Digital Dollar Exploration Gets Backing From Treasury Secretary Yellen

Full steam ahead for the digital dollar — but no go for bitcoin as (widespread) transaction mechanism?

U.S. Treasury Secretary Janet Yellen said at a virtual conference held Monday (Feb. 22) by the New York Times that central banks should examine creating and issuing sovereign digital currencies.

As quoted in the Times, Yellen said that a digital dollar, overseen by the Federal Reserve, tied to the blockchain, could result in “faster, safer and cheaper payments,” according to the discussion, as quoted by the newspaper.

But in terms of the actual creation, issuance and distribution of digital dollars, Yellen posed what might be seen as existential questions. “What would be the impact on the banking system? Would it cause a huge movement of deposits out of banks and into the Fed? Would the Fed deal with retail customers or try to do this at a wholesale level? Are there financial stability concerns? How would we manage money laundering and illicit finance issues? There’s a lot of things to consider here, but it’s worth looking at.”

Those considerations stand in stark contrast to the likes of bitcoin, where Yellen seemingly downplayed the potential of that banner crypto, saying, “I don’t think that bitcoin is widely used as a transaction mechanism. It’s an extremely inefficient way of conduction transactions and the amount of energy that’s consumed in processing those transactions is staggering.”

The call-out on energy consumption is a nod to the fact that hardware and computing power in the service of bitcoin production is considerable. According to estimates from Digiconomist, the annualized total carbon footprint of bitcoin equates to nearly the annualized annual equivalent of New Zealand, with annual electricity consumption equivalent to the annual power consumption of Chile.

Yellen previously sounded the alarm on risks tied to crypto due to fraud and cybercrime.

Yellen’s remarks this week underscore what seems to be growing support at the Fed for digital dollars that remain well within the confines of the traditional central banking system. As reported in this space earlier in the month, James Bullard, president of the Federal Reserve Bank of St. Louis, said bitcoin and other digital currencies don’t represent a threat to the dollar. Part of that is due to the dominance of the dollar itself, he told CNBC.

“I just think for Fed policy, it’s going to be a dollar global economy as far as the eye can see — and whether the gold price goes up or down, or the bitcoin price goes up or down, doesn’t really affect that,” Bullard told CNBC. He added that “dollars can be traded electronically already, so I’m not sure that’s really the issue here. The issue is privately issued currency … You don’t want to go to a nonuniform currency where you’re walking into Starbucks and maybe you’ll pay with ethereum, maybe you’ll pay with ripple, maybe you’ll pay with bitcoin, maybe you’ll pay with a dollar. That isn’t how we do this. We have a uniform currency that came in at the Civil War time.”

But it will likely be a while before we see the digital dollar actually make the leap from concept to concrete availability.

Jim Cunha, senior vice president, secure payments and FinTech at the Federal Reserve Bank of Boston, told Karen Webster in an interview last August that the previously-announced joint efforts between the Fed and MIT are focused on exploring the infrastructure that would underpin a central bank digital currency (CBDC). And, conceivably, the use cases would be widespread.

“Anywhere where you have a cash transaction can be a possible use case,” Cunha told Webster, noting that such a wide net can help foster financial inclusion for the banked and unbanked populations.

Read More On Digital Currency: