Money Matters: The US Dollar, Cryptocurrency, and the National Interest

By Kevin Warsh

The 21st century is off to a rocky start. Recent shocks of plague and war make the global financial crisis of 2008–09 and the terrorist attacks on 9/11 seem like ancient history. But the United States and the global economy were rocked by these events, too—one and two decades ago, respectively.

Key Points:

  • China is challenging the predominance of the American dollar by adopting digital currencies, which significantly reduce transaction costs and allow for smoother exchange in the marketplace.
  • Efforts to strengthen the dollar must recognize the growing influence of digital currencies on the international landscape while understanding the importance of stability and predictability.
  • The Fed should establish a wholesale digital currency to capture the importance of technological innovation while ensuring that volatility does not jeopardize the dollar’s predominance.

The cumulative effects on our nation loom large. The scale, scope, and frequency of economic and geopolitical shocks threaten to change something fundamental in the American ethos. And the rest of the world looks at America through a fuzzier lens.

Until recently, most official measures of economic and employment growth appeared strong, but something is seriously amiss in the nation. US inflation is running at a rate not seen in more than 40 years. National debt is now greater than national output. Approval ratings for major American institutions have fallen dramatically. More than three-quarters of all Americans believe the country is on the wrong track.1 The chasm is bigger and more consequential than captured by a single statistic or remedied by a particular piece of legislation.

Still, the US dollar has more than held its own. The greenback is trading near its strongest level since 2002, including against the next four most widely held sovereign currencies. Year-to-date (as of September 13, 2022), the dollar is 12 percent stronger against the euro, 20 percent stronger against the Japanese yen, 15 percent stronger against the British pound sterling, and 8 percent stronger against the Chinese yuan. Relative dollar strength, however, may say less about the United States and more about fortunes in the rest of the world.

The value, prevalence, and durability of the US dollar—and the concomitant financial and economic architecture—are crucial to American economic stability and our standing in the world. The dollar has proven an important signal and symbol of American economic power since World War II. It makes the financing of the US government less costly. It bestows a significant comparative advantage on American business. It also lowers the costs of consumer goods.

The dollar, termed the exorbitant privilege, reinforces American strength.2 Benefits of dollar dominance, however, extend far outside the United States. The dollar is a global public good: The world is better off managing its affairs around a single currency. There is good reason the dollar’s use in global trade, international bond issuance, and cross-border borrowing significantly outstrips the US share in these activities.3

The dollar’s persistent, outsize role in global markets is also a function of network effects: The more people use the dollar, the more valuable it becomes. And the harder it is to dislodge.

The dollar’s more recent strength owes significantly to an about-face at the turn of the year by the Federal Reserve. Having failed to act on a timely basis to dampen incipient inflation, the Fed is now belatedly raising rates. Other major central banks, including the European Central Bank and Bank of Japan, have been considerably slower to change course. They appear relatively more devoted to policies championed by the Fed in prior years. Some central banks appear more accepting of higher levels of inflation or more persuaded it is transitory. No matter the rationale, the relative interest rate divergence has caused the dollar to surge.

Policy regime change by the Fed in August 2020 catalyzed and amplified the new era of high inflation. The Fed set forth a newfangled policy framework that kept monetary policy inert even as the economy and inflation surged.4 In 2021, US economic output reached record levels, economic growth accelerated to its fastest rate in decades, and the unemployment rate fell to near-historic lows.5 In an ahistorical action, the Fed maintained the loosest monetary policy amid the boom. What’s more, the Fed supported highly expansive spending by Congress, which the Fed accommodated in 2021 by buying a majority of net Treasury issuance.

At the time of writing this chapter, the price level is growing more than four times the Fed’s price stability target of 2 percent.6 The country is suffering from a growing cost-of-living squeeze. The new era of price instability confounds business plans and preoccupies the mindshare of households, further harming the real economy. There is a high price to pay for high prices.

Tipping Point

Amid dollar strength, US policymakers should avoid complacency. The US dollar has the advantage of incumbency. The advantage, however, is not necessarily permanent.7 It’s hard to judge precisely the degree to which the foundation that underpins the dollar is showing cracks. Weakness can be profound even if unobservable.

