Aug 24, 2020 - Economy

Coronavirus pandemic could trigger a digital currency race

Animated illustration of a hand holding a rotating glowing golden pixel coin.

Illustration: Aïda Amer/Axios

China is moving ahead "rapidly" with its version of a central bank-issued digital currency and the Fed looks to be prioritizing development and moving forward with urgency to produce one in the U.S. as well.

Why it matters: Digital currencies would provide a number of new policy tools to help stimulate the economy, including allowing Congress to send money more quickly and efficiently to Americans or facilitating direct transmissions from the Fed to consumers.

What's happening: Spending patterns by the unemployed and others who received funds through the CARES Act and private company progress on digital currencies "has intensified calls for [central bank digital currencies] CBDCs to maintain the sovereign currency as the anchor of the nation's payment systems," Fed governor Lael Brainard said in a speech earlier this month.

  • "Moreover, China has moved ahead rapidly on its version of a CBDC."

Watch this space: Separate House and Senate bills have emerged this year proposing the creation of digital currencies.

The big picture: Congress' inability to pass additional economic stimulus could put more pressure on the Fed to hold up the economy, and its current tools are ill-suited to do so.

  • The Fed's Main Street Lending Program, its most high-profile effort to directly help individual Americans and smaller businesses, has provided less than one half of 1% of its $600 billion mandate.
  • The growing talk of the K-shaped recession in the U.S. has led to concerns that the Fed is driving income and wealth inequality, and even prompted a Senate bill to give the Fed a third mandate to reduce inequality.

The intrigue: A digital currency could also help the Fed implement monetary policy by setting interest rates on consumers' accounts holding the digital currency — analysts say this also could be a more efficient way for the Fed to institute negative interest rates to boost consumption and inflation.

Between the lines: China already is far ahead of the U.S. and much of the developed world in mobile payments, and a new digital currency could provide another avenue to challenge the dollar's supremacy as the world's funding currency.

What's next: The Fed could provide some hints on the next steps in developing a digital currency at its annual Jackson Hole Symposium, which is set to kickoff virtually on Thursday.

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