The United States is considering issuing a digital dollar, which would be backed by the nation's central bank and could help reinforce the U.S. role as a leader in the world financial system. Several financial institutions, including Citibank and Mastercard, announced this week that they're testing the idea in a 12-week pilot with the Federal Reserve Bank of New York.
The interest in launching a digital currency is motivated by many factors, such as enabling faster, safer, and cheaper payments. But mostly it is an effort to keep up, as China and other countries have already issued-at least in pilot form-digital currencies backed by their central banks, and cryptocurrencies have become increasingly popular, says Bhaskar Chakravorti, dean of global business at The Fletcher School and executive director of the Institute for Business in the Global Context. For now, the interest in such currencies has persisted even after the spectacular meltdown of the cryptocurrency exchange FTX earlier this month.
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"The recent implosion of [cryptocurrency exchange] FTX should be a warning to everyone about how little even so-called experts understand about this emerging phenomenon of decentralized finance," says Bhaskar Chakravorti, dean of global business at The Fletcher School. Photo: Alonso Nichols
"If we don't have a digital dollar and other central bank currencies take off-particularly if the yuan, the Chinese currency, takes off-the dollar will definitely lose its supremacy in international settlements," says Chakravorti, who chairs the Digital Planet program at Fletcher. International settlements are the way that banks in different countries facilitate payments across borders.
Consumers won't be using digital dollars right away. Although President Biden issued an executive order on the responsible development of digital assets in March and the White House in September released a comprehensive framework for the development of a central bank digital currency, the government is still studying the issue.
If the U.S. does move ahead, this new form of currency probably won't be put into wider use for several years, Chakravorti says. The very limited 12-week pilot involving the Federal Reserve Bank of New York will be rolled out soon using simulated digital tokens and data.
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