Why Does The Federal Reserve Need A Digital Currency?

Why Does The Federal Reserve Need A Digital Currency?

New technology is upending everything in finance, from saving to trading to making payments.

By John Detrixhe      Published July 28, 2021

Digital money is nothing new—debit and credit cards have been with us for years. What’s changed is its pervasiveness. With fewer people carrying paper money, and with some places no longer accepting it, we’ve become ever more reliant on electronic cash provided by commercial institutions, from PayPal to Visa.

As physical cash goes away, so do the properties that make it special. Cash allows people to transact without a bank account, without fees, and without a middle man in the way of their access to currency issued directly by the central bank, the lender of last resort and the bedrock of the financial system.

Is it time for America’s central bank to create a digital dollar?

Congress is asking. And in hearings on July 27, a group of experts laid out their reasons why the Federal Reserve needs to go digital. Here are a few of their arguments.

Payments are expensive

Andrew Levin, an economics professor at Dartmouth College and a 20-year veteran of the Federal Reserve, highlighted examples of businesses in New England that pay 3% or even more to the likes of Square, PayPal, and Visa whenever a customer makes a digital transaction. He points out that small businesses typically get by on tight margins, and high payment costs could make the difference between between surviving and going under.

He notes that physical money isn’t free either, as businesses have to pay for security and cash management, which can cost as much as the electronic services. Levin suggests that a central bank digital currency, by contrast, could be designed to be costless or at least lower cost, which could promote job creation.

A digital dollar could be a new tool for monetary policy

The Fed has already pushed interest rates about as low as they can go, meaning policy makers have less scope to rev up the economy than they used to. A digital currency would let the central bank deposit money directly into accounts held by general public (so-called “helicopter money”), as Julia Coronado, president and founder of MacroPolicy Perspectives, said in her testimony.

This could be faster, cheaper, and better targeted than the paper stimulus checks issued by the US government during the pandemic. (Digital money also could also come with an expiration date to encourage spending.)

China is already far along in developing a digital currency

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