Kitco | Jordan Finneseth  | Sep 16, 2022

A digital dollar would allow Americans to directly open up an account at the Fed

In recent months as more than 100 governments from around the world are in various stages of exploring the launch of digital cash.

Friday’s release of a regulatory framework by the Biden White House included a section on policy objectives for a CBDC system, which brought the U.S. one step closer to creating a digital dollar.

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To gain further insight into what a digital dollar would mean for the global financial system, Kitco Crypto interviewed William Luther, Director of the Sound Money Project at the American Institute for Economic Research (AIER) and an Associate Professor of Economics at Florida Atlantic University.

“Americans already have access to a host of digital dollar accounts, which are provided by banks and other financial institutions.  But the assets in these accounts are not actual dollars. They are claims to actual dollars.  A genuine Fed-issued CBDC would be very different in that respect. It would essentially allow Americans to open up an account at the Fed.”

FedNow and the digital dollar

FedNow is mainly a platform for allowing banks to clear payments in real-time, according to Luther.  More than anything, FedNow is a much-needed upgrade to the Fedwire service, which Luther called “a real-time payment system – with a big asterisk on ‘real-time’.”

“FedNow, in contrast, will be open 24 hours a day, seven days a week, 365 days a year. Banks building on the FedNow platform will be able to support instant retail payments because they will have access to instant settlement with other banks at the Fed.”

As for why the U.S. has thus far dragged its feet in the creation of a digital dollar while countries like China are already testing digital versions of their currencies with the public, Luther suggested that the reluctance was for good reason. 

“Essentially, the Fed faces a tradeoff between offering a useful retail payment device and supporting private-sector financial intermediation,” Luther said. 

If a CBDC becomes so useful that everyone wants to use it, people could start to “exchange their checking account balances for CBDC, leaving banks with fewer funds to support their lending operations.”

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“By disintermediating the financial system, a highly useful CBDC would likely slow economic growth,” Luther warned. 

At the other end of the spectrum, if no one uses the CBDC to make payments, the banking system will be unaffected, but that also means that “the purported benefits of a CBDC go unrealized.”