The Digital Dollar Is Coming and May Be Problematic

Abstract

Purpose: The aim of the study is to examine the potential problems with the new proposed Central Bank Digital Currency (CBDC) known as the digital dollar. 

Methodology:  Qualitative research design examining pertinent and timely studies and articles about several aspects of the CBDC. Kuznichenko’s study used the Vector Autoregressive model to examine volatility spillover to the CBDC from equity markets. Most studies researched on the subject were Qualitative as well.                         

Findings:  The CBDC, although providing benefits like payment efficiency, cross-border transactions, and less illegal activity than a cryptocurrency, also has potential downsides. During periods of financial panic, people can run from banks to the digital dollar. These bank runs could be even worse because whereas normal bank runs cause deposits to be moved from one bank to another, in this case, deposits would be moved out of the banking system entirely, into the digital dollar. Another theoretical problem with the digital dollar is a potential lack of individual privacy. Because the government would have a permanent blockchain record of all transactions and access to a person’s finances, this could cause potential government overreach. Lastly, although unlikely, if the Federal Reserve does not regulate the CBDC to the extent that it needs to be, volatility spillover from equity and forex markets could problematic to the stability of the digital dollar.

Recommendations: Theoretically, policymakers can manage risk using the knowledge that the CBDC can exacerbate financial panics and instability. Increased regulation would be necessary to avoid potential volatility and bank runs during financial panics.