A digital girl in a digital world with... digital dollars?

March 9, 2022 • Issue #134

Hi y’all —

I’m a digital girl, living in a digital world.

In high school, I spent every second of my free time chatting on Jonas Brothers message boards. In college, I made no fewer than three separate Tumblr blogs. These days, I Zoom with my doctor and use Apple Pay on the subway, and when I wake up in the middle of the night, I watch Disney+ on my iPhone to fall back asleep.

I have no qualms about doing anything and everything online. So it only makes sense that my money would be digital, just like the rest of my life.

Here’s the problem: Every time I think I have a grasp on how cryptocurrency works, something happens that confuses me all over again. The most recent culprit was a long-awaited paper from the Federal Reserve weighing the pros and cons of a government "digital dollar." The paper made waves — and attention-grabbing headlines like “The U.S. is debating whether to adopt a digital dollar” — but all it did was turn me around.

What is a digital dollar? If the Fed develops one, what does that mean for people like me? And does this relate to crypto?

I called Michael Barr, an Obama administration alum who founded the University of Michigan’s Center on Finance, Law and Policy, to get some clarity. Barr says that, in some ways, we already have digital dollars — after all, the money in my bank account isn’t actually a physical stack of cash sitting in a room somewhere. It’s more like a credit to my account that’s insured by the bank, regulated, and backed by the U.S. government.

The digital dollar up for debate right now is kind of a public version of that. The idea, Barr says, is “instead of it being a bank dollar that is backed by the government, it’s directly a government dollar.” As such, it would have stable value.

Stability is one of the big issues right now with crypto. Cryptocurrencies like bitcoin are notoriously volatile because their values constantly fluctuate based on demand. That’s why there are stablecoins, which are cryptos that are tied to legit assets like fiat currency or gold. With stablecoins, Barr says, the issuer is promising it can be converted back at a fixed rate.

“The problem with that is there's no regulation at all of stablecoin issuers and their ability to actually meet that promise,” he adds. “That, to me, is extremely dangerous.”

Proponents like Rohan Grey, an assistant professor of law at Willamette University, see the digital dollar as a solution.

Depending on the model and who issues it, it could work like cash, where I’d hold a balance on a card or device and transact with people offline. Or, Grey says, it could function basically as “a better bank account” that I could access using a “no-frills, public label service.” It’d be similar to how I can take my phone number to different cell phones.

“The idea is if you have a dollar that is backed by the government, then it does have stable value. You're not worried about the ability to get that dollar back. You can use it directly to buy or sell goods or services,” Barr adds.

This could be a chance to fix a few of critics’ major complaints with our current, privatized banking system. Grey, also the research director of the Digital Fiat Currency Institute, says the government could offer free transfers and no overdraft fees.

Proponents of the digital dollar argue these developments would be good for the roughly 7 million U.S. households that are unbanked (meaning nobody in the home has a checking or savings account). We know from surveys that some of the biggest reasons people are unbanked are that they don’t have enough money to open/maintain a bank account, can’t afford the fees and don’t trust the banking system.

The digital dollar would — at least theoretically — alleviate those concerns. It’d also make it easier for the government to get money out to people, like with the COVID-19 stimulus checks and advance child tax credit payments.

Both of my sources emphasize that nobody would be required to use the digital dollar. I’m not going to all of a sudden get paychecks in an unfamiliar digital currency. It’d be an option, Grey says, that would “sit there alongside existing payment options and the banking system, and people could choose to use it or not.”

So what’s the catch?

Well, perhaps the most popular argument against the digital dollar is that when the government is involved with my money, the government is… involved with my money.

We can see this with China, the major country that’s furthest along with a digital dollar. As of October, about 140 million people had used digital yuan wallets to conduct $9.7 billion in transactions in China. The digital yuan project is still in its trial phase, but critics are already raising concerns that it’s a way for China to oversee, track and control people’s transactions.

Grey predicts that won’t go over well in the U.S., where there’s bipartisan interest in protecting freedoms. This is part of the reason why the approach here has been largely to wait and see — to learn, experiment and put out research papers like the one last month.

THE BOTTOM LINE

(but please don't tell me you scrolled past all of my hard work)

The digital dollar would be a way for people to access virtual, stable, government currency without a lot of the risks (and challenges) associated with crypto and private banks. But the debate over whether the U.S. should implement one is messy and complicated.

Even if the Fed was able to scrounge up enough public and political support for the digital dollar — and that’s a big if — we’re still years away from implementation. Especially with everything happening with inflation.

VIA GIPHY

RECEIPT OF THE WEEK

check out this wild celebrity purchase

VIA INSTAGRAM

Actress Reese Witherspoon and her husband are hoping for a big payday on a house in Los Angeles they spent the past two years flipping. The couple bought the seven-bedroom home in March 2020 for $16 million and, taking a cue from the red-hot housing market, have listed it for $25 million. Witherspoon changed the wallpaper, ceilings and library and even installed a smart shower — all while pumping out some hilarious TikToks. What, like it’s hard?

INTERNET GOLD

five things I'm loving online right now

1	Give me one good reason I shouldn’t adopt a monkey in Thailand for $9 a month.
2	This $39 million, 70-room British mansion hasn’t been built yet, but the lucky buyer will also get an NFT of the property that they can put into the metaverse. “Every single item down to the hand towels have been replicated in the virtual version,” the realtor said in a statement. It’s not too shabby IRL, either: The home has a bowling alley, a home theater, a gym, a sauna and a pool.
3	How to Make Potatoes While Dread Presses In from Every Direction.
4	The band Weezer has made its own Wordle, called Weezle, which joins the ranks of Wordle spinoffs like Lewdle (for profanity), Globle (for travelers) and Octordle (for people who want to play eight words at once). I think my personal fave is Taylordle, though, for Swifties.
5	Me? Crying while watching TV interviews with Nathan Chen and his mom? No. Someone must be cutting onions.

401(K)ITTY CONTRIBUTION

send me cute pictures of your pets, please

VIA DON MCGRATH

Meet Tiger, a financially minded feline who is keeping a close watch on the digital collar debate.

See you next week.
 

 
P.S. Would you use a digital dollar? Should I adopt a monkey? What’s your best potato recipe? Send suggestions to julia.glum@money.com or @SuperJulia on Twitter.

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