Should the US payment system have a digital currency? | Opinion

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The payment system in the US is efficient and, together with the deposit insurance provided by the Federal Deposit Insurance Corporation, is extremely secure. However, there are challenges facing our payment system. According to the Federal Reserve, more than seven million, or 5 percent of households, remain unbanked. Nearly 20 percent have bank accounts but still rely on more expensive financial services like money orders, check cashing services and payday loans.

Reasons for being unbanked vary, for some it’s not having enough funds to meet minimum deposit requirements or high fees, for others it’s mistrust of the banking system or privacy concerns. Whatever the reason, a quarter of Americans don’t benefit from our current payment system. For these and other reasons, the Fed is considering creating a digital currency that would be available to the public.

One of the functions of the Federal Reserve is to provide a payment and settlement system to the banking community and the United States government. In the US we have three forms of money, central bank money (currency issued by the Fed), commercial bank money (checking accounts at financial institutions), and, to a much lesser extent, non-bank money (for example, Pay Pal and ApplePay). What we don’t have is a federally issued digital currency that is available to the public. A digital currency is a payment method that exists only in electronic form. Digital currencies allow instant transactions and international transactions. Digital currencies may have restrictions, unlike physical currencies which do not.

Currently, only commercial banks and a few other entities, such as foreign central banks, have a digital currency account with the Federal Reserve. By law, the public is not allowed to hold accounts at the Federal Reserve, but there is a growing feeling that perhaps the time has come to start offering a digital currency to the public. China has been offering its citizens a digital currency since 2014. Earlier in January, two small private Chinese banks announced they would no longer provide note- or coin-related services, the latest sign that China is accelerating its march toward a society without money. cash.

Creating a digital currency that is available to the public would be a risk-free account from which consumers could make purchases, pay bills, and the government would use the digital currency to collect taxes or make benefit payments directly to families. Digital accounts might have no minimum balance requirements, no fee structure, and no credit or liquidity risk, a digital currency would be the safest possible form of money.

A digital currency could also be used to provide assistance in times of financial need. Pandemic stimulus checks were quickly distributed to families who had filed taxes electronically, for others there were significant delays. But other social programs that operated through third parties, such as commercial banks or state governments, had serious distribution problems. Pandemic unemployment assistance, the emergency rental assistance program, and the PPP loan program failed to reach large numbers of unemployed workers, renters, and small-business employees, problems that would not have existed if government agencies were able to make deposits. directly to individuals. digital accounts.

While a digital currency would benefit consumers, there are serious policy issues and risks that need to be assessed. A digital currency would drastically alter the structure of the American financial system. Banks rely on customer deposits to finance loans to consumers and commercial businesses. A massive shift from commercial bank deposits to digital accounts could disrupt lending activity.

If a digital account earns interest, it could drain funds from low-risk assets, such as shares in money market mutual funds and Treasury bills, again reducing the availability of credit and increasing borrowing costs for businesses and governments. These problems could be less severe if the Federal Reserve did not pay interest on digital accounts or if it limited the size of digital accounts.

A final problem for those advocating a digital currency is where to house the accounts, by law they cannot reside in a Federal Reserve Bank. They could reside in commercial banks, but that brings us back to the issue of public trust. One suggestion that has been put forward is to allow the post office to participate in postal banking. The initial proposal was to allow the post office to offer savings accounts, but allowing them to offer digital accounts could be a viable solution.

The bottom line here is that the world is going digital. China is making a big push to go digital and have the e-yuan replace the dollar as the world’s reserve currency. This threat, coupled with the benefit to low-income families, should prompt us to quickly and seriously consider issuing a digital currency.

Gary Latanich, Ph.D., is an emeritus professor of economics at Arkansas State University. He can be contacted by email at [email protected]

Gary Latanich, Ph.D., is an emeritus professor of economics at Arkansas State University. He can be contacted by email at [email protected]

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