National cryptocurrency: US digital dollar pilot launches

The US Federal Reserve (Fed) in New York is launching a digital dollar pilot project in cooperation with 12 global financial firms. It was announced on Tuesday, 15 November. Major bank HSBC, payment services provider Wells Fargo and financial services provider Mastercard are also participating in the project. The New York Innovation Center (NYIC), founded in 2021 as part of a strategic partnership between the FRB of New York and the Bank for International Settlements (BIS), is providing support.

Pilot project on transactions between financial institutions

The duration of the pilot project is twelve weeks and will be conducted in a test environment with simulated data. It is only about transactions between financial institutions (“bulk transactions”) and not about the use of the digital dollar for citizens.

It is tested how to conduct transactions more efficiently in a common database with the digital dollar.

After three months, the first results should be published.

US stalling

Earlier this year, the Fed published a paper discussing the benefits as well as potential risks of a central bank digital currency (CBDC). The government has yet to decide whether to introduce CBDC at all. So the Fed will have to wait for the green light from Washington to launch a broader project.

For now, however, the Fed seems to be primarily concerned about improving efficiency through the use of the digital dollar. Michelle Neal, senior vice president and head of markets group at the Federal Reserve Bank of New York, commented earlier this month on the benefits of the digital dollar for faster settlement in foreign exchange markets, Reuters reports. Neal explained that the settlement period for the digital dollar averages 10 seconds, rather than the two days it currently has.

In other countries, such as China or Nigeria, the CBDC digital currency is already used by a portion of the population. In the euro zone, CBDC is scheduled to launch in 2026.

Withdrawal

With the digital dollar, cross-border transactions can be processed faster than today. No one seems to have anything against increased efficiency either.

Nevertheless, every development around CBDC should be monitored. Even if the digital dollar is currently only used for transactions between financial institutions, one step closer to the dreaded dystopia may be possible. With the widespread adoption of digital currency, every transaction by citizens will be directly monitored by the government. The alternative, of course, would be bitcoin, which also allows cross-border transactions in seconds using the Lightning network and at the same time protects the privacy of citizens.