A currency reigns supreme until it doesn’t. The British pound sterling was dominant through most of the 19th century until World War II.8 The German deutsche mark suffered a similar fate during the fall of the Berlin Wall.9 Tipping points cannot be identified with precision. They are best avoided by steering clear altogether. Instead, the United States seems tempted to touch the tipping point.

For some perspective, the dollar’s share of international reserves declined significantly since the turn of the century. The money held as reserves by the world’s central banks, however, has not migrated to the euro, the British pound sterling, or the Japanese yen. According to a recent International Monetary Fund paper, about one-quarter has migrated into the Chinese renminbi (RMB) and the balance to “nontraditional reserve currencies”—namely, the currencies of many smaller economies.10 The allocators of reserves appear to be searching for an alternative—or, at least, hedging their bets on the dollar’s status.

Significant threats to dollar dominance—economic, geopolitical, and technological—merit attention by market participants and economic authorities. I discuss each in turn.

Fiscal profligacy in recent years is worrisome. Federal spending is running 32 percent higher than its pre-COVID-19 level, 3.5 percentage points higher relative to gross domestic product (GDP) than in recent decades.11 And high debt levels, which are now well in excess of GDP, are strongly correlated with lower levels of long-term economic growth.

High levels of inflation represent a clear and present danger to the US economy. If the central bank tolerates a prolonged period of high prices, the specter of stagflation rises, and the dollar could well lose its vaunted position. As events overseas remind us, the price of stopping a dictator goes up over time. The same is true of inflation.

High levels of intragovernmental transfers constitute financial repression, another economic risk to dollar dominance. In 2021, the US economy grew about 5.7 percent, and for reasons difficult to fathom, the Fed still purchased a majority of net new Treasury issuance. Quantitative easing was conceived in the global financial crisis as an emergency measure. It morphed into normal operating procedure. Wisdom is not the word for this sort of alchemy—when one part of government is the de facto long-term buyer of the nation’s own debt—in all seasons and for all reasons.

Other troubling factors could also serve as catalysts for the dollar to be dethroned, especially if the United States fails to adapt to the changing environment. History teaches that currency dominance is not just about economics. Strong economic governance and military might are twin bulwarks to ensure America’s benign power and currency strength.

America played the decisive role in ensuring a global economic and security commons since World War II. Threats to freedom by America’s rivals, however, are not some relic of the past. The postwar global balance of power is being attacked on many fronts: Russia’s invasion of Ukraine, Iran-backed terrorist attacks throughout the Middle East, and China’s growing appetite to expand its sphere of influence. The swift and scarcely resisted takeover of Hong Kong is one glaring example. China’s plan to assert greater influence over countries in the South China Sea and East China Sea is part of the strategy.

In response to new threats in the 21st century, the US accelerated its use of economic sanctions as a principal tool of statecraft. This development caused antagonists to look for new ways to make themselves less susceptible to Western, dollar-based sanctions regimes. China’s leaders possess the means and will to build a new rival architecture, as they are wont to emphasize, with Chinese characteristics.

If a new geopolitical architecture prevails—by some imprudent mix of Chinese force and American fatigue—the dollar’s globally dominant role could well be undermined. Decoupling the world’s two largest economies would not be limited to trade and investment or munitions and might. It would most probably include the proliferation of a non-dollar reserve currency in a bipolar world.

During the past several years, China pushed for the broader adoption of the RMB in international commerce. Progress has been limited, even though China is among the world’s most globally integrated economies. China is a strong economic force, but the lack of transparency, lack of liquidity, and unreliable rule of law has been a meaningful obstacle to broader use and adoption of its fiat currency.

I do not expect China’s fiat currency to dislodge the US dollar on the world stage in the next decade. But the coupling of two powerful trends—the emergence of great-power rivalry and the technological revolution in financial infrastructure catalyzed by the creation of blockchain technology—represents a consequential threat to the extant American-led financial architecture.

Unless American policymakers recognize the new technology frontier, the US runs the risk of losing the privilege of currency dominance. The US should not sit on its laurels. Nor should it follow China’s lead in creating a broadly available, end-to-end central bank digital currency (CBDC). Instead, I proffer a quintessentially American model, whereby the US would marshal the new technology to deepen the use case and profile of the dollar consistent with America’s interests and values.

To understand the policy choice, I first discuss the essence of money. Then, I decipher the core attributes of cryptocurrency. Next, I lodge my concerns about the recent direction of policy. Finally, I propose an American-style, narrow CBDC, which should strengthen the profile of the US dollar and serve the national interest.

