Why the US is ditching the digital dollar while China and Europe are working on their official digital currencies | Crypto assets
While Europe continues to move slowly but – at least apparently – steadily towards the creation of a new form of money called the digital euro, on the other side of the Atlantic the US Federal Reserve is keeping a careful silence on doing the same with the dollar . And the prospects that such a project could materialize are becoming even more remote with the election of Donald Trump as president and Republican control of the legislative chambers.
Announcement about stablecoin Facebook’s pound in 2019 was the starting signal for efforts by central banks around the world to design official digital currencies and therefore issue their own (CBDC in the jargon, an acronym for central bank digital currency). The Federal Reserve System was no exception. Shortly after the announcement of this private project, which ultimately came to nothing precisely because of the Fed’s frontal opposition, work began on the first analyzes and studies of the digital dollar at the Eccles Federal Reserve Board building. It didn’t take long for the effort to collide with a polarized American political climate. Now, even though the recently re-elected Donald Trump campaigned closer to crypto assets than during his first term, the digital dollar has little prospect of moving forward. And one (being digital asset friendly) does not necessarily contradict the other (preventing the creation of a US CBDC).
Joe Biden was the first to open fire on official movements. The still-American president, anticipating a Republican takeover in January, signed an executive order (a type of regulation that does not need US Congressional approval) in 2022 calling on the Federal Reserve to develop a digital dollar. According to Funkas, the main reason was the fear of being left behind in light of the efforts China is making with its own digital yuan. Republicans, seizing on the potential benefits of opposing such a move, argued that creating an electronic version of the dollar would be a weapon of mass government control and voiced their outright opposition.
In 2023, Republicans began considering two different bills to kill the digital dollar. On the one hand, the eloquently named Digital Dollar Pilot Prevention Act (Digital Dollar Prevention Act), and on the other hand, no less pompous State Law Against CBDC Surveillance (state anti-CBDC regulation law). The first ran aground and did not live to join. The second option was approved by the then-dominated House of Representatives, but still lacking the blessing of the Senate (then in Democratic hands) and the President. Now, after the Republican wave of elections on November 5, it can be foreseen that this will be one of the laws that gets approved, which will prevent the Fed from making any efforts to create a digital dollar, unless the US Congress decides to do so.
“I believe that the digital dollar is in dead end in the US,” says Santiago Carbo, director of financial research at Funcas. “I don’t think it will revive with Trump’s arrival, because that would mean a radical change in its policies. Republicans wanted to ban it. “He’s at a crossroads,” he makes, a diagnosis very similar to another financial source who spoke on condition of anonymity. “The Fed has always said that in any case, the decision to issue a digital dollar must come from Congress, from the legislative branch. And so what we have is a bill against CBDC. Beyond that, there is opposition at the political level, starting with Trump himself, so I don’t think there will be any movement towards issuing a digital dollar in the US,” he says.
Despite Trump’s apparently more open views on crypto assets, the digital dollar is facing difficult times. While both are forms of electronic money, this position is by no means controversial: “Trump’s support for cryptoassets does not necessarily imply possible support for a digital dollar. In fact, these are two diametrically opposed things. The digital dollar will be a government-issued currency, while cryptocurrencies are currencies issued by private entities outside the government,” the same source describes.
Popular opposition, but still unfounded
Can we hope that there will never be a digital dollar? Experts’ forecasts for the medium and long term are changing, and they see the possibility of its creation over time. In theory, the US, Europe and China all face the same problem when it comes to justifying the development of digital currencies issued by their central banks, although the underlying motivations that each may have in practice are not at all similar. In the case of the Old Continent, one of the arguments most often put forward by the European Central Bank in favor of creating a digital euro is the reduction in the use of cash and the resulting alarming shift away from money publicly issued by practical banks. exclusive use of what is created by private banks (money in bank accounts).
And although the entire monetary system is designed in such a way that the euro deposited into the account of any private bank is identical to cash, in reality this is not the case; When money goes into this account, it becomes money. published the specific bank in which it is stored. A euro delivered to a bank represents a promise of payment from the business to the person who deposited it there. When money is withdrawn from this account at an ATM, it returns to its form as money issued by the central bank. So, for example, 10 euros deposited into a BBVA account is equal to 10 euros deposited into a Santander account, since in both cases you can go to an ATM and withdraw it.
Since each bank is subject to its own risks, the ECB fears that in a hypothetical scenario of running out of cash as a result of non-use, monetary stability would be lost as €10 published in a private bank with problems may not be worth as much as 10 euros in another bank without them. This is the reason for the creation of a CBDC, which is shared by Washington, Beijing and Frankfurt, since in both the US and China or the Union, the use of cash, the only form of bank-issued money that exists centrally today, is in retreat.
According to financial sources, beyond publicly stated goals such as maintaining a monetary anchor and secure control over policy implementation, there are deep and different motives in each of the world’s major economic regions. In the case of the digital euro, in addition to guaranteeing monetary stability, it will ensure that the European payment network does not depend solely on two American companies: Visa and Mastercard. In China, this is an opportunity to further control the population, as well as a way to try to gain influence in trade and international settlements. In the United States, given Beijing’s ambitions, the motivation will be to maintain the dollar’s prized primacy.
There are voices that say that CBDC is not a solution to the problem of reducing the use of publicly issued money, but rather a solution in search of a problem. There are those who think that this will happen. “In Europe, at least, there was a debate on this issue, which was actively promoted and promoted by the ECB, but it was talked about seriously, listening to different parties,” Carbo assesses. On the other hand, the debate in the US has been more passionate and emotional than rational, and one of the many things that has been overlooked is that although they have one name, there are many potential types of CBDCs. They may or may not be anonymous. It is possible that they will be used en masse, known as retailers, or, conversely, only large financial institutions-wholesalers. “I believe the United States will release a wholesale digital dollar in the medium term because if it doesn’t, it will have a lot of competition internationally,” financial sources say.
Ross Buckley, a professor at the University of New South Wales in Australia and the author of various studies on new forms of money and their consequences, says there is no way to know whether this hypothetical wholesale digital dollar will help strengthen the primacy of the dollar. or not, but something in his opinion is obvious. “The only thing that is clear is that if the United States does not create a digital dollar for wholesale use, and China or other countries do, then the dominance of the dollar will go into some decline, primarily because a wholesale CBDC will be much more efficient and effective “than our current configurations in the field of large international payments,” the expert defends.
Republicans have been vocal opponents of the digital dollar, but Trump has also been a vocal opponent of the crypto assets he now praises. It is clear that something similar to the euro, which the ECB is currently working on, is very far from happening in the United States, given the massive nature and use at the civilian level of the future European currency, but it is possible that the American analogue will arrive in a different format and with a different function. Attacks on the digital dollar have been popular, but the real test of the sustainability of this opposition remains to be seen: whether opposition to the dollar is practical or not.