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

The Fed loses sight of the public interest in many ways. It emphasizes that private firms must have a role to play in providing any new federal digital dollar. It also expressed “concerns” that a digital dollar could turn people and businesses away from bank deposits, which would be costly for banks. To avoid this, the Fed suggests making the digital dollar “less attractive” – for example, not paying any interest.

The Fed’s skewed analysis comes after a year of rapid growth. In 2021, the cryptocurrency craze went mainstream. The outstanding value of Tether, a ‘stablecoin’ designed to trade the equivalent of cash, has topped $70 billion. Circle’s USD Coin Closes To $50 Billion. PayPal’s more traditional Venmo app snatched more business from banks. Globally, both China and the Bahamas introduced central bank digital currencies (CBDCs). China’s version allows instant transactions over the phone via an app with no default risk and no fees.

US private banks, savings associations and credit unions have legal monopolies on deposits. His offerings are negligible. US bank payments are among the slowest in the developed world; It may take a few days to transfer money to the deposit account. Fees are high, often extortionate. And the proportion of America’s population without a bank account is worse than that of Canada, France, Germany, Japan, Italy, Singapore, Spain, and even Iran. Fed officials flagged this problem in their report. They also put their thumbs up when it comes to envisioning America’s monetary future. According to the Fed, a public alternative to digital money should probably be reduced: provided through existing financial institutions, with limited balances and no interest. These features will protect the profit margins of the financial sector, but it is hard to see how the public will benefit from it.

The Fed already offers digital currency—and has been doing so for decades—but only to banks and other financial institutions. Its ‘master accounts’ pay higher interest (currently 0.15%) than consumers, are uncapped and allow instant payments.

In surveying retail options, the Fed also miscalculates costs and benefits. First, it suggests that it would be bad if a new digital dollar is so attractive that it ousts existing forms of money such as bank deposits and money market mutual funds, as it would reduce credit availability. But the Fed offers no evidence that creating better forms of money will limit lending. And existing non-bank forms of currency, as acknowledged by the Fed, precipitated America’s 2008 crisis. Less of these would be good.

Second, the report suggested that the offering of the US digital dollar would increase financial volatility. As Wall Street has argued, and as the Fed argues, a good public currency will cause people to run away from private money in periods of uncertainty, making the panic worse. It is an indictment of existing systems, not a reason to avoid reform. And if private money gets crowded into the new digital dollar, it will reduce the panic problem.

Third, the Fed’s valuation ignores the financial benefits involved in creating a digital dollar. Commercial banks currently earn $70 billion a quarter partly by creating deposit balances (which, as the report noted, are a form of digital currency). A Fed substitute for the digital dollar would reduce these profits. This would let the Fed expand the assets on its balance sheet, recapture some profits from the banking sector, and increase the money transferred to the Treasury by potentially tens of billions per year. In other words, a digital US dollar would reduce the deficit and strengthen the financial position of the government.

We don’t need to settle for a ‘skim milk’ CBDC that would create opportunities for the private sector to extract more fees and income from the public while sacrificing huge potential benefits for American families and businesses.

Instead, the US should develop a no-fee digital dollar that facilitates instant payments, lowers costs for small businesses and increases access to digital payment options. Such a full-power offering would allow the government to quickly and easily distribute stimulus in an economic downturn. It would be more efficient, saving the economy billions in costs. And it would be more justified. If we’re going to design a new public money, let’s make it serve the public.

Lev Menand and Morgan Ricks are respectively an associate professor of law at Columbia Law School and a professor of law at Vanderbilt University.