A digital dollar is for banks and governments, but not you

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WASHINGTON, DC (THE STRAITS TIMES)  – Almost nobody talks about digital dollars any more.

Just a couple of years ago, as cryptocurrency was peaking and China was experimenting with a virtual version of the renminbi, Washington was abuzz with the idea that the United States Federal Reserve could create America’s own digital currency.

Enthusiasm faded as people began to hash out the details. Although, in theory, digital dollars could provide wider access to the financial system, in practice, using them would require a smartphone and a banking relationship, which some low-income people lack.

Banks complained that giving consumers a safe way to store electronic cash could lead to a drain on deposits, potentially undermining their stability during a financial scare. Politicians raised fears of government surveillance of retail transactions. And, of course, the crypto crash happened – digital money lost its glamour.

“The promise of financial inclusion is still there, but the hype got ahead of reality,” said Mr J. Christopher Giancarlo, a former chairman of the Commodity Futures Trading Commission and co-founder of the Digital Dollar Foundation, a non-profit advocacy group.

Still, the idea is not dead. While you may never spend a digital dollar yourself, a technological leap may be coming for the money that moves among central banks and big financial institutions.

Think of it as a wholesale digital dollar. A group of researchers from the New York Fed and a handful of top banks have been experimenting with simulated digital payments. They have shown it is possible to use blockchain-like technology to zip money almost instantly around the world 24 hours a day, 365 days a year.

In one sense, these dollars already are digital.

Big money is not held in the form of paper bills; it is simply an account entry at a bank and moving it is a matter of changing the entries on a computer.

But cross-border transfers can sometimes be painfully slow. Each one involves recording parallel changes in at least three, and frequently more, entirely segregated databases – those belonging to two banks and the Fed. This necessitates a series of messages requesting and confirming every step as assets are handed from party to party.

Although many international transfers settle within minutes, they screech to a halt on weekends and when there is a holiday in any involved country.

Transfers to and from small countries usually take longer because local banks often must work through larger banks, frequently in separate countries, that hold accounts at the Fed. The more intermediaries and countries involved, the more likely the transaction will be delayed, sometimes for days, and the more chance for error.

This represents an opening for countries keen to loosen the greenback’s dominance in international payments. About half of global trade is invoiced in US dollars – and the dollar’s top-dog status makes US borrowing cheaper and helps keep the currency stable. It also aids the enforcement of economic sanctions, since dollar transactions ultimately flow through US-regulated banks.

Efforts to speed up global payments include Project mBridge, an experiment involving the People’s Bank of China and the central banks of Hong Kong, the United Arab Emirates and Thailand. The most advanced project of its kind, it is testing ways to handle transfers and foreign exchange transactions in multiple digitised currencies.

“Wholesale payments are cross-border,” said Mr Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Centre in Washington. “If you’re truly concerned about the role of the dollar in the world, the project you should be focusing more on is actually the wholesale project, not the retail project.”

One way to smooth wholesale transactions would be to “tokenise” dollars that commercial banks keep on deposit at the central bank, turning them into Bitcoin-like digital packets, but without the anonymity that makes crypto so popular for illicit trade.

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