The digital dollar has the potential to become the backbone of the United States economy and change the face of global commerce. Known as a central bank digital currency (CBDC), the proposed electronic currency could make financial transactions completely digital, which would make transferring money faster and cheaper. It has also become a hot-button issue, with Republican lawmakers weighing in on the topic and voicing concerns.
Critics say there are massive privacy and security issues and an electronic currency could give the US government unprecedented control over transactions. Federal Reserve Chair Jerome Powell said in March the possibility of launching a digital dollar in the US was slim to none.
So what will it take to create a digital dollar here in the States?
Understanding the digital dollar
A CBDC, known as a “digital dollar,” is a proposed form of electronic currency that could be used to buy or sell almost any goods and services in the US much like a regular dollar is used today. Unlike the traditional greenback, however, a CBDC would not exist in paper form but would be solely transacted and represented in an electronic format.
The money would be directly issued by the Federal Reserve and live on a digital ledger, such as a blockchain, meaning there wouldn’t be a need for traditional banks to handle certain types of transactions or recordkeeping. A digital currency would require a fully integrated digital infrastructure and could take years of research and development to launch.
CBDCs gained popularity in the late 2010s when global technology companies announced their own digital currencies, most notably Facebook’s now-defunct Libra. Dozens of central banks and governments have since launched digital currencies or pilot programs, according to data from the Washington, DC-based non-partisan think tank The Atlantic Council.
The data show that all of the G20 countries, which have some of largest economies in the world, are in some phase of developing a CBDC:
Source: The Atlantic Council
In an election year, CBDCs have also become a common issue on the campaign trail, with several presidential candidates voicing concerns about privacy and government oversight.
Advocates say the technology would push the world’s economy into the digital age by bringing down transaction costs, opening up access to financial services and enhancing security and transparency.
How likely is it that the US dollar will become a digital currency?
While the jury’s still out on a US digital dollar, Powell recently threw cold water on the idea while testifying before a Senate committee in March. Policymakers are “nowhere near” taking action on adopting the technology and the government would most likely take a backseat to the banking industry in the creation of a digital currency.
“If we were to ever do something like this — and we’re a very long way from even thinking about it — we would do this through the banking system,” Powell said.
While the government could theoretically create a digital dollar that would make transactions faster and easier for many Americans, there are serious concerns and potential dangers. The most alarming is that the government would potentially have the ability to track the financial transactions made by hundreds of millions of its citizens, something Powell said would not fly in the US.
“That is how it works in China,” he noted.
Supporters say the US risks falling behind much of the world if it fails to move on a digital currency. The most ambitious pilot program launched so far is China’s digital yuan, which is already in use in 260 million wallets across 25 cities. After its launch in 2022, the pilot program has now completed transactions in Hong Kong and Macau and is being explored as a tool to boost overseas tourism, according to Atlantic Council data.
“It’s just really a question of following technology as it evolves, and in a way that serves the public better,” Powell said. “People don’t need to worry about a central bank digital currency. Nothing like that is remotely close to happening anytime soon.”
Benefits of becoming a digital currency
There are certainly benefits to a digital dollar fully run and backed by the Fed. The money would be transferred almost instantaneously from bank accounts without having to wait days for the transactions to clear multiple financial institutions. This could also help reduce costs by cutting out intermediaries, and the minimal fees they charge, possibly opening up access to larger groups of Americans.
“The world is becoming more digitally native, with each upcoming generation leading more digitally led lives,” said Damon Polistina, director of research at Eaglebrook, a cryptocurrency investment platform. “As the overall comfort level increases, the chances of adopting the digital US dollar increases.”
A fundamental similarity to traditional dollars is centralization, he said. A digital currency would still be part of the standard monetary system and be subject to the Fed’s same monetary policy, as opposed to cryptocurrencies that are based on the principle of a decentralized network and have no central authority. Ideally, digital dollars would also be much more stable than cryptocurrencies and be fully insured by the federal government.
“It could facilitate faster and potentially more secure transactions and work better in an economy where digital payments are becoming more prevalent and part of everyday life,” he said.
Challenges with digital dollar status
The main challenges to digital dollars involve concerns about privacy, surveillance and the control of money. By their very definition, digital transactions are tracked on a blockchain-like digital ledger, meaning each purchase is publicly stored and recorded. The technology would, therefore, eliminate anonymous or under-the-table transactions. While this could help deter tax evaders, it also has the potential to give the government unprecedented visibility into American citizens’ everyday purchases.
Governments could also potentially program the digital money and theoretically dictate or limit certain purchases, according to Avivah Litan, an analyst of artificial intelligence and blockchain at Gartner Research. Programmable money would give the government even greater control over the flow of money.
“There’s just no need for a digital dollar quite yet,” Litan said. “Maybe it’ll happen one day, but [the government] has been working on it for years. There’s just no appetite for it.”
Another major obstacle is that digital currency can only be accessed online through an internet connection, which could prove an issue in communities with limited access to the internet or for those in rural areas.
Timeline for a US digital dollar launch
Buzz around a digital dollar has been heating up as central banks worldwide continue researching and launching pilot programs. Three countries have fully launched a CBDC: the Bahamas, Jamaica and Nigeria. As of March 2024, these are the only three surviving digital currencies in use, down from a peak of 11 at the end of 2022, Atlantic Council data show.
“Digital currencies have not been successful at all,” said Litan. “No one’s ever really proven why we need a digital currency issued by the government.”
Still, banks and governments from another 36 countries have ongoing CBDC pilots, including the digital euro and all of the members of the BRICS countries: Brazil, Russia, India, China and South Africa. So far, the US is still in an exploratory phase with the Biden administration announcing an executive order in 2022 that led to further research into digital currencies.
“Given the early stage of experiments, testing and learning that the CBDC programs are in, the complexity of the financial system and limited political appetite, widespread implementation of a digital dollar could be many years off,” Polistina said.
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Frequently asked questions (FAQs)
A digital dollar would function like any other fiat currency and would be used to buy and sell almost all goods and services. The major difference is that the underlying technology utilizes blockchain or other digital ledger technology and is completely digital, meaning transactions could become much faster and less expensive than paper and existing digital formats.
Yes. Critics claim the digital dollar, or any form of digital currency, would have major privacy and security concerns and could give the government unprecedented access to Americans’ financial data. Digital currencies may also be more susceptible to cyberattacks or hacking than traditional payment methods.
