A digital currency should serve the public interest, not the banks

Last month, the U.S. Federal Reserve released a report on how the U.S. could update its currency for an “era of digital transformation.” While the long-awaited assessment doesn’t come to a conclusion on whether a new digital dollar would be a good idea, the way it breaks down the issues confuses the interests of the financial industry with those of the public. United needs a digital dollar that serves households and businesses, not banks and fintech companies looking to put up toll barriers for e-commerce.

The Fed is losing sight of the public interest in several ways. He insists that private companies should play a role in providing any new federal digital dollar. He also voices “concerns” that a digital dollar could divert individuals and businesses away from bank deposits, which would be costly for banks. To avoid this, the Fed suggests designing the digital dollar to be “less attractive” – for example, by paying no interest.

The Fed’s biased analysis comes after a year of rapid developments. In 2021, the cryptocurrency craze has gone mainstream. The exceptional value of Tether, a “stablecoin” designed to trade at par with cash, has exceeded $70 billion. Circle’s USD Coin approached $50 billion. PayPal’s more traditional Venmo app has siphoned more business from banks. Globally, China and the Bahamas have both introduced Central Bank Digital Currencies (CBDCs). The Chinese version allows instant transactions on phones through an app with no risk of default and no fees.

US private banks, savings associations and credit unions have a legal monopoly on deposits. Their offers are poor. Bank payments in the United States are among the slowest in the developed world; it can take days to transfer the money from the deposit account. The fees are high, often exorbitant. And the proportion of the American population without a bank account is worse than in Canada, France, Germany, Japan, Italy, Singapore, Spain and even Iran. Fed officials airbrush this issue in their report. They also put their thumbs in the balance when it comes to imagining America’s monetary future. According to the Fed, a public option for digital currency would likely need to be watered down: provided through existing financial institutions, with capped balances and no interest paid. These features would protect profit margins in the financial sector, but it is difficult to see how the public would benefit.

The Fed already offers digital cash — and has done so for decades — but only to banks and other financial institutions. Its “main accounts” pay higher interest (currently 0.15%) than consumers, are uncapped and allow instant payments.

In reviewing a retail option, the Fed also miscalculates costs and benefits. First, it suggests that it would be bad for a new digital dollar to be so attractive that it crowds out existing forms of money, such as bank deposits and money market mutual funds, as this would reduce the availability of credit. . But the Fed cites no evidence that creating better forms of money will limit lending. And existing non-bank forms of money, as the Fed acknowledges, were the root of the 2008 US crisis. Less of those would be good.

Second, the report repeats the bogeyman that offering a US digital dollar will exacerbate financial instability. As Wall Street has argued, and as the Fed argues, good public money would cause people to flee private money in times of uncertainty, which would make panic worse. This is an indictment of existing arrangements, not a reason to refrain from reform. And if the new digital dollar crowded out private money, that would reduce the panic problem.

Third, the Fed’s assessment overlooks the financial benefits of creating a digital dollar. Commercial banks are currently earning $70 billion per quarter, in part by creating deposit balances (which, as the report notes, are a form of digital currency). A Fed option for digital dollars would reduce these profits. It would also allow the Fed to increase the assets on its balance sheet, claw back some profits from the banking sector, and increase the money it transfers to the Treasury by potentially tens of billions a year. In other words, a digital US dollar would reduce the deficit and strengthen the government’s fiscal position.

We don’t need to settle for a “skimmed milk” CBDC that would create opportunities for the private sector to extract more fees and revenue from the public while foregoing huge potential gains for households and businesses. American companies.

Instead, the United States should develop a zero-fee digital dollar that facilitates instant payments, lowers costs for small businesses, and increases access to digital payment options. Such a comprehensive package would allow the government to distribute stimulus quickly and easily during an economic downturn. It would be more efficient, saving the economy billions of dollars in costs. And that would be fairer. If we want to design a new public money, let’s put it at the service of the public.

Lev Menand and Morgan Ricks are Associate Professor of Law at Columbia Law School and Professor of Law at Vanderbilt University, respectively.

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