You Have to Be in It to Win It. Will Europe Beat America to the Digital Currency Post?
First it was China, and now the European Union looks set to beat America to a central bank-backed cryptocurrency, or CBDC. But as the adage goes, you have to “be in it to win it,” and there still doesn’t appear to be any commitment to a digital dollar in the quarters that matter.
The pandemic has accelerated discussions of the benefits of, and necessity for, a digital currency. Online transactions cannot be conducted in central bank money or physical cash. For those who qualify for credit cards, this is not a problem. But for the many who don’t, it potentially means being excluded from the mainstream economy in the future.
However, a digital dollar — or Fedcoin — is no simple matter. What’s involved, and how are developments proceeding?
The U.S. Senate Banking Subcommittee on Economic Policy Considers CBDCs
Senator Elizabeth Warren recently chaired a sitting of the US Senate Banking Subcommittee on Economic Policy to discuss the merits of a digital dollar. The senator made her view in favor of the move clear. In her opinion, a “well-designed” and “efficiently executed” CBDC is essential to the efficient, inclusive, and safe working of our monetary system. And to drive out “lousy” alternatives.
Warren described non-regulated cryptocurrencies as a poor investment given their fluctuating values and lack of consumer protection. She also pointed out that they facilitate illegal transactions and that their mining activities consume copious amounts of energy.
Testifying before the committee, MIT Digital Currency Initiative Director Dr. Neha Narula cautioned against moving prematurely without first being clear on how a CBDC would be managed and distributed. And in particular, she argued that the rules governing its data — who sees it and what it can be used for — need to be clear.
Cameron Chell, executive chairman of CurrencyWorks, agrees there are significant benefits for the government to adopting a digital currency. It would allow the government to identify the source and flow of funds, thereby facilitating tax collection and preventing crime. It would also ease the distribution of benefits. But, he points out, instant access to wallets comes with the enormous political advantage of making it easy to impose and monitor sanctions on organizations or nations. “If we are not careful with our policies and our laws, we are in for a controlled society,” he warns.
Other speakers at the subcommittee meeting were mainly in favor of pursuing a CBDC. Columbia Law School Academic Fellow and Lecturer in Law Lev Menand expounded on the shortcomings of the American banking system. Describing it as inaccessible, expensive, and slow, he believes a digital currency can overcome these issues and bypass the restrictive legislation imposed on deposit substitutes after the 2008 financial crisis.
Stanford University Graduate School of Business Professor of Management and Finance Dr. Darrell Duffie felt the US must assume the “leadership position” in digital currencies from China.
J. Christopher Giancarlo, Willkie Farr & Gallagher Senior Counsel, expressed his view that a digital dollar would have been helpful during the early stages of the COVID-19 pandemic to instantly rollout relief benefits. He also argued that a well-designed US CBDC would set an example to the rest of the world, especially anti-democratic foreign regimes that might use CBDCs as surveillance instruments.
A US CBDC Would Require Congressional Approval
Last year, the Federal Reserve disclosed that it is partnering with MIT to build and test a digital currency. But at this point, research is focused on gaining a better understanding of digital currencies, their uses, and the potential implementation of a Central Bank digital currency through a “hypothetical” currency. An American digital dollar, or Fedcoin, would still need congressional approval.
The European Central Bank Starts Work on a CBDC
Meanwhile, in London, Christine Lagarde, President of the European Central Bank (ECB), has announced that the ECB has embarked on developing a digital euro. The project is anticipated to take two years, with another two years on top of the design and investigation stage. Europe’s CBDC will complement its existing monetary system to ensure that commercial lenders, which rely on physical cash, can continue to operate.
While there is no doubt an advantage to learning from others’ mistakes, it’s looking unlikely that the US will take the “leadership position” in digital currencies urged by Dr. Duffie. But, having long held the stage as the most popular reserve currency globally — is this a position America can afford?
