One of the big stories of the 2022 General Election is the economy. Voters are trying to determine which candidates (and political party) can best solve the many financial challenges individuals, families, and businesses are facing today.
In addition to covering the promises of candidates (as we looked at in the last newsletter), I highly recommend that journalists in the United States get ready to cover one of the biggest stories of their careers - the coming digital economy. That will mean enormous changes in the way Americans will handle their finances in the coming months and years. Some financial experts think it’s a great idea — but others think it may be the worst.
Digital Money
The current administration has a financial plan that journalists should get a good handle on and cover aggressively. While the U.S. government, other governments, and many financial institutions are for a digital economy (e.g. digital currency, digital assets), many people (including economists) are not. I’ll share both views with you in this article, starting with the federal government’s.
You can read the full White House report here — FACT SHEET: White House Releases First-Ever Comprehensive Framework for Responsible Development of Digital Assets — because you will find many other stories to cover inside. Here are some highlights —
Today, traditional finance leaves too many behind. Roughly 7 million Americans have no bank account. Another 24 million rely on costly nonbank services, like check cashing and money orders, for everyday needs. And for those who do use banks, paying with traditional financial infrastructure can be costly and slow—particularly for cross-border payments.
The digital economy should work for all Americans. That means developing financial services that are secure, reliable, affordable, and accessible to all. To make payments more efficient, the Federal Reserve has planned the 2023 launch of FedNow—an instantaneous, 24/7 interbank clearing system that will further advance nationwide infrastructure for instant payments alongside The Clearinghouse’s Real Time Payments system. Some digital assets could help facilitate faster payments and make financial services more accessible, but more work is needed to ensure they truly benefit underserved consumers and do not lead to predatory financial practices. White House Fact Sheet
Notice that the Federal Reserve plans to launch FedNow next year (target date of May to July 2023). That means the groundwork for the new financial system has already been laid, and local financial institutions and organizations are preparing for new regulations and ways of doing business. Journalists can and should start covering the story now. Where do you start?
More than 120 organizations, including Square Financial Services Inc., an industrial-bank subsidiary of Block Inc., and Q2 Holdings Inc., a provider of digital banking and lending solutions, are participating in the pilot. Participants in the testing phase satisfied criteria surrounding instant-payments readiness and expressed a desire to participate in early testing, the Federal Reserve says.
The Federal Reserve announced the FedNow pilot, which includes three phases: advisory, testing and closed-loop production, in October 2020. Digital Transactions
The U.S. Government believes the benefits of FedNow, and other digital programs, will be important for consumers and businesses. You can find answers to many frequently asked questions about FedNow here.
Here’s more from the White House report about the digital dollar —
A U.S. CBDC – a digital form of the U.S. dollar – has the potential to offer significant benefits. It could enable a payment system that is more efficient, provides a foundation for further technological innovation, facilitates faster cross-border transactions, and is environmentally sustainable. It could promote financial inclusion and equity by enabling access for a broad set of consumers. In addition, it could foster economic growth and stability, protect against cyber and operational risks, safeguard the privacy of sensitive data, and minimize risks of illicit financial transactions. A potential U.S. CBDC could also help preserve U.S. global financial leadership, and support the effectiveness of sanctions. But a CBDC could also have unintended consequences, including runs to CBDC in times of stress. White House Fact Sheet
Many leaders in Congress are also supportive of moving to a system of digital currency. Congressman James Himes (D-Conn.) is the Chair of the House Financial Services Committee’s Subcommittee on National Security, International Development and Monetary policy. Himes wrote a 15-page White Paper a few months ago in support of moving to a U.S. CBDC. Here are a couple of highlights from the paper —
The nature of money is changing. Today's money and payment systems would have been unimaginable to previous generations that carried cash and wrote checks to pay for purchases. Innovations in new transaction networks and the emergence of digital currency have revolutionized the way we send and receive money, pay our bills, and conduct business. A U.S. CBDC that offered a safe, reliable, appropriately transparent, and trusted network to transact with a digital dollar could help keep the United States at the forefront of innovation, encourage the next wave of entrepreneurship, and spark the development of transformative payment technologies.
It is important, in the face of the potential for dramatic innovation, not to focus too narrowly on “inefficiencies” in the status quo. The current stage of development of digital assets and blockchain generally resembles the development of the internet in the early 1990s. At that time, there was skepticism about the internet’s “use case”, breathless speculation about the future, and disbelief in the seeds of truly transformative technology. In the early 1990s, no one accurately predicted the transformational effect of the internet 30 years later, any more than we can predict the ultimate “use cases” of cryptocurrency today. CBDC White Paper
With a White House and majority Congress supporting CBDC, there is a good chance of it becoming a reality — soon. That’s why journalists need to get in front of this huge story to let their viewers, listeners, and readers understand how personal and business transactions will probably change in the near future.
The bottom line is that a “digital dollar” will not exist in printed form. It’s digital, not physical. People won’t be able to go to an ATM machine or their bank to get cash that they can hold in their hand, place in a wallet or purse, and use to make purchases. All of their money, including their financial assets, would exist in the digital world.
That leads us to what journalists should be able to do best — be curious, skeptical, objective, and accurate in their reporting about CBDC.
