– [Narrator] The Federal
Reserve might want to fix your wallet by turning it from this into this. (phone beeping) Though your wallet is still
designed for dollar bills, Americans have been using cash
to buy things less and less over the years. (till dinging) That's part of why the Fed
is considering digitizing the US dollar, giving
people money they can access on their phone and bypassing
electronic payments that can be slow and
costly for businesses. Some see this as a necessary upgrade to the US financial
system but others worry it could potentially
upend commercial banking.
– There's some very, very
difficult questions to answer but I think we, and we are
engaged in a serious program to understand both the technology and the policy issues. – [Narrator] A central bank
digital currency, or CBDC, is exactly what it sounds like, a purely digital form of
a country's money issued by its central bank that
people can use just like cash. It's true that cards
and apps already allow for electronic payment but behind the scenes, these financial transactions
involve several steps, settling payments over
a patchwork of systems. – The plumbing of the system is still based on a cash system. – [Narrator] Josh Lipsky is the director of the Atlantic Council's
GeoEconomics Center and says the US financial system is still pretty old school when it comes to moving money around. – It's based on banks talking to banks, saying hey, I need you
to transfer this to me.
We've updated some of that over the years but actually, if you were to look back, a lot of it dates back
to the 1950s and before. And that's not a great way to
run a modern global economy. – [Narrator] After a debit card is swiped, the transaction can flow
through several entities, including point-of-sale systems, payment networks like Visa and Mastercard, your bank and the merchant's bank. The system can take up to three days to move money between accounts and often comes with transaction fees that can weigh heavily
on small businesses, who experts say may have to pass the cost onto customers or put
restrictions on card usage. These extra costs can limit their revenues and customer base. CBDCs could bypass this system, allowing digital money to flow directly between two people, in the same way you hand
over cash at the register. One method the Fed is considering is issuing digital wallets
to Americans directly or through commercial banks or other financial service providers.
The digital dollars themselves would be no more than computer code, possibly stored on a
central ledger at the Fed or on a distributed ledger, like many cryptocurrencies. When you use your wallet
to pay for something, the Fed would take the digital
cash out of your wallet and deposit it into the merchant's, simplifying the process and doing it without fees. These could be done
through an app on a phone or for those without smartphones, an SMS text message or debit card. Besides frictionless payments, a digital dollar could help the 8.4 million unbanked households who don't have a debit or credit card and can get left behind
in a cashless world. For example, instead of mailing checks, the government can deposit your tax refund or stimulus payments directly
into your Fed wallet, making the money available immediately. (till dinging) Proponents also say CBDCs offer
a much more effective tool for central banks to
enact monetary policy. Right now the Fed
influences interest rates across the entire economy by setting borrowing rates between banks, known as
the Federal Funds Rate. But this is often a fraught process that doesn't always produce
the desired results.
– The Fed sets this benchmark rate and other private banks
are supposed to cue off it and then your mortgage is
supposed to cue off it. Does that really work? How much time does it take? And the answer that
economists will tell you is it works but there're
probably more efficient ways to transfer monetary policy. – [Narrator] Economists believe
that if the Federal Reserve were to assign interest rates to the money stored in digital wallets, it would be much more effective at influencing economic decision making at the household level.
According to a January survey, 60% of central banks around the world are currently experimenting with CBDCs. The Bahamas was the first country to release a digital currency, called the Sand Dollar in October 2020. And China has been developing and testing a digital version of the yuan but there are questions
about how a digital currency would work in the US. – Legitimate digital public money could help drive out bogus
digital private money. It could help improve financial inclusion, efficiency and the safety
of our financial system if that digital public
money is well designed and efficiently executed, which are two very big ifs. – [Narrator] The recent
rise of cryptocurrencies like Bitcoin and private currencies like Facebook's Diem have spurred central banks to explore CBDCs in an
effort to keep pace.
Experts say these alternative
currencies expose the risk of money and payments circulating
outside the watchful eyes of central banks. – This is a blind spot for them because when they're
setting monetary policy, they like to know how much
money is in circulation, broadly how that money is being used and so that helps them
understand the macroeconomics and the fundamentals of the economy at any given time. – [Narrator] But by keeping
up with new competitors, CBDCs could threaten to leave
traditional banking behind. – So if the Fed were to become a bank in the traditional sense, and actually issue people money and hold people's money directly, then you might hold less money in your Bank of America app and that would cut into
their business model.
So they have to think about
how digital currencies affect their business. – [Narrator] Because of these issues, the Federal Reserve is
still studying the scope and structure of how a
digital dollar would work and how it could be integrated into the current banking system. – The Fed doesn't wanna start dealing with 300 million customers overnight. They're not equipped to do that. So you don't wanna call up the Fed at midnight and say I forget my password. This is not something the Fed
wants to be doing or can do.
So they need to think
about who to work with to deliver digital dollars. – [Narrator] The Fed would also have to tackle privacy concerns over how anonymous digital
dollar payments should be and whether the money should be restricted to specific transactions or programmed to expire
after a certain time period to encourage spending. It plans to release a discussion paper on the benefits and risks
of a dollar this summer and has said it would move forward without support from Congress. Many experts say the Fed will need to figure out a digital dollar to keep up with the pace of a rapidly changing global economy. What that looks like remains to be seen but it could mean using this a lot less..