Is Digital Currency on the Way?

Digital Currency is on the Way

When will digital Currency start?

We have been getting a lot of questions about what happens when the Treasury comes out with the digital dollar. There are already eleven countries that have a digital currency with many more to come as it gives certain advantages from a monetary policy standpoint. The Treasury is rolling out FedNow the end of the summer 2023 which many see as a precursor to a CBDC—Central Bank Digital Currency. FedNow is a system that facilitates immediate exchange between institutions. Think about your bank bill pay system, maybe that payment to your local utility left your account but may not have been credited to the utility for a matter of days. This new system, once everyone is signed on, will result in that payment leaving your account and immediately showing up on the books of the utility. This program is intended to reduce costs by eliminating delays. Banks are closed over the weekends, but FedNow will be a 24/7 system.

A potential unintended consequence will be that banks are going to lose out on the float income, the money has left your account but not arrived to your vendor for several days during which the bank benefits from those days of incremental interest income. The government will now start to use this program for direct payments to recipients. Many of you received stimulus payments due to Covid over the last few years in check form, FedNow will allow for those funds to immediately hit the consumers accounts and thus get those funds to consumers in a much quicker time frame (About the FEDNOWSM service. The Federal Reserve. (n.d.). https://www.frbservices.org/financial-services/fednow/about.html).

How Digital Currency Works

The reason this is seen as a first step to a true CBDC issued by the Treasury is that it establishes a system that will allow institutions and later individuals to essentially have an account on FedNow. Once there is a true digital currency to roll out the infrastructure will already be in place. Many ask what it means to have a digital currency. In its simplest form, individuals and institutions will have accounts, or digital wallets, directly with the Central Bank. Then thru the FedNow system they will be able to transact business with whomever they please. We really already act in this manner, just not as efficiently. This will have an impact on banks as they will now need to be lean and focused on value added services as many deposits will leave. They will still be the predominant consumer lenders and will have to innovate to continue to grow in this new environment. There are a couple of major perceived negatives. One of which is that with a CBDC, unlike cryptocurrency, there will be no anonymity with respect to how you spend your money. Thus, in theory, the government will know a great deal about you and where your money goes. A bigger issue, from a markets’ standpoint, is that with a CBDC the Fed will have another way to affect economic growth. The main tools today the Fed uses is to raise of lower interest rates and to set bank lending standards. With a CBDC, they will have the ability to push thru stimulus direct to consumers having an immediate impact. The contrary is true as well as they could try to suppress growth by negatively impacting our digital wallets with the Central Bank (About the FEDNOWSM service. The Federal Reserve. (n.d.). https://www.frbservices.org/financial-services/fednow/about.html).

Questions about the future of Digital Currency

Needless to say, there are many questions left to be answered and safeguard to be put in place, but path to a US CBDC has already been started and we will ultimately be there. As with any major issue coming our way, we will continue to analyze how this impacts strategies we have in place and what types of companies this system will help or hurt.