Excited About a Digital Dollar? Not So Fast.

The privacy technology isn’t ready. Meanwhile, there’s a lot the U.S. can do to improve the existing payment system.

By Darrell Duffie / BLOOMBERG

President Joe Biden’s effort to craft a U.S. strategy for cryptocurrencies has highlighted a big question: Should the Federal Reserve enter the fray by issuing a digital version of the national currency, as China and others have already done?

Although some are urging the U.S. to act, there’s really no need to rush that decision. The digital-currency technology required to safeguard Americans’ privacy will take years to develop. Meanwhile, policy makers can do a lot to improve the payment system by other means.

So far, the main opposition to a U.S. digital currency has come from the banking industry. Some argue that each additional digital dollar issued by the Fed would mean one less dollar of bank deposits. This, in turn, would sharply reduce the lending power required to support economic growth.

Serious bankers know better. If banks were forced to compete against a central bank digital currency, the best available researchsuggests that they would offer higher interest rates, attracting more deposits and perhaps even increasing credit provision. Granted, profits could decline, which might be the industry’s genuine concern. But disruption of banks’ traditional franchises in deposit-taking and payments is likely coming anyway. Some are preparing, others will get left behind.

That said, there’s a more significant reason for concern about digital currencies: How to protect users’ privacy, while also allowing authorities to combat money laundering and other illicit activity?