China leads the world when it comes to digital currencies. Now, the US is waking up to the prospect that it might lose yet another technological edge.
US Senators will meet next week to discuss whether there can be a digital version of the dollar using blockchain technology, a system that would, in theory, operate alongside its paper equivalent.
With many stores around the US still closed due to the coronavirus pandemic, online sales of goods and services have spiked. A vaccine remains elusive for now, and it is possible, therefore, that the use of cashless transactions will continue to be vital.
A digital currency is much more than simply a vehicle for online purchases, however. Recent US interest in the technology is also driven by Chinese ambitions to make its currency a global means of exchange which would rival the dollar.
What is digital currency?
Unlike physical, old-fashioned cash, a digital currency, as its name suggests, is only available in electronic form, eliminating any option to physically withdraw money - it will only ever operate online.
Cryptocurrencies like Bitcoin are digital currencies that can be used anonymously, whereas state-backed digital currencies, on the other hand, can be monitored and subjected to centralised oversight like standard fiat currencies.
The digital dollar currency would operate alongside the paper dollar and it would be issued by the US Federal reserve which also issues the paper money.
A digital dollar would not be a decentralised blockchain-based token, but rather a centralised unit at the Federal Reserve and therefore different from Bitcoin.
Why is the US interested?
The debate over whether to introduce a digital dollar has become more urgent during the Covid-19 pandemic.
US lawmakers have been looking for new ways to distribute much-needed stimulus funds directly to citizens. Thus far, cheques have been sent by post, or bank transfers have been used. Both methods can take several days.
In great contrast, a digital dollar disbursement could be transferred to millions of people at the same time to an account of their choice.
There is a hurdle, however, namely that the infrastructure for such a swift and efficient method does not yet exist. Nonetheless, US digital companies have started coming up with their own proposals.
When Facebook announced last year that it intended to start a digital currency that could be used by its 2.5 billion global users, the US Federal Reserve Chair, Jerome Powell, said that it “raises a lot of serious concerns, and those include around privacy, money laundering, consumer protection and financial stability.”
The American tech-giant has in the past faced criticism over customer privacy and it is their poor record with handling personal information that has largely caused the unease US politicians feel about this move.
These same people, however, appear to be slowly realising that digital currencies may indeed be the future. What is noticeable, though, is how cautiously Washington has moved on this concept, whereas China seems to have had no such qualms.
What is China doing?
The Chinese are light-years ahead of the Americans in the adoption of a digital currency. Chinese tech giants like WeChat and Alipay have already popularised cashless payments.
From just those two apps, the average Chinese consumer can make simple and quick payments in a restaurant, shop, cinema, and much more besides.
The Chinese government, for its part, has been working for six years on efforts to create a digital yuan that could go on to be used globally.
Some believe that its creation will mean China could potentially internationalise its currency.
Instead of competing with the US dollar, which tends to dominate the trading system around the world, China is looking to sidestep the international financial system and create a peer-to-peer payment structure by moving into the digital payment sphere - a shift that could potentially transform the way the world trades.
In April of this year, the Chinese Central Bank said that it had begun testing the use and storage of the digital currency, highlighting that an official launch is still some time off.