The president of the United States, Joe Biden, ordered the Department of the Treasury to study the creation of a digital Dollar, a movement with the potential to change the way money is moved and used around the world.
Before your order actually results in a virtual dollar, there will be numerous important impacts and risks to consider.
What form would a digital dollar take?
It would still be a dollar issued by the Federal Reserve (Fed, central bank) like all US bills and coins in use now, but in a digital form accessible to everyone, not just financial institutions.
Unlike money deposited into a bank account or spent through apps like Venmo and Apple Pay, it would go to Federal Reserve accounts, not a bank.
At the same time, the digital dollar would be worth the same as its paper counterpart, a divergence from cryptocurrencies that currently have highly volatile quotes.
Key questions remain unanswered, such as whether a digital dollar would be based on blockchain technology like bitcoin or linked to some kind of payment card.
If the government decides to go ahead, they could spend "several years" before it is possible to use a digital dollar; authorities will have to explore, for example, what technology to use, said Darrell Duffie, a digital currency expert at Stanford University in California.
Why launch a digital dollar?
It would reduce or even eliminate transaction costs, since exchanges would no longer only go through banks, bank cards, or apps that charge fees on each payment.
Proponents of the idea say it would help people without bank accounts, about 5% of households in the United States, and could make it easier to pay social benefits.
There are risks like a system crash or cyber attack, and there are also privacy concerns, as the government could theoretically have access to all transactions.
The banking system could also be undermined, as banks currently use customer deposits to make loans to others, and with a digital dollar they could have less money at their disposal.
How will global finance be affected?
International transfers, often time-consuming and expensive to carry out, could be greatly facilitated.
A trade that currently takes two days to validate could be done in an hour, said Marc Chandler, a foreign exchange expert at brokerage Bannockburn.
For Chandler, the geopolitical role of the US dollar would not be altered by the introduction of the digital version.
A digital dollar would represent "a natural evolution rather than a revolution"he pointed out, recalling that more than 6.5 billion dollars are already exchanged electronically every day in the foreign exchange market.
Even if China launches a large-scale digital yuan, he said he doesn’t think it will change Beijing’s role in the world economy since "there will always be issues of trust, transparency, (and) depth of markets".
However, for Stanford’s Duffie, if the United States wants to continue to benefit from the dollar’s status as the dominant currency in central bank reserves and international payments, it is essential that the government act with caution.
"The United States will need to ensure that it remains in a leadership position in international forums that discuss standards for making cross-border payments with digital currencies."he pointed.
Can America catch up?
Other countries are already working on digital versions of their own currencies, from the eurozone to India, but "there is no evidence to suggest that being first to market provides significant or material advantages"pointed out Jamiel Sheikh, founder of the think tank CBDC Think Tank.
On the contrary, failure due to unintended consequences, due to its operation and use or other problems can undermine faith in the issuing institution, he noted.
"The overwhelming dominance of the dollar gives the United States the luxury of learning from… other countries"Cornell University professor Eswar Prasad agreed.
Dollar or cryptocurrencies?
If designed properly, a digital dollar could be preferable for home use than a cryptocurrency, Duffie opined.
However, for international transfers, it was shown "skeptical that the big central banks like the Fed or the ECB, those of China or Japan, grant accounts in a central bank to people from all over the world".
If the United States were to do so, he pointed out, it could wreck the monetary system of small countries whose people would prefer to use the digital dollar instead of the local currency.