On 15 August, the United States marked the 50th anniversary of the birth of fiat currency, or a currency that depends on faith in the Federal Reserve and not in the gold standard. Like most 50th anniversaries, this one shows the celebrant worse for wear.
The ‘almighty dollar’ is facing a raft of challenges from other supra-national currency powerhouses such as China and from giant technology companies that understand they would exercise even more market clout if they controlled not just what we buy and sell, but also how we pay for it. If the Fed doesn’t quickly redefine the dollar to reflect its rapid digitalization by other hands, central banks will join shopping malls on the long list of complacent category leaders felled by agile competitors.
When the Fed designs the US central bank digital currency (CBDC), it must focus not only on its own concerns, including how it would impact the transmission of monetary policy, but also on ensuring that CBDC is money that materially improves economic opportunity. This does not and must not mean manipulating a digital dollar’s value to advantage one group or another; it means that digital dollars need to be a truly neutral transmitter of value just like physical dollars.
Although Fed Chair Jerome Powell disputes any of the risks digitalization poses to the dollar as both fiat and the primary global reserve currency, the US central bank is preparing for a possible assault. And while work is underway, nothing said by Fed officials so far indicates any awareness about the importance of a CBDC’s design beyond just the Fed and the banking system. There are four design features essential for equitable CBDC.