Feb 25, 2021 - Economy

The digital dollar is now high priority for the Fed

Digital coin spinning

Illustration: Aïda Amer/Axios

The U.S. is starting to get serious about a central-bank-backed digital currency, with recent comments from top officials laying out the strongest support yet.

Driving the news: On Tuesday Fed chair Jerome Powell told Congress that developing a digital dollar is a "high priority project for us," but added that there are "significant technical and policy questions."

Why it matters: More consumers and financial institutions are transitioning toward digital payments, putting greater pressure on policymakers to ensure the dollar's status as the world's reserve currency remains intact.

The big picture: Powell's "high priority" language and the ensuing report reflect a shift in rhetoric and action from the Fed, which had previously urged caution and patience on the development of a digital dollar.

  • Treasury Secretary and former Fed chair Janet Yellen had similar comments earlier this week, saying, “It makes sense for central banks to be looking at” the issue.
  • “Too many Americans don’t have access to easy payments systems and banking accounts, and I think this is something that a digital dollar, a central bank digital currency, could help with. It could result in faster, safer and cheaper payments, which I think are important goals.”

What's happening: Cash accounted for just 20.5% of all in-store payments globally, down by nearly a third from 2019, according to a report from financial services company FIS. By 2024 FIS expects that to drop to 13%.

  • "The pandemic accelerated the decline of cash by over three years, exceeding in 2020 our previous projection for 2023," FIS analysts note in the report.

Between the lines: Perhaps more important than the decline in cash usage is the growing popularity of cryptocurrencies and the acceleration of real-world testing by China's central bank of its own digital currency.

  • Data analysis company MicroStrategy announced Wednesday it had purchased another $1 billion of bitcoin, while payment processor Square announced it had added another $170 million of the cryptocurrency.
  • China on Tuesday said that the People's Bank of China was extending testing of its digital renminbi to the city of Chengdu, which is home to 16 million people.
  • And the PBOC announced it would be participating in a cross-border payment project with the central banks of Thailand, United Arab Emirates and Hong Kong that would explore distributed ledger technology.
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