Money: A Primer

Money serves as a unit of account, store of value, and medium of exchange. The form of money, over time, has migrated from coins to gold-backed paper notes to fiat currency backed by sovereign nations.

But, what is money?

Put plainly, money is the obligation of another. And the principal question is what backstops the obligation. That is, what gives money its enduring value?

Some money, such as cash and the digital balances held by banks at the Fed, is backed directly by the central bank, which itself is backed by the strongest sovereign on the planet. If the central bank is credible, and the sovereign acts worthy of its elevated status, then its money is the safest and most liquid.

Most money used by the public sits in digital form in accounts at commercial banks. The safety of this so-called commercial bank money is predicated on deposit insurance, capital requirements, and the quality of supervisory and regulatory oversight. Its value is also a function of the commercial banks’ access to central bank liquidity. When commercial bank money has a call on the central bank of the strongest sovereign in the world, it’s deemed safe and sound.

The nexus between the commercial bank and the central bank is where the alchemy happens. But the magic is only believed when the central bank delivers price stability and serves as a source of strength. As Ravi Menon, the highly capable head of Singapore’s central bank, stated: “The credibility of money is underpinned by this two-tier monetary structure where commercial banks create money and central banks preserve its value.”12

Matters of money are often best not spoken about in polite company. But confidential discussions inside the marbled walls of the Federal Reserve are no place for politesse.

Believing that money plays an important role in the conduct of monetary policy didn’t used to be blasphemy. The quantum and velocity of money have some important bearing on the price level. In recent years, however, money has scarcely received the attention it deserves at places such as the Federal Open Market Committee (FOMC). A review of the transcripts of FOMC deliberations in the past 20 years shows a paucity of references to money. Instead, the Fed canon elevates the role of the Phillips curve to forecast future prices and relegates the role of money. Money plays virtually no role in the dominant dynamic stochastic general equilibrium economic models the Fed uses to forecast output and inflation.

Sensing the crucial moment for the dollar and America’s role in the global economy, the Biden administration recently ordered federal government agencies to make policy determinations on the future of money and the dollar’s role in the world economy. The executive order is decidedly imperfect, but it is to be applauded for capturing the essential importance of money: “Sovereign money is at the core of a well-functioning financial system, macroeconomic stabilization policies, and economic growth.”13

The Fed would be well served to pay more heed to money and the moment. If inflation moves higher and the central bank acts dismissively or belatedly about the price trajectory, confidence in the nation’s money will dissipate. If the central bank’s “lender of last resort” responsibility morphs into “purchaser of sovereign debt for all seasons and all reasons,” confidence will take another hit. If the central bank’s regulatory and supervisory functions fail to ensure prudential oversight, then the regime’s credibility will be further undermined.

Institutions like the Fed and Treasury must act with competence, credibility, and faithfulness to their respective remits to ensure the dollar’s strength and longevity.14

Cryptocurrency: A Primer

Cryptocurrency is a misnomer: It isn’t secretive, and it isn’t money. It’s software.15

Bitcoin was the first cryptocurrency—that is, the first application of the revolutionary new open-source software. Its computer code was unveiled on January 3, 2009, by the pseudonymous Satoshi Nakamoto. It deftly allows participants, who do not know or may not trust one another, to complete transactions without having to rely on a third-party intermediary. Transactions are typically stored on a decentralized ledger, commonly known as the blockchain. Hence, value can be transferred cheaply, safely, and instantaneously.

Nakamoto made clear that the 2008–09 global financial crisis provided the rationale for the new technology to advance. In bitcoin’s “genesis block,” its creator inserted a curious bit of text, a headline from a UK newspaper that day: “Chancellor Alistair Darling on Brink of Second Bailout for Banks.”16 Bitcoin’s founding spirit is amplified in what the founder wrote shortly thereafter: “The root problem with conventional currency is all the trust that’s required to make it work.”17

Bitcoin’s founder understood the essential attribute of sovereign currency. And he sought to solve the problem of trust, such that those who don’t know each other can be comfortable doing business.18 The new technology could allow transactions to be executed with greater speed and security at lower cost.

