How Would Digital Currency Affect You?
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If the U.S. adopts a digital currency, it would work as an alternative to cash but would also have the built-in advantage of quick money transfer since it’s electronic.
Cunha has a few ideas on what this would look like for consumers. “Our presumption is that it will be free or near free, like cash. Other private sector players may innovate on top of it and possibly additional fees, but that has to be fleshed out more,” he says.
Even though a digital currency would be electronic, it still needs to be as accessible as cash.
“Anyone should be able to use it, not just those with the latest smartphones,” Cunha said, suggesting chip-based cards, point-of-sale systems and web accounts as alternative ways to access the CBDC. He also believes a way to handle transactions offline will need to be developed, so two people can exchange CBDC even if they aren’t on a cell or WiFi network.
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Benefits of Digital Currency
Faster payments. Using digital currency, you can complete payments much faster than current means, like ACH or wire transfers, which can take days for financial institutions to confirm a transaction.
Cheaper international transfers. International currency transactions are very expensive. Individuals are charged high fees to move funds from one country to another, especially when it involves currency conversions. Digital assets could disrupt this market by making it faster and less costly.
24/7 access. Existing money transfers often take more time during weekends and outside normal business hours because banks are closed and can’t confirm transactions. With digital currency, transactions work at the same speed 24 hours a day, seven days a week.
Support for the unbanked and underbanked. More than 7 million American households do not have a bank account, according to the FDIC in a 2019 survey. They end up paying costly fees to cash their paychecks and send payments to others through money orders or remittances. If the country launched a CBDC, unbanked individuals could access their money and pay their bills without extra charges.
More efficient government payments. If the government developed a CBDC, it could send payments like tax refunds, child benefits and food stamps to people instantly, rather than trying to mail them a check or figure out prepaid debit cards.
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Disadvantages of Digital Currency
Too many options. The current popularity of cryptocurrency is a downside. “There are so many digital currencies being created across different blockchains that all have their own limitations. It will take time to determine which digital currencies may be appropriate for certain use cases, including whether some are designed to scale for mass adoption,” Tessler says.
Steep learning curve. Digital currencies require work on the part of the user to learn how to perform fundamental tasks, like how to open a digital wallet and properly store digital assets securely. The system needs to get simpler for digital currencies to be more widely adopted.
Expensive transaction. Cryptocurrencies use blockchain, where computers must solve complex equations to verify and record transactions. This takes considerable electricity and gets more expensive as there are more transactions. However, this would probably not exist for CBDC since the central bank would likely control it and complex consensus processes are not needed.
Price volatility. Cryptocurrency prices and values can change suddenly. Cunha believes this is why businesses are reluctant to use it as a medium of exchange. “As a business, do I want to accept something volatile? What if I hold a Bitcoin for a week and it loses 20% of its value?” With CBDC, though, the value is much stabler, like paper currency, and cannot fluctuate like this.
Slow progress. A U.S. CBDC is still hypothetical, and if the government decides to create one, there will be costs associated with its development.
