin, shifting from bloodcurdling threats to gentle billing and cooing as need be. And at the level of power politics he is steadily and consistently tightening the screws on Iran: arming its neighbors and assuring them of his support, tightening sanctions, and raising the psychological pressure on the regime.
Mr. Trump well understands the constraints under which his Iran policy is working. Launching a new Middle East war could wreck his presidency. But if Iran starts the war, that’s another matter. A clear Iranian attack on American or even Israeli targets could unite Mr. Trump’s Jacksonian base like the attack on Pearl Harbor united America’s Jacksonians to fight Imperial Japan.
Americans did not want war in 1941. By levying crippling economic sanctions on Japan, President Roosevelt gave Tokyo the choice between retreating in Asia and launching a war against the U.S. Mr. Trump believes he can drive Iran into a similar corner—and that a weakened Iran will choose retreat over war.
Mr. Trump’s approach to American diplomacy horrifies an establishment that believes restraint, predictability and responsibility are the hallmarks of a global hegemon. Lesser powers can indulge in histrionic grandstanding, clownish antics, outrageous claims and public tantrums. The hegemon exhibits power by rising above such tawdry tricks.
While he described Saudi Arabia as, in the past, “a good ally,” Mr. Graham said “there is a difference between a country and individual. The MBS figure to me is toxic. He can never be a world leader on the world stage…This guy has got to go.”
.. Mr. Graham said he “can never do business with Saudi Arabia again until we get this behind us.” Mr. Graham described the crown prince as a “wrecking ball.”
While he described himself previously as Saudi Arabia’s “biggest defender” in the Senate, Mr. Graham said the alleged murder of Mr. Khashoggi made him “feel used and abused.”
Frankly, it’s a disgrace that Trump administration officials and American business tycoons enabled and applauded M.B.S. as he
- imprisoned business executives,
- kidnapped Lebanon’s prime minister,
- rashly created a crisis with Qatar, and
- went to war in Yemen to create what the United Nations calls the world’s worst humanitarian crisis there.
Some eight million Yemenis on the edge of starvation there don’t share this bizarre view that M.B.S. is a magnificent reformer.
.. Trump has expressed “great confidence” in M.B.S. and said that he and King Salman “know exactly what they are doing.” Jared Kushner wooed M.B.S. and built a close relationship with him — communicating privately without involving State Department experts — in ways that certainly assisted M.B.S. in his bid to consolidate power for himself.
The bipartisan cheers from Washington, Silicon Valley and Wall Street fed his recklessness. If he could be feted after kidnapping a Lebanese prime minister and slaughtering Yemeni children, why expect a fuss for murdering a mere journalist?
.. M.B.S. knows how to push Americans’ buttons, speaking about reform and playing us like a fiddle. His willingness to sound accepting of Israel may also be one reason Trump and so many Americans were willing to embrace M.B.S. even as he was out of control at home.
In the end, M.B.S. played Kushner, Trump and his other American acolytes for suckers. The White House boasted about $110 billion in arms sales, but nothing close to that came through. Saudi Arabia backed away from Trump’s Middle East peace deal. Financiers salivated over an initial public offering for Aramco, the state-owned oil company, but that keeps getting delayed.
.. The crackdown on corruption is an example of M.B.S.’s manipulation and hypocrisy. It sounded great, but M.B.S. himself has purchased a $300 million castle in France, and a $500 million yacht — and he didn’t buy them by scrimping on his government salary.
.. In fairness, he did allow women to drive. But he also imprisoned the women’s rights activists who had been campaigning for the right to drive.
Saudi Arabia even orchestrated the detention abroad of a women’s rights activist, Loujain al-Hathloul, and her return in handcuffs. She turned 29 in a Saudi jail cell in July, and her marriage has ended. She, and not the prince who imprisons her, is the heroic reformer.
.. The crown prince showed his sensitivity and unpredictability in August when Canada’s foreign ministry tweeted concern about the jailing of Saudi women’s rights activists. Saudi Arabia went nuts, canceling flights, telling 8,300 Saudi students to leave Canada, expelling the Canadian ambassador and withdrawing investments. All for a tweet.
.. Western companies should back out of M.B.S.’s Future Investment Initiative conference later this month. That includes you,
- Credit Suisse,
- Bain and
all listed on the conference website as partners of the event.
.. We need an international investigation, perhaps overseen by the United Nations, of what happened to Jamal. In the United States, we also must investigate whether Saudis bought influence with spending that benefited the Trump family, such as $270,000 spent as of early 2017 by a lobbying firm for Saudi Arabia at the Trump hotel in Washington. The Washington Post reported that Saudi bookings at Trump Chicago increased 169 percent from the first half of 2016 to the first half of this year, and that the general manager of a Trump hotel in New York told investors that revenues rose partly because of “a last-minute visit to New York by the Crown Prince of Saudi Arabia.”
.. If Saudi Arabia cannot show that Jamal is safe and sound, NATO countries should jointly expel Saudi ambassadors and suspend weapons sales. The United States should start an investigation under the Magnitsky Act and stand ready to impose sanctions on officials up to M.B.S.
America can also make clear to the Saudi royal family that it should find a new crown prince. A mad prince who murders a journalist, kidnaps a prime minister and starves millions of children should never be celebrated at state dinners, but instead belongs in a prison cell.
On Friday, Aug. 10, President Donald Trump announced he would double steel and aluminum tariffs on Turkey. The WSJ’s Gerald F. Seib explains how this political move could backfire. Photo: Getty