Not So Fast
Not everyone is in favor of a digital form of the U.S. dollar. Even though several countries have already launched CBDCs (including China), and more than 80 other countries have digital initiatives underway, many financial experts are recommending that the U.S. government slow down and take a hard look at what it’s doing.
CBDC stands for “Central Bank Digital Currency.” It’s basically the digital form of a country's fiat currency. Why would anyone have a problem with that?
One big issue is what is known as "programmable money” (also known as “expiring money”). The Federal Reserve has been looking at how to do that technologically for some time.
Agustin Carstens, head of the International Settlement Bank, recently addressed the power of that technology —
The key difference [with a CBDC] is that the central bank would have absolute control on the rules and regulations that will determine the use of that expression of central bank liability, and we will have the technology to enforce that. Agustin Carstens
Those in opposition to the idea of digital currency are concerned that the federal government would have the power to control how people spent their money, what they were allowed to purchase or not purchase with their money, and that people’s money might expire after a period of time that the government would determine.
In many ways, programmable digital money would be a fantasy come true for economists. This is because economists believe economies are driven by human behavior, and human behavior is driven by incentives, and all kinds of incentives could be built into digital money.
Imagine, for example, a maximum limit on the loan-to-value (LTV) ratio of home mortgages, designed to prevent future housing bubbles.
If such limits were programmed into the digital currency, as a form of “smart contract,” the transaction would not go through for a loan amount deemed too large.
Economists, political leaders, and central bank officials could then use the “smart contract” feature of digital dollars to tweak or massage incentives in all sorts of ways.
For example, fossil fuel use might be embedded with a higher VAT (value-added tax) surcharge than green energy use. Buying sugary cereal might create a small debit, whereas buying broccoli creates a small credit. And so on.
In addition to the above, all transactions would be instantly available for review, or easily aggregated into “big data” analysis patterns. This would give the Federal Reserve unprecedented new levels of visibility into the current state of the economy. Nasdaq.com
Here are some other concerns that have been expressed about CBDC —
Digital dollars could easily be tracked by banks, federal agencies and the Federal Reserve. They could also be programmed to control the kinds of things people can buy, how much could be purchased at a single time or any number of other variables.
In short, the development of a digital currency could present the most dramatic expansion of federal power in history, depending on its design.
In the coming weeks and months, advocates of a digital dollar might allege that all of these concerns are highly speculative, or perhaps even "conspiracy theories." But there are good reasons to think a digital dollar like the one the White House is considering would be used to micromanage the U.S. economy—and, by extension, the whole of society.
The Biden administration's recent executive order plainly states that "financial inclusion and equity" as well as limiting "climate change and pollution" must be key considerations in the development of a new central bank digital currency and digital asset regulatory schemes. Newsweek.com
(Bloomberg) -- The world’s reserve currency may be about to go digital, potentially transforming the way Americans move and use their money.
A digital dollar also raises questions about financial privacy. The ledger underpinning the currency would likely be operated by the government, which would potentially give it the ability to monitor transactions, halt them or confiscate balances.
“If the government controls the ledger, then there is a risk that it will monitor those transactions without going through the proper legal channels because it’s not taking information from someone else,” said Luther at the Bitcoin Policy Institute. “It’s just looking at its own information.”
[William Luther is a fellow with the Bitcoin Policy Institute and associate professor of economics at Florida Atlantic University.]
Separately, banks and financial institutions that depend on deposits from customers to run their businesses and finance lending might take a hit if a digital dollar becomes popular, Luther said. The Federal Reserve released a discussion paper earlier this year that said a digital currency could reduce the amount of money in the banking system, increase the cost of loans and reduce credit availability to households and businesses.
This is a truly remarkable and deeply troubling development. If a CBDC were to be created, it would dramatically expand the power and influence of the federal government and Federal Reserve, in ways most Americans won’t understand until it’s too late to roll the CBDC back.
Unlike blockchain-based digital currencies such as Bitcoin, which are by design decentralized, a central bank digital currency would likely be programmable, meaning that it could be designed so that Americans could only use it for specific purposes. And it would be easy for banks and government agencies to track digital dollars and the people using them, unlike printed U.S. dollars available today.
Although some might be tempted to dismiss these fears as too far-fetched to be of serious concern for a country like the United States, there is strong evidence that the White House and Federal Reserve have already considered making a new digital dollar programmable, in line with their various social and economic goals. FoxBusiness.com
The problem is that there is no limit to the level of control that the government could exert over people if money is purely electronic and provided directly by the government. A CBDC would give federal officials full control over the money going into–and coming out of–every person’s account.
This level of government control is not compatible with economic or political freedom. Forbes
I’ll revisit this story in the future, but I hope the article will help as you look for ways to localize and personalize this story. It has the potential of impacting your viewers, listeners, and readers unlike almost any other story you have ever covered.
Next Newsletter
One of the generational groups that will be impacted in a big way by stories like CBDC is Generation Z (Gen Z). I will share some thoughts about the future of how Gen Z will get their news in my next newsletter.
Comments Welcome
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Newsletter Purpose
The purpose of this newsletter is to help journalists understand how to do real journalism and the public know how they can find news they can trust on a daily basis. It’s a simple purpose, but complicated to accomplish. I’ll do my best to make it as clear as I can in future newsletters.
Well written and presented article. I am definitely one in the "Not so fast" camp. As Henry Kissinger said "Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world." That is the goal with CBDC. Control.