Doc's Daily Commentary
Mind Of Mav
The Digital Dollar Is Coming. Are You Ready?
The term “Digital Dollar” has been popping up in several stimulus drafts lately, as well as various white papers from the IMF and other finance-related institutions, and also private-sector projects over the last few years. While a new currency is unlikely to be instituted as a result of a 5-page Senate bill, its presence should act as a reminder of where the financial system is most certainly headed — even if not by way of official legislation just yet.
Bitcoin was a wake up call, though it originally wasn’t spoken of by leaders as a global threat.
Years before Gen Z was born, we just understood that money can’t move on weekends — because bankers don’t work on weekends. We assumed that we needed to pay a fee to transfer money. If you needed to give your friend 10 bucks and you had no cash on you, you were out of options without heading to the closest ATM. All that and more has changed, making us collectively realize that artificial hurdles had been in place to basically inconvenience us, and cost us more money.
Today, banks and their old stodgy ways of doing business have been falling behind. In a time of 24/7 instant payments using PayPal, the Cash app, or a dozen other FinTech services, banks seem slow and inflexible.
The banks and the Federal Reserve realized that the financial system is being taken over by tech and reinvented right in front of them— so they’re finally stepping into the 21st-century.
Bitcoin was a wake up call, though it originally wasn’t spoken of by leaders as a global threat. Then came Facebook‘s announcement of its intentions to launch Libra, which caught quite a lot of hell by Congress. China is already piloting their new Digital Yuan in three cities, and in the Hong Kong special economic zone.
In short, unless you’ve been a world traveler, you wouldn’t realize just how far behind the US is with modernizing the money and banking systems. Parts of Sweden are almost entirely cashless. In India, you can use your fingerprint or an iris scan to access money.
Without digressing too much into the proposed bills themselves, here is the gist of the changes we’ll begin to see implemented fairly soon:
An all-digital US currency referred to as the Digital Dollar;
Your new bank account at the Federal Reserve.
It’s important to note that some of these bills haven’t passed, and since Republicans haven’t been too keen on stimulus bills submitted by Democrats, any other pending bills may not pass either — but that does not at all mean the financial system is not moving forward with it’s modernization efforts – of which the Digital Dollar, and Fed-based bank accounts, represent just a small piece.
This extends far beyond US consumer needs — much of the world is getting on board with the digitization of money; so the powers that be realize modernization needs to be part of the global financial system, lest the US lose influence — just as banks have lost influence over consumers.
Below I’ll explain more about the current topic, and in upcoming articles I will write in far more detail about the technical aspects, the Geopolitical reasons and ramifications of these changes, reasons we should be concerned, and much more.
Not only has cryptocurrency gained a wider acceptance, but the government truly considered Facebook‘s Libra as a very real threat to the system.
It may seem unlikely to you and me — but if we look to China, we see Ant Group’s AliPay, and WeChat Pay, who’ve both gained relative dominance in their markets in a very short period of time. They are not banks — they are FinTech companies, just like PayPal when it began. After all, the Internet is not closed at 5 PM and on weekends.
Wait — isn’t our money already digital? And why would we need accounts at the Fed?
About 97% of today’s dollars are digital, yes — however the coming Digital Dollar is a different beast. The remaining 3% of the money is physical, with coins created by the US Mint, and paper money coming from the Bureau of Engraving and Printing. The 97% that is digital however, is created by commercial banks, completely based on lending. If it wasn’t borrowed, it doesn’t exist — that is what a debt-based monetary system entails.
The Fed does not create the money you and I use — yet. That is extremely likely to change, however.
In the near future, the Federal Reserve will create Digital Dollars, and the Fed will maintain your “Digital Dollar Wallet Account” — likely called a FedAccount, or a Pass-Through FedAccount.
You’ve probably noticed that the Fed doesn’t exactly have branches near you. The ideas on the table are to utilize the current commercial bank infrastructure effectively as a branch for the purpose of the FedAccount (hence, a “pass-through account”).
This does not mean your current bank account will go away overnight; in fact, it may be around for quite awhile, but that doesn’t mean you shouldn’t pay attention.
Additionally, there are calls for credit unions, and US Postal Service locations to make your FedAccount accessible, as well as provide ATM’s and banking services.
As to why these changes are happening, I’ll cite several reasons — some of which will be the public arguments for the changes, and others that I’ve found while sifting through many white papers on the subject.
Publicly, as you would garner from the proposed Senate bills, the primary reasons are:
1-To get stimulus to individuals faster and more effectively, since the Fed has enough independence to react quickly as we’ve seen;
2-To reach the unbanked, and the under-banked (i.e., a more “inclusive” financial system);
3-Theoretically, to overcome the problem of top-down money through the current system taking approximately 18 months to reach the “real” economy.
Now, are you ready for the real reasons? Reasons that were cited as far back as at least 2015, long before the pandemic? I hope so!
1-So many consumer credit scores have been trashed from debts and job losses, that the big commercial banks won’t give those consumers accounts now. Alternate means, like money orders and FinTech apps offer a way out. FinTech services like Square’s Cash App, (which can handle most of the functions of a bank — deposits, debit card, withdraws and money transfer), run as a layer on top of the system, but they don’t benefit the big banks the same way. The government wants everyone included in the traditional banking system.
2-The Federal Reserve has been struggling to hit their inflation target of 2%, and at this point, the Fed is out of tools. The reasons they can’t get inflation, in my humble opinion, are A) So much of the stimulus goes to the top and and does not circulate in the real economy where needed, and B) a tidal wave of business failures, personal bankruptcies, and debts unable to be repaid — which are cancelling money out of the money supply faster than it can be replenished.
3-Even without proof, the Fed seems to believe that “if only they could take the 0% interest rate even lower, THEN we’d get inflation. After all, it’s better than recognizing the significant inequality problem.”. They refer to this as the ZLB, “The Zero Lower Bound”. (see “Breaking Through the Zero Lower Bound”, IMF, Oct. 2015)
4-The US economy has been struggling, and we are losing our grip on controlling the world’s financial system.
5-To ultimately transition away from cash to a fully Digital Dollar. It costs banks money to deal with physical cash, anywhere between .5% and 1% of GDP on average. Cash in physical dollars is always “at par” — always one dollar. True inflation means it’s worth less, but physical money is a real hindrance to devaluing the dollar. I don’t want to think about what that means, either.
Additionally, digital currencies, such as Ethereum, have the ability to be programmable. I have a tremendous amount to write about this, coming in a future article. Suffice to say the idea of “Stimulus” is to stimulate the economy. It doesn’t do that unless it’s spent — not saved, not used to pay debts — spent.
I believe this will all culminate into the US population and all US-based businesses ultimately having new bank accounts that appear normal, but are actually administered by the Federal Reserve instead of the commercial banks, credit unions, etc. It does not mean that your current bank account(s) will go away overnight, but will be separate; and it may very well mean that if there’s no significant improvement in the economy and stimulus must again be provided, it will very likely go to this new “FedAccount”, once online. Ultimately, we will fully transition to this new Digital Dollar currency, and eventually, cash will stop being circulated. Hopefully not too soon.
…if there’s no significant improvement in the economy and stimulus must again be provided, it will very likely go to this new “FedAccount” once online.
If you haven’t looked into this phenomenon of a central bank digital currency, you will be quite shocked when you see the sheer volume of literature available on the topic. The digital money transition is something that has been considered for quite some time, along with the consumer and Geopolitical ramifications
Now, we must step back for a wider view of the various happenings around the world, as well as some technological advances in the currency space. My hope is that this somewhat disparate information will coalesce into an understanding of the importance, recent developments, and where things are likely headed.
Beyond that, it may get a bit Orwellian. Stay tuned.
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