Cash will soon be superfluous.  Will America be ready?

Cash will soon be superfluous. Will America be ready?


The Federal Reserve should start experimenting with a virtual currency.

When was the last time you paid with dollar bills?

Some people still prefer to use cash, for example because they like the tactile nature of physical currency or because it offers confidentiality in transactions. But digital payments, made with a swipe of a card or a few ts on the phone, are fast becoming the norm.

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The Federal Reserve should start experimenting with a virtual currency.

When was the last time you paid with dollar bills?

Some people still prefer to use cash, for example because they like the tactile nature of physical currency or because it offers confidentiality in transactions. But digital payments, made with a swipe of a card or a few ts on the phone, are fast becoming the norm.

To keep their money relevant, many central banks are experimenting with digital versions of their currencies. These currencies are virtual, like bitcoin; but unlike Bitcoin, which is a private company, they are issued by the state and function similarly to traditional currencies. The idea is for central banks to introduce these digital currencies in limited circulation – alongside cash as just another monetary option – and then expand their circulation over time as they gain popularity and cash dwindles.

Also read | The race for the national digital currency is picking up speed, is India lagging behind?

China, Jan and Sweden have started experiments on central bank digital currency. The Bank of England and the European Central Bank are preparing their own processes. The Bahamas have already introduced the world’s first official digital currency.

The US Federal Reserve, however, remained largely on the sidelines. This could be a missed opportunity. The United States should develop a digital dollar, not because of what other countries are doing, but because the benefits of a digital currency far outweigh the costs.

One advantage is security. Cash is prone to loss and theft, a problem for both individuals and businesses, while digital currencies are relatively safe. Electronic hacking poses a risk, but new technologies can be used to manage it. (As it turns out, offshoots of Bitcoin technology could prove helpful in increasing security.)

Also read | Crypto Mining: How Does Digital Currency Manufacturing Affect the Environment?

Digital currencies also benefit the poor and “unbanked”. Getting a credit card is difficult when you don’t have a lot of money, and banks charge low-balance accounts that can make them prohibitively expensive. But a digital dollar would give everyone, including the poor, access to a digital payments system and portal for basic banking services. Any individual or household could have a toll-free, interest-free account with the Federal Reserve that is connected to a cell phone to make payments. (About 97 percent of American adults own a cell phone or smartphone.)

To see how this could help, look at the payments the U.S. government made to households as part of the coronavirus stimulus packages. Millions of low-income households with no bank accounts or direct deposit information on file with the Internal Revenue Service experienced complications or delays in receiving these payments. Checks and debit cards sent to many of them have been delayed or lost, and fraudsters have found ways to intercept payments. Central bank accounts could have reduced fraud and made managing stimulus payments easier, faster, and safer.

A central bank digital currency can also be a useful policy tool. If the Federal Reserve wants to stimulate consumption and investment, it can usually cut interest rates and provide credit. But if the economy is cracking and the Fed has already cut the short-term interest rate it controls to near zero, its options are limited. However, if a digital dollar were to be substituted for cash, the Fed could impose a negative interest rate by gradually shrinking the electronic balances on all digital currency accounts, stimulating consumers to spend and businesses to invest.

Also read | Chinese banks promote digital currency and pose a threat to Alipay, the WeChat duopoly

A digital dollar would also prevent illegal activities based on anonymous cash transactions, such as drug trafficking, money laundering and terrorist financing. It would overshadow economic activity “off the books” and into the formal economy, and increase tax revenues. Small businesses would benefit from lower transaction costs as people would use credit cards less often and would avoid the hassle of cash.

Of course, there are potential risks to central bank digital currencies, and any responsible plan should prepare for it. For example, a digital dollar would pose a threat to the banking system. What if households moved their money from regular bank accounts to central bank accounts and found it safer, even if they weren’t paying interest? The central bank could find itself in the undesirable position of having to lend and decide which sectors and companies deserve credit.

But that risk can be managed. Commercial banks could verify customers and run the central banks’ digital currency accounts along with their own interest-bearing deposit accounts. The digital currency accounts may not directly help banks make profits, but they would attract customers who could then be offered savings or loan products. (To help protect commercial banks, the amount of money stored on central bank accounts can also be capped, as the Bahamas did.) A central bank digital currency could be developed for use on various payment platforms to encourage private sector competition and innovation that make electronic payments happier, faster and safer.

Also read | Bitcoin digital currency hits record high; now worth over $ 1700

Another problem is the loss of privacy that central banks’ digital currencies bring with them. Even with safeguards to ensure confidentiality, no central bank would forego the ability to review and track transactions. A digital dollar could threaten the rest of the anonymity and privacy of commercial transactions – a reminder that adopting a digital dollar is not only an economic but also a social choice.

The end of cash is in sight and will have far-reaching effects on the economy, finance and society. With proper preparation and open discussion, we should welcome the advent of a digital dollar.

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