Will the United States Create Its Own Cryptocurrency?

After publishing its "discussion paper" last month, the Fed is gathering feedback across the government, private sector, and general public on next steps.

Measure twice, cut once -- that practice makes sense for carpenters crafting a project and it's the approach the Federal Reserve is taking in its hyper-caution policy crafting and evaluating the potential of launching a U.S. digital dollar. Right now, the Fed is in "discovery phase" after issuing its discussion paper last month that laid out the debate for whether the U.S. should deploy its own cryptocurrency as a central bank digital currency (CBDC).

What is a CBDC?

A CBDC is a form of virtual fiat money that runs on a private blockchain with government oversight that complements the official printed and minted currency of that issuing country. CBDCs are generally regulated and issued by a country's central bank or governing monetary agency. It's worth noting that a CBDC is backed by the full faith and credit of its issuing government.

Cryptos are highly politicized so the Fed is taking its time

But launching a U.S. digital dollar is politically dicey, and critics might rightly claim that such a move would be a gross power grab by the Fed governors and Chair -- all of whom are political appointees and not duly elected officials by American voters. Additionally, there's a wide range of opinions among politicians in Washington D.C. on the topic of cryptocurrencies and CBDCs.

Some politicos see blockchain-based money as a technological innovation that can secure U.S. global economic dominance far in the future while simultaneously advancing economic equality to the 1.7 billion unbanked individuals globally. Others claim crypto is the latest way for terrorists and cyber thugs to steal from unsuspecting innocents, laundry criminal cash, and wreak on- and offline havoc. Both political perspectives are right and wrong by measures of degree.

That's precisely why the Fed is taking a measured approach to CBDCs. Consider that the day after the Fed posted its discussion paper the White House announced that President Biden would be issuing an executive order authorizing all federal agencies under his authority to evaluate the threats and opportunities that crypto poses to national security, and how to address those dynamics respectively. Those agency readouts are expected in the back half of the year.

Whether or not the Fed knew that announcement was coming, its neutrality on the topic of CBDCs was politically astute. In its discussion paper the Fed went to great lengths to stress that it has no formal position on issuing a CBDC, and will only take further steps toward developing a CBDC in the context of broad public and cross-governmental support.

Will the U.S. have its own CBDC some day?

All this political sound and fury around digital dollars begs the question if the U.S. will issue its own CBDC. The short answer is yes it will. It's almost impossible to imagine that the government of the world's largest economy will disavow the most significant monetary innovation in decades.

The real question is not if the U.S. will launch its own CBDC, but rather a question of when. According to the Fed's actions and statements, whether motivated by political survival or genuine concern for everyday people, it's taking this issue very seriously and genuinely seems to want to build a possible CBDC policy right rather than build it fast.

For now, a measured approach seems like the right approach rather than rushing a slapdash economic fix that cuts to the quick. Most consumers and carpenters would approve.