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Currently, everyone is talking about the US decision to consider a digital form of the dollar. But such a move would have numerous ramifications. We simply must ask the question, how would implementing a digital dollar impact international trade? While advocates are quick to point out several assumed benefits, others caution of secondary consequences and risks.
On March 9th, President Biden signed an executive order calling for the regulation of cryptocurrencies and for research into implementing a digital dollar. The order was not the first time a US digital currency has been considered, but it is the most significant step taken to date by the federal government.
The Biden administration states that the order was crafted with input from leaders in academia, the crypto industry, and the consumer protection field. In tackling head on the question of a state-sponsored digital currency and its risks and potential benefits, the executive order focuses on six priorities:
The goal is to ensure the current crypto market has sufficient protections for investors and that illicit activities do not use digital currencies as a means to circumnavigate federal regulations. The order calls for input from concerned agencies regarding how to implement a digital dollar as well and what this might entail for the domestic and international markets.
While a digital dollar may change international trade in various ways, experts are not agreed as to whether these changes are all good or bad. There are several key changes a digital dollar could make to international trade:
Advocates of a digital dollar say it would make cross-border trade more efficient. Currently, these payments typically take 1-5 business days. Human interaction dictates how slowly these transactions currently occur, as the transaction details must be established and verified to prevent fraud and financing terrorism (AML and CTF). Payments made on a decentralized blockchain, however, could be verified in minutes or even seconds.
Many small to medium enterprises (SMEs) simply do not have sufficient credit established to finance international trade. A publicly verified ledger might serve as an alternative source for underwriters to establish creditworthiness for these SMEs to finance import and export loans. However, this opens up potential privacy risks that would need to be established before a digital dollar could reliably service this need.
In countries where high drug crime or terrorism-related activity may occur, de-risking means companies based there do not have access to the same financing options as potential trading partners. We recently saw this in action when the major financial institutions of Russia were banned from the SWIFT financial messaging service over the Ukrainian invasion. Digital currency may serve as an alternative form of transacting business. But if a digital dollar is a central bank digital currency (CBDC) and therefore subject to the same sanctions and regulations as the current dollar, an unregulated digital currency would be necessary.
Another way a digital dollar would potentially change international trade is that it might render current FDI (foreign direct investment) regulations obsolete. For example, the Bilateral Investment Treaty (BIT) does not encompass digital investments. Treaties and regulations would have to be updated to reflect this seismic shift.
Currently, the US dollar is the world currency reserve. Would international trade be conducted in the digital dollar as it is currently traded in USD? According to a recent Bank of America report, it would. Because this new CBDC would be the liability of the Fed, and not a commercial bank, the digital dollar would remain the reserve currency for the world.
Yet, this assertion has its skeptics. China is far more advanced in their digital yuan. It would take years for the US to role out a digital dollar, while many millions of Chinese already have digital wallets for their digital yuan. Some experts fear this convenience will soon spread to international commerce and supplant US currency’s status.
While the arguments for a digital dollar in regards to international trade focus on the conveniences, expanding banking benefits to the disadvantaged, and reducing risks of illicit activities, there is reason to believe that in all those ways, the dollar already is digital.
Today, all around the world, dollars are traded in bank computer systems. Large transactions are always wired directly from bank to bank. Even paper checks are just authorizations to move digital dollars from one account to another.
Formally establishing a digital dollar would only serve to centralize control over these already-digitized dollars. And in so doing, by withdrawing the deposit base in local, commercial banks along with their function of disbursing finances, the US central bank might reduce innovation and introduce more risk into the financing function.
Additionally, far from bringing the unbanked into the formal banking environment, the likeliness of losing all privacy would further strengthen decentralized and unregulated cryptocurrencies. While the NSA and IRS may thoroughly favor a digital dollar, thus allowing total centralized control and oversight of all transactions, both domestically and internationally, the result might actually be a dethroning of the US dollar as the world currency and a flight to alternatives like Bitcoin.
In considering the case for a digital dollar and how it might impact international trade, it is important to weigh the risks against the perceived advantages. Would a digital dollar provide additional convenience and security for international markets? Or are convenience and security already provided by a mostly-digital banking system that is trusted globally more for the depth of US financial markets and backing of the US legal system? Would the loss of privacy and total centralization of finance be sufficiently offset by tangible benefits? And if so – just what are they?