A modern currency must meet the needs of a modern economy. Yet in an important way, the US dollar is failing: As currencies around the world become more user-friendly, it's in danger of falling behind. The Federal Reserve is rightly working to remedy this, but the broader government must do more to ensure that the dollar remains competitive, within the country's borders and beyond.
In recent decades, countries ranging from the UK to China have introduced payment systems enabling people to transact instantly, directly from their bank accounts and at extremely low cost, with everyone from friends to the phone company. By one estimate, this transition to real-time payments has boosted global economic output by $78 billion a year — meaning faster paychecks, smoother transactions and generally accelerated commerce.
Not so much in the US. Less than 1% of all transactions settle in real time. The fastest retail payment systems — such as Venmo and Zelle — have only limited uses or coverage. Bank transfers can still take days to process, with all the frustration, expense and risk that entails. Card payments, albeit relatively convenient, incur merchant fees as high as 3%, amounting to tens of billions of dollars a year in added costs that consumers ultimately pay.
To its credit, the Fed is trying to address at least part of the problem: the country's outdated "automated clearinghouse," which processes by far the largest share of payments by value — more than $70 trillion in 2021 — but only in batches and during weekday business hours. In mid-2023, the central bank intends to launch a new service called FedNow, which will operate around the clock. If successful, it will complement and expand upon existing private services, enabling a wide range of instant payments among financial institutions, businesses and consumers.
So far, so good. But the rest of the world isn't standing still.
Consider international payments. Governments can facilitate trust between banks within their territories, but things become more complicated across borders. Payments often need to travel convoluted paths among banks that have established correspondent relationships, adding delay, risk and expense. Workarounds such as Wise or Western Union don't fully address the issue. The typical international remittance fee, for example, is about 5%, extracting billions of dollars a year from people sending money to family and friends.
One promising solution, borrowed from cryptocurrencies: Create a true digital form of cash. This could come in various forms, such as regulated versions of stablecoins tied to fiat currencies, or tokens issued directly by central banks. Much like bearer instruments, these wouldn't require trust. They could be exchanged on platforms that transcend borders, making international transactions fast, secure and cheap. Among others, the central banks of Australia, China, France, Singapore and Switzerland have tested such platforms, and the International Monetary Fund is advocating a more robust version to connect payment systems worldwide.
The US hasn't been entirely idle in this respect. The Fed has been exploring the possibility of a digital dollar — and to some extent, the issuer of the world's dominant currency can afford to wait and learn from the experience (and mistakes) of others. That said, policy makers need to ensure that the US helps shape whatever legitimate payment infrastructure emerges. To that end, regulators should get a grip on stablecoins, insisting that any token purporting to be worth a dollar be backed by actual dollars. And Congress should grant the Fed the authority to issue a central bank digital currency if needed.
The next iteration of money has the potential to benefit billions, enhance global trade, and broaden access for previously marginalised people and places. The US shouldn't allow itself to fall behind again.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement