- [Narrator] The Federal Reserve might want
to fix your wallet
by turning it from this into this.
(phone beeping)
Though your wallet is still designed for dollar bills,
Americans have been using cash to buy things less and less
over the years.
(till dinging)
That's part of why the Fed is considering digitizing
the US dollar, giving people money they can access
on their phone and bypassing electronic payments
that can be slow and costly for businesses.
Some see this as a necessary upgrade
to the US financial system but others worry
it could potentially upend commercial banking.
- There's some very, very difficult questions to answer
but I think we, and we are engaged in a serious program
to understand both the technology
and the policy issues.
- [Narrator] A central bank digital currency, or CBDC,
is exactly what it sounds like,
a purely digital form of a country's money issued
by its central bank that people can use just like cash.
It's true that cards and apps already allow
for electronic payment
but behind the scenes,
these financial transactions involve several steps,
settling payments over a patchwork of systems.
- The plumbing of the system
is still based on a cash system.
- [Narrator] Josh Lipsky is the director
of the Atlantic Council's GeoEconomics Center
and says the US financial system
is still pretty old school
when it comes to moving money around.
- It's based on banks talking to banks,
saying hey, I need you to transfer this to me.
We've updated some of that over the years
but actually, if you were to look back,
a lot of it dates back to the 1950s and before.
And that's not a great way to run a modern global economy.
- [Narrator] After a debit card is swiped,
the transaction can flow through several entities,
including point-of-sale systems,
payment networks like Visa and Mastercard,
your bank and the merchant's bank.
The system can take up to three days
to move money between accounts
and often comes with transaction fees
that can weigh heavily on small businesses,
who experts say may have to pass the cost
onto customers or put restrictions on card usage.
These extra costs can limit their revenues
and customer base.
CBDCs could bypass this system,
allowing digital money to flow directly
between two people,
in the same way you hand over cash at the register.
One method the Fed is considering
is issuing digital wallets to Americans directly
or through commercial banks
or other financial service providers.
The digital dollars themselves
would be no more than computer code,
possibly stored on a central ledger at the Fed
or on a distributed ledger,
like many cryptocurrencies.
When you use your wallet to pay for something,
the Fed would take the digital cash out of your wallet
and deposit it into the merchant's,
simplifying the process
and doing it without fees.
These could be done through an app on a phone
or for those without smartphones,
an SMS text message or debit card.
Besides frictionless payments,
a digital dollar could help
the 8.4 million unbanked households
who don't have a debit or credit card
and can get left behind in a cashless world.
For example, instead of mailing checks,
the government can deposit your tax refund
or stimulus payments directly into your Fed wallet,
making the money available immediately.
(till dinging)
Proponents also say CBDCs offer a much more effective tool
for central banks to enact monetary policy.
Right now the Fed influences interest rates
across the entire economy
by setting borrowing rates
between banks, known as the Federal Funds Rate.
But this is often a fraught process
that doesn't always produce the desired results.
- The Fed sets this benchmark rate
and other private banks are supposed to cue off it
and then your mortgage is supposed to cue off it.
Does that really work?
How much time does it take?
And the answer that economists will tell you
is it works but there're probably more efficient ways
to transfer monetary policy.
- [Narrator] Economists believe that if the Federal Reserve
were to assign interest rates
to the money stored in digital wallets,
it would be much more effective
at influencing economic decision making
at the household level.
According to a January survey,
60% of central banks around the world
are currently experimenting with CBDCs.
The Bahamas was the first country
to release a digital currency,
called the Sand Dollar in October 2020.
And China has been developing
and testing a digital version of the yuan
but there are questions about how a digital currency
would work in the US.
- Legitimate digital public money
could help drive out bogus digital private money.
It could help improve financial inclusion,
efficiency and the safety of our financial system
if that digital public money is well designed
and efficiently executed,
which are two very big ifs.
- [Narrator] The recent rise of cryptocurrencies
like Bitcoin and private currencies
like Facebook's Diem
have spurred central banks
to explore CBDCs in an effort to keep pace.
Experts say these alternative currencies expose the risk
of money and payments circulating outside the watchful eyes
of central banks.
- This is a blind spot for them
because when they're setting monetary policy,
they like to know how much money is in circulation,
broadly how that money is being used
and so that helps them understand the macroeconomics
and the fundamentals of the economy
at any given time.
- [Narrator] But by keeping up with new competitors,
CBDCs could threaten to leave traditional banking behind.
- So if the Fed were to become a bank
in the traditional sense,
and actually issue people money
and hold people's money directly,
then you might hold less money
in your Bank of America app
and that would cut into their business model.
So they have to think about how digital currencies
affect their business.
- [Narrator] Because of these issues,
the Federal Reserve is still studying the scope
and structure of how a digital dollar would work
and how it could be integrated
into the current banking system.
- The Fed doesn't wanna start dealing
with 300 million customers overnight.
They're not equipped to do that.
So you don't wanna call up the Fed
at midnight and say I forget my password.
This is not something the Fed wants to be doing or can do.
So they need to think about who to work with
to deliver digital dollars.
- [Narrator] The Fed would also have
to tackle privacy concerns
over how anonymous digital dollar payments should be
and whether the money should be restricted
to specific transactions
or programmed to expire after a certain time period
to encourage spending.
It plans to release a discussion paper
on the benefits and risks of a dollar this summer
and has said it would move forward
without support from Congress.
Many experts say the Fed will need
to figure out a digital dollar
to keep up with the pace
of a rapidly changing global economy.
What that looks like remains to be seen
but it could mean using this a lot less.