2022 has been the year of the digital dollar. In January, the Fed released a report on the digital transformation of the dollar and in March, there was an ask for government agencies to investigate the risks and opportunities in cryptocurrencies that called on the Treasury Department to look into creating a government controlled digital currency. Janet Yellen also gave her first speech on “transformative” digital assets. Although most Americans have heard about cryptocurrencies or digital money, only 16% have actually made an investment, fewer than the 24% who feel very informed about it. Sure, unbacked cryptocurrencies are fear-inducing, but a digital dollar would be an avenue for these currencies and the start of a digital financial revolution with the security and backing of the U.S government.
Inflation is rising, and the US economy is up. But on the ground, as people spend more in the post-pandemic boom, we see a lack of goods due to supply shortages, soaring prices, and no one at the register. Main street is already feeling what many have felt on Wall Street this week. There's a looming concern about an inevitable downturn in the coming months. Why are so many people feeling the stress of the economy and how can a digital dollar get us out of this mess? We have to start by looking at where we started, 2019.
In 2019, the Federal Report on Economic Well Being showed that many Americans did not have $400 to address and unexpected expense that would be disruptive to their families. COVID exposed the fragility of that system. And while it is true that Pew and others have seen the price of flexible indicators like food, airline travel, and other goods soar, the reason so many Amerians are worried is that they already had less to spend to begin with.
Pew documented downward income shifts among 32% of upper income earners and 16% of middle-income earners. During the pandemic, I and millions of other Americans, saw systems that supported us fail as people lost their jobs and living got too expensive. The government on one hand, was unable to meet the moment and we saw websites fail, unemployment fraud, and stimulus checks that took months to hit the people’s wallets. The social sector on the other, largely failed to deliver, stymied by regulations and budget cuts. While it was inspiring to see people help each other in the informal economy of activism like GoFundMe’s, mutual aid projects, and peer to peer support, it became clear that our economy is shaky and we don’t have the tools to stabilize it.
Among those who stopped spending money, it is true some saved as student loan payments paused and the social calendar evaporated. However, that is also part of the problem:
Many individuals decided to spend it in 2022 as the economy has picked up with so-called “revenge” spending, further driving up prices. If demand drops, prices will stay high, due to the high costs associated with transportation like the absence of available containers compared to larger break bulk shipping, as well as the costs of labor and raw materials.
Fed officials have said they want to raise interest rates to a neutral rate of 2.4% but because of inflation, supply-chain issues, employment, and demand, that “magic number” has become a moving target. What would it look like if we stopped shooting in the dark? Research on a Central Bank Digital Currency at Rutgers has shown how much more impact monetary policy could have on the economy if it was done through a digital dollar.
Rather than having quarterly rate increases with hard to track outcomes, we could have smaller, targeted shifts that more accurately represent the current world we live in: fast-paced , fueled by uncertainty, and rapidly shifting. These shifts could allow the Fed to make decisions that you could feel right now rather than too late, which many economists are touting is the case right now. So how could it do this and what’s stopping this from becoming a reality?
This technology would allow commercial banks to work with the Fed as they usually do, to adjust for inflation, decreasing prices across sectors and allowing for closer monitoring of how we spend money to better allocate rates. We saw this after 2008, when the Fed introduced policies to try to influence both markets and macroeconomic policy. It could also do things like ensuring access or rebates in lieu of stimulus checks for specific types of essential goods, like groceries or gasoline, for example, and generate anonymized information on broader trends around consumer spending. Knowing consumer spending isn’t enough. We could know whether we are just spending more money on the same things like gas prices for example, or whether we are actually contributing to the growth of new markets.
Who are these early adopters? Like many young Americans, I already opt for digital app-based payment alternatives, like Venmo. In fact younger people are using cash at low rates, with 25-34 year olds using it for 11% of transactions and 18-24 year olds at 20%, marking the biggest cash adoption drop in a generation as they move towards debit cards as their first payment methods to use as adults. Apps like Venmo,. Square, and Cash app all have introduced debit cards that hold their own “cash.” A digital dollar could increase access for unbanked and underbanked Americans, helping populations ignored and deemed unprofitable by big banks.
Not surprisingly, much of the interest around digital money originated among people, communities, and countries where traditional banking is absent or the economy is unstable. Chime, the rapidly growing digital bank looking at a valuation of $40 billion, focuses on young and underbanked people. In the U.S., Asian and Latino young men are the most likely to have used cryptocurrency, followed by Black men, according to Pew. When we look at places that have been successful in the adoption of digital currency, regions like the Caribbean and developing economies rise to the top. There’s D-Cash in the Caribbean, the Nigerian E-Naira, and the Chinese E-Yuan.
In Nigeria and Kenya, peer to peer payment options akin to Venmo also rule, with many of these countries leapfrogging over traditional bank accounts . Makhtar Diop, Managing Director of the International Finance Corporation, recently mentioned at The University of Chicago the role the IFC can have in investing in fintech startups in the global south, like Wave in Senegal, to increase economic development and lower entry for more solutions as they become so widespread in these countries they create monopolies.
As younger, diverse Americans are being drawn to innovative financial technologies both in the U.S. and abroad, the reality of a digital dollar is becoming much more attractive. The advent of digital U.S. currency would reroute our economy more efficiently, increase access to banking in partnership with the private sector for millions of Americans, and would stabilize the economy as our world grows increasingly uncertain.
