Will the Dollar Go Digital?

Annabelle Huang, 28, recently won a Chinese government lottery. As a prize, she got to test out the country’s new digital currency. Two hundred electronic Chinese yuan, or eCNY, worth about $30, showed up on her phone. To spend it, she went to a convenience store for some nuts and yogurt and pulled up a QR code for the digital currency, which the store scanned for payment.

You probably already use digital money, as many people opt to pay for items with a card or app rather than by forking over bills and coins. But there are differences between the money involved in your digital payments and China’s experiment with digital currency: Your debit card or payment apps are linked to the physical cash you can withdraw from your bank account, for starters. China’s new currency, on the other hand, must always be exchanged electronically because it has no physical form.

The first digital currencies to gain popularity were cryptocurrencies, such as Bitcoin, which was created in 2009 and uses complex technology to protect users’ privacy. As cryptocurrencies have taken off, dozens of countries have considered creating their own official digital currencies. Unlike cryptocurrencies, these are backed by a government’s central bank, which oversees the monetary system for the entire nation. That means they’re likely to be more universally recognized as “money”—something you can use to pay for goods and services. Most businesses still don’t accept Bitcoin.

The U.S. is in the early stages of developing a central bank digital currency (C.B.D.C.), but some experts are excited about the idea.

“For hundreds of years, governments have made money to help people buy and sell things . . . but technology is moving, and the governments have fallen behind,” says Tadge Dryja, a research scientist at the Massachusetts Institute of Technology’s Digital Currency Initiative, which is researching C.B.D.C.s with the Federal Reserve Bank of Boston. “This is like updating cash for the era of the internet.”

Annabelle Huang, 28, recently won a Chinese government lottery. As a prize, she got to test out the country’s new digital currency. Two hundred electronic Chinese yuan, or eCNY, worth about $30, showed up on her phone. To spend it, she went to a convenience store for some nuts and yogurt. When she was ready to check out, she pulled up a QR code for the digital currency, which the store scanned for payment.

You probably already use digital money. In fact, many people pay for items with a card or app instead of using bills and coins. But there are differences between the money involved in your digital payments and China’s experiment with digital currency. For starters, your