In recent years, some of the most promising businesses are using the new software to create new business models (e.g., buying virtual goods in the metaverse), disintermediate middlemen (e.g., peer-to-peer communities in Web3), and disrupt incumbents in legacy industries (e.g., securities trading).

Some other new companies are hard at work building the rails and laying the infrastructure for the next generation of payments. At present, execution of a payment may appear instantaneous, but key processes—clearance and settlement—take days, sometimes weeks.

A final category of businesses has come onto the scene. They purport to create money. Plague and war in the past couple of years drove unprecedented fiscal spending and money printing, which exacerbated the problem of trust in governmental and private institutions. Amid the liquidity boom, the creators of this new money found a responsive market. Today, thousands of digital assets are masquerading as money in some form of circulation.

But money (as discussed in the prior section) is a special and different application of the new software altogether. The new money has a particularly high bar to meet—namely, to stack up favorably to the world’s reserve currency. Some of the new money can be used as a medium of exchange; that is, it can be traded at lower cost with fewer frictions than fiat currency. But most forms of new money lack the other key indicia to survive and prosper: They aren’t a sufficiently reliable store of value or stable unit of account.

To remedy these failings, so-called stablecoins emerged to make the revolutionary new software more money-like. Stablecoins purport to peg their value to a sovereign currency like the dollar. They are largely used as a kind of gateway currency to move money from traditional fiat form to facilitate the trading of other digital assets. They may serve as a useful proof of concept around blockchain-based settlement.

The principal question remains: Who or what backstops the liability?

Many stablecoins are backstopped by ambiguous or insufficient collateral. Others are backed by some sort of algorithm that works satisfactorily in ordinary times but are unlikely to be reliable when times get tough. Other stablecoins are backstopped with some mix of cash, Treasurys, and other assets.

Most of these stablecoins will be stable until they aren’t.19 Money shows its true colors in times of stress. A small number might become of great value by adding operational efficiencies. Most, however, will be worthless.

The China Factor

China bristles at US preeminence in the world’s financial system. It believes the US uses its dollar hegemony to control global capital flows and extract value from others.

Beijing has long sought to promote the internationalization of its fiat currency. Strict capital controls, illiquidity, and uncertainty about the rule of law, among other obstacles, have limited more wide-scale internationalization of the Chinese currency. So, China is increasingly demanding the use of RMB by foreign businesses that want to sell goods and services into the vast domestic Chinese market.

Beijing is keen to build a new financial ecosystem to bolster its geopolitical position. Chinese authorities appear to have redoubled their efforts this year. The financial, economic, and geopolitical response by the United States and its allies was more robust than most expected. Beijing appears to be seeking greater resilience from the specter of Western economic sanctions and dollar dominance.

China, for example, is actively expanding use of its own payment messaging system—China’s Cross-Border Interbank Payment System (CIPS)—an alternative to the US-backed SWIFT system.20 In demonstration of the alliance, Russia and Turkey are using CIPS to conduct business outside the purview of Western sanctions.

Enter blockchain technology. China appears to view the new software—enabling a new form of record-keeping, transfer, and payment—as a once-in-a-generation opportunity to erode American hegemony. The new software is a significant potential hack of the American-led financial order. It’s little surprise that China is the first major country to deploy a CBDC, which it calls e-CNY.21 Capitalizing on its status as first mover, China is keen to become at least as formidable a force in international payments and money as it is in international economics and global trade.

The e-CNY could well lead to a more efficient Chinese payment system. When fully deployed, the underlying technology could mean a significant upgrade of the payment and settlement rails that have long moved money among domestic counterparties. At least as important, the new software could come to dominate payments among sovereigns and businesses that find themselves in China’s sphere of influence. Benefits may include faster and more secure settlement at lower cost per transaction. That sounds like the basis of a new, promising medium of exchange.

But China’s e-CNY is broader in scale, scope, and importance than broadly recognized. If foreigners want continued access to the Chinese market, they might well be compelled to use e-CNY. It might soon be the technology backbone for most wholesale transfers among the People’s Bank of China, regulated banks, and foreigners. Given the broad desire for access to Chinese goods and financial markets, we could, in short time, see a parallel international payment network to that of the West.

