Biden orders to evaluate the creation of a US digital currency backed by the Federal Reserve

By Jason Abbruzzese and Kevin Collier -

An American digital currency could be on the horizon.

The Biden administration is supporting the research and development of a “Central Bank of the United States Digital Currency,” or CBDC.

The move is part of a sweeping executive order that President Joe Biden is expected to sign on Wednesday, urging the federal government to explore the possible uses and regulations of digital assets such as cryptocurrencies.

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“We know that the implications of the possible issuance of a digital dollar are profound.

They are extraordinarily spacious,” a senior administration official told reporters in a call Tuesday.

Although a US digital currency wouldn't necessarily change much in terms of everyday experiences like buying goods and services, economists say it could transform central and commercial banking, as well as government sanctions, banking accessibility and taxation.

"The potential is huge and very exciting

," said David Yermack, professor and chair of the finance department at New York University.

The executive order will ask the government to investigate the technical needs of a digital currency and advocate that the Federal Reserve (Fed) continue its research and development, according to a fact sheet published by the White House.

The Federal Reserve published a parliamentary document in January on the possible creation of a CBDC that would complement existing payment systems.

It concluded that this measure could make payments cheaper and easier for consumers, but could also pose a risk to the stability of the US financial system.

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In its fact sheet, the Administration detailed that it would also take steps to "mitigate the illicit financing and national security risks posed by the illicit use of digital assets, by leading unprecedented coordinated action across all relevant agencies of the United States Government." to mitigate these risks.

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The United States would not be the first country with a digital currency.

China has introduced its own CBDC and already has more than 140 million people who have opened digital “wallets”.

Many other countries have launched or are developing digital currencies.

.

Yermack said the Biden administration's move pointed to something inevitable given the global trend toward digital currencies.

“It is not a question of yes or no, but when.

Once central banks start adopting the technology, it's game over,” he opined.

Although the Administration's fact sheet does not provide any details on how a US digital currency could work, Yermack suggested that the functionality could be reasonably straightforward, with transactions flowing directly to and from the Fed, bypassing banks and payment systems. and creating near-seamless cash flows.

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It is a simple concept with the potential to have wide ramifications.

Yermack explained that a widely adopted digital currency would raise existential questions for banks and many other financial services focused on facilitating payments.

“Bill Gates said that there will always be banks, but there won't be,” Yermack contradicted.

Digital currencies also open up new possibilities for government policy, according to Michael Bordo, professor of economics and director of the Center for Monetary and Financial History at Rutgers University in New Jersey.

President Joe Biden speaks in the South Court Auditorium on the White House campus, on March 4, 2022, in Washington. Patrick Semansky / AP

A digital currency could make the kind of coronavirus pandemic stimulus payments nearly instantaneous and much more efficient, reaching people who have so far been unbanked.

Bordo pointed to the digital currency of the Bahamas as an example of how people without a bank account can benefit.

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“They found that it really worked, and they figured out ways to make it really simple, because there are a lot of very low-income people who don't have bank accounts,” Bordo recalled.

In addition to the consumer benefits, a US digital currency would offer the Federal Reserve a new tool that economists have only previously theorized about: negative interest rates.

Controlling interest rates is the Fed's main way of stimulating or cooling the economy, but it has its limits.

Banks can only lower interest rates on normal money to a certain point, known as the zero limit, leaving central banks with little choice when interest rates are already low and the economy needs a boost.

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With a digital currency, the zero limit does not exist, allowing you to act aggressively when necessary.

“If the money is electronic, the government can just erase 2% of your money every year.

I think this is going to become a necessity just because of demographic changes in the world,” Yermack explained.

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Bordo also noted negative rates as an important feature of digital currencies.

"I think it's something that could change the rules for the Fed," he said.

Despite all the theoretical possibilities, an American digital currency faces many obstacles.

Bordo noted that commercial banks have a vested interest in opposing this technology.

"Getting this to go ahead is going to be a big project," he

said.

However, the momentum for government-backed digital currencies is growing.

Yermack has advised major governments looking to start their own currencies as more countries adopt theirs.

"The others are probably going to adopt it in a domino effect very quickly," she said.

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“Two years ago everyone ridiculed this.

Now it is what is fashionable”, said Yermack.