An emerging consensus on the U.S. dollar: Figure out how to fix it now in case it breaks later

We all know the saying: If it ain’t broke, don’t fix it. In other words, if you try to fix something that is already working you might do more harm than good.

That certainly helps explain America’s stance thus far toward the prospect of digitizing its currency. After all, the dollar is the world’s reserve currency, meaning that U.S. banks play a central role in the global financial system. That gives the nation a potent geopolitical weapon: countries that act in an adversarial way toward the U.S. risk getting kicked out of the whole network. Nothing appears obviously broken about that system at the moment, so why fix it? 

But now a more nuanced view may be starting to take shape in Washington: Figure out how to fix it now, so that in case it breaks down the road, the U.S. won't be caught flat-footed.

How might the system break? Some say to look no further than China, which appears to be on the verge of becoming the first major economy to issue a central bank digital currency (CBDC). Some national security experts see that system as a potential threat to the dollar’s role as the global reserve currency. That was one of several topics that came up today during a hearing of the Senate banking committee’s subcommittee on economic policy.

One of the witnesses at the hearing was former Commodity Futures Trading Commission (CFTC) chair, J. Christopher Giancarlo. Since his term at the CFTC ended in April 2019, Giancarlo has become the single loudest voice in Washington calling for a “digital dollar.”

But while the U.S. may be late to the CBDC game, the winner won’t necessarily be the central bank that launches one first. Instead, he cast it as a competition to build the best technological system.

“Future-proofing” the dollar can’t be achieved overnight, said Giancarlo, since there are “a lot of elements” to it. Instead, what’s needed is a series of focused pilot programs that build on one another — similar to the way the nation has approached the exploration of space, he said.

In a recent webinar hosted by The Block, Robert Bench, assistant vice president in the secure payments group at the Federal Reserve Bank of Boston, similarly acknowledged the role that technology may play in the future of the dollar. “We understand that there is a lot happening on the technology front that could aid the mission of the Federal Reserve,” he said.  

It’s also possible that something could happen that might make a technological upgrade of the dollar an imperative, said Bench, who spoke for himself and not his employer during the webinar. “We are learning from the rest of the world that problems can arise or challenges can arise that would need the Federal Reserve to respond — potentially with new technology and potentially with a central bank digital currency.”

Bench compared this view to that of Canada’s central bank, which has no plans to issue a digital currency but has said that it will prepare in advance for the case that a need arises. For instance, it said in February, a need for a digital currency might arise if the use of physical banknotes “were to continue to decline to a point where Canadians no longer had the option of using them for a wide range of transactions.”

Something like that has already happened in Sweden, and that’s the rationale behind the nation’s “E-krona” project. Meanwhile, the Eastern Caribbean Central Bank (ECCB), which is also seriously considering a digital currency, has a different need: it costs $100 every time anyone wants to send currency between islands. “What [the ECCB] had to do was build a system that was cheaper than $100 per transaction, faster than a boat or a plane,” Bench said.

“So every use case is dependent on the central bank burden.”

In that vein, the unique role of the dollar in the world makes the burden of America’s central bank unique as well. If something were to happen that changes that role — say a CBDC with technological features that somehow make it more attractive as a reserve currency — it’s likely that the U.S. would be compelled to respond. 

So ultimately Bench and Giancarlo are making the same argument, just from different perspectives: Even if the dollar isn't broken, it's not too early to start figuring out how to fix it.