Over time, e-CNY is also expected to be the de facto protocol for all retail and personal financial transactions, disintermediating to some significant extent China’s fintech companies, including Alipay and WeChat Pay. The government would thereby be able to trace virtually all money flows. According to a new report from the Hoover Institution, Digital Currencies: The US, China, and the World at a Crossroads, “Transactions can be tracked, accounts frozen, and balances adjusted. With this power, e-CNY could become an important tool for punishing Chinese citizens for their social or political activism or criticism of the government.”22

When fully implemented, China’s central planners are expected to have a powerful new tool to monitor transactions and enforce compliance with government directives. Its leaders may well intend e-CNY to vault the RMB and accompanying financial system into the big leagues.

The underlying software represents a significant technological breakthrough, one that poses both promise and peril for the existing global financial architecture. The combination of a powerful, ambitious sovereign—working with a new disruptive technology—is a clear and foreseeable risk to the dollar. The implications for the great-power rivalry should not be underestimated. The US should make stronger and more immediate efforts to ensure that e-CNY does not undermine the national interest of the United States.

Policy Alternatives

Several of the leading policy paths under review by US authorities are of concern. I first critique three policies that are gaining particular traction in Washington. I then propose an alternative path forward.

First, the dominant Treasury and Fed strategy to date has been to abide by the status quo. According to Fed Chairman Jerome Powell, being a policy laggard bestows important advantages:

We don’t feel an urge to be, or need to be, first. Effectively, it means we already have a first-mover advantage because we’re the reserve currency. So I think there are both benefits and potential costs and unresolved questions around CBDC.23

The status quo, in my view, is neither sufficient nor sustainable. US authorities should not take false comfort from recent dollar strength. The risk of squandering the privilege of the world’s reserve currency is elevated. The Fed and Treasury should cease to play the slow game while China, among others, actively seeks to carve out a new monetary and financial architecture.

Every detail of a new money framework need not be fully determined. But US authorities should decide and announce the essential design features of the new financial architecture, including their plans for new technology-enabled wholesale payment rails and the outlines of the private sector’s role and responsibilities.

Most of the United States’ existing payment systems are antiquated, slow, and expensive. US authorities have made modest improvements in recent years to Fedwire and the National Settlement Service, two systems the Fed uses to move payments between banks. But the wholesale rails that connect the central bank and the regulated banks were built using mid- to late-20th-century technology and practices. Failure to embrace new, more capable payment systems, including those based on distributed ledger technology or blockchain, leaves the US a great distance from the efficient frontier.

Moreover, the Treasury market, which trades the most important asset anywhere in the world, needs fixing. It is not sufficiently robust or resilient. And it’s prone to bouts of illiquidity. Its vulnerabilities are indicative of risks to the dollar. As noted in a recent Group of Thirty report:

A series of episodes, including the “flash rally” of 2014, the Treasury repo market stress of September 2019, and the COVID-19 shock of March 2020, have created doubts about its continued capacity to absorb shocks and focused attention on the factors that may be limiting the resilience of Treasury market liquidity under stress.24

The US must modernize the architecture for trading US Treasurys. Blockchain software should be part of the solution to make the Treasury market more liquid, complete, and resilient.25 The benefits would include real-time settlement, greater ease of auditability, open application programming interfaces so better tools can be written atop open-source systems, and superior privacy protections.

Amid the great leap in technology—and increasing stresses in the global financial markets—the sovereign, which is “last mover,” will have fewer good options. America’s natural allies are unlikely to wait around while US authorities ponder reforms. Unless the US adjusts to the changing technology frontier, the privilege of currency dominance is at risk. The US should show greater urgency in responding to the prospective challengers to dollar dominance.

The rapid proliferation of private cryptocurrencies appears to have caught the Biden administration somewhat by surprise, which has given rise to a second policy prescription.

The Treasury and White House appear keen to promote private stablecoins as a linchpin of a new regime. In a report issued by the President’s Working Group on Financial Markets, the administration made clear that it is working “to stabilize” the stablecoin market. The administration proposes that stablecoin issuers be regulated as “insured depository institutions.” By subjecting stablecoins to supervisory and regulatory oversight, “interoperability” would be promoted. The President’s Working Group believes that stablecoins should be treated as “systemically important.”26 The administration appears to believe that private stablecoins are the best, most effective way forward.

At the very least, if this policy were adopted, Congress and the regulators should insist that private stablecoins be backed dollar-for-dollar by Treasurys, cash, and other risk-free assets only. They would be wise to also require strong capital requirements for the stablecoin sponsor.

But, perhaps owing to the scars of the 2008–09 financial crisis, I worry that even these seemingly high standards would fall over time. Weaker collateral would be substituted, regulation would become less exacting, and private stablecoins would become more vulnerable to runs. That’s how the political economy tends to operate.

The case of money market mutual funds is instructive. These funds, largely regulated by the Securities and Exchange Commission, were reasonably stable for long periods. But their stability and resiliency were tested in times of stress. Money market funds proved unable to withstand the macro-shocks of 2008 and 2020. Policymakers were compelled to provide extraordinary fiscal and monetary support to bail out the funds. They turned out to be considerably less stable and less resilient than promised, making them a poor substitute for US Treasurys.27

The stakes are even higher when considering private stablecoins, which would ostensibly serve as a proxy for the US dollar. Would demand by the foremost foreign governments and other sophisticated, institutional investors be as strong if the US chose to operate the world’s reserve currency on a private company’s IOUs? Would demand for the dollar remain as steadfast by virtue of the Federal Reserve serving as the regulator of the private stablecoins?

I am concerned that bank-like regulation of private stablecoins might not prove a sufficiently strong foundation from which a reformed American-led financial architecture should be established. “Proper regulation” may ultimately be insufficient to ensure the long-run stability of the US dollar. Moreover, labeling stablecoins “systemically important” risks connoting another implicit government guarantee.28

The policy the Biden administration is promoting could add private stablecoins and their sponsors to the growing category of products, activities, and firms that are quasi-backed by the US government. The world’s reserve currency could hence be subject to a policy of so-called constructive ambiguity. That’s not robust enough for the US dollar in a changing world.

There is only one true stablecoin, and it’s the silver dollar (and its paper equivalent). I’d prefer a more robust response to the Chinese challenge than a multitude of privately issued stablecoins.29

A third policy preference is gaining considerable traction in Washington. Some are pushing the US to adopt an end-to-end CBDC, whereby the Fed would intermediate all payments, including serving as the direct counterparty to US consumers. According to a recent paper, the Fed describes a CBDC as a “digital liability of the Federal Reserve that is widely available to the general public.”30 That sounds like America’s version of China’s e-CNY. US authorities should not copy the Chinese model, not least in creating a cryptocurrency.

A retail-oriented, customer-facing CBDC would undermine the private sector’s role as the direct counterparty to citizens’ economic and financial lives. It’s at odds with the American ethos of privacy from government intrusion. The specter of state surveillance of individual spending choices is not the American way. The interface with citizens should be with the private sector, conferring some substantial degree of competition, choice, and autonomy for individuals and businesses.

A wholesale-to-retail CBDC would also risk eroding the US financial system’s resilience. It would threaten to crowd out commercial bank money with government-backed money, thereby altering the structure of the US financial system. The implementation of monetary policy—already more cumbersome than optimal—would be hampered. And it could give rise to a single point of failure of the US financial system.

No less important, Congress and the president have constitutionally sanctioned responsibilities in allocating and redistributing national resources. Imagine the political pressure if households held a direct claim on central bank cash. If the new CBDC were consumer-facing, the Fed would inevitably become more embroiled over time in decisions about fiscal transfers.

As I experienced during the panic of 2008 and observed in the 2020 crisis, the political class was tempted to bypass the legislative process, querying if the Fed would fill citizens’ wallets. In my view, the Fed is not a repair shop for broken fiscal policy. It should have no role in direct payments to households and businesses. An end-to-end CBDC would risk increasing central bank power without democratic accountability.

For too long, the Fed has played an outsize role in our system of government. An end-to-end CBDC would expand further the scale and scope of the Fed’s role. Now more than ever, the Fed must demonstrate complete focus and fidelity to its price stability mandate. Establishing an end-to-end CBDC would be a significant economic and geopolitical policy error.

The good news is that the policy choices need not be among these three alternatives: doing nothing, outsourcing the dollar’s special status to private stablecoins, or adopting the Chinese model that impinges on citizens’ rights and the private sector’s responsibilities.

A Way Forward

The annual report of the Bank for International Settlements nicely captures the broad objective:

The future monetary system should meld new technological capabilities with a superior representation of central bank money at its core. Rooted in trust in the currency, the advantages of new digital technologies can thus be reaped through interoperability and network effects.31

To achieve this goal, the US should take the lead in pronouncing the essential design features of a wholesale-only, dollar-based CBDC. The new wholesale digital dollar framework should be established to intermediate dollar payments between the US government and wholesale providers of banking services. The proposal has a powerful use case.

The existing wholesale payment system is slow, cumbersome, opaque, and expensive. The growth in the digital economy demands a fast, efficient, safe, and sound payments system. Modernizing the wholesale payment rails would deliver significant benefits.32 Settlements would be made far faster. Payments would become cheaper. Cross-border transfers would be virtually seamless and considerably more affordable. And money creation would be made more transparent.

A narrow-purpose digital dollar would also strengthen the US leadership position in the world. The US leads the global economy, and the dollar is the linchpin of the financial system. But its standing is under threat. Absent a definitive leadership role by the US, other countries—with decidedly different views of the public good—are actively seeking to use new technology to erode America’s standing.

A narrow, well-considered digital dollar regime is most conducive to monetary soundness, sovereign control, financial innovation and competition, and individual privacy.

Soundness. The wholesale-only digital dollar would be fully backed by the full faith and credit of the US government. There would be no ambiguity or implicit backing. The proposed architecture has another important advantage over an end-to-end CBDC: Each transaction would have its own ledger, so there would be no single point of vulnerability. The separation between wholesale and retail funding ensures continuity with the long-held distinction between central bank money and commercial bank money.

A wholesale digital dollar would also preserve an important role for an old-fashioned and credibility-enhancing form of money: cash. The option for individuals and businesses to continue to access cash is a design feature, not a bug, of the proposed reform.

Sovereignty. A digital dollar—for exclusive use by the central bank and the financial services system—would bolster our currency’s role as a global public good. The proposed framework would give agency to other countries to make their own monetary choices and maintain their own sovereignty. They would not be compelled to be subservient to the demands of any other sovereign. The framework, however, would be designed to encourage interoperability with other foreign central banks and their financial systems. Sovereigns would establish their own home-host rules to govern how their own payment systems could interface with ease with the digital dollar.

Innovation and Competition. The framework would be designed to be pro-innovation and pro-competition. Private companies would serve as the exclusive interface to businesses and households. Financial institutions would face the consumer and, at the same time, connect seamlessly into the new wholesale digital protocol. Domestic financial institutions would compete to be the most efficient provider of retail payment intermediation and serve as the source of innovation. Smaller, regulated financial institutions would plug in to the new protocols as readily as the largest banks.

Economic rents imposed by legacy systems would be competed away. So the cost of money transfers and remittances to the end user would be expected to fall significantly. Cutting-edge payments, including micropayments, could well gain new traction.33

Privacy. Direct use of the wholesale-only digital dollar would explicitly be bounded: Individuals, households, and businesses would not be eligible holders. Americans have rightful concerns about government encroachment in their private affairs, including privacy in financial services transactions. The consumer privacy ethos would not just be maintained, but strengthened, under the new regime.34 The new framework would give users not just privacy but also more control of their personal financial information.35


China is giving the US a run for its money. The advent of blockchain technology—combined with the ambition and assertiveness of the Chinese regime—represents a new front in the great-power rivalry with the US.

China has made its move, building out a fully integrated wholesale-to- retail CBDC. It reveals clear Chinese designs on an alternative, non-dollarized global network. Its use of carrots (fast and inexpensive transaction execution) and sticks (compulsory usage if wanting to do business in China) will be tempting to many sovereigns and enterprises.

A rigorous and timely response from US authorities is required, consistent with American values and traditions. The US payment system requires a significant upgrade, and a new wholesale digital dollar would improve America’s economic and political standing. The US should announce the architecture of a new wholesale-only digital dollar, not a Chinese copycat.

Now more than ever, the US and its allies need sound and stable money to escape a period of weak output, high inflation, and geopolitical confrontations. A narrow, resilient, efficient digital dollar backed by the full faith and credit of the US should be an important part of the reformed US financial and monetary architecture.


I am especially grateful to Mark Carney, Jay Clayton, John Cogan, Avichal Garg, Alan Howard, Paul Ryan, and Eryn Witcher for their invaluable comments and suggestions. The errors are, of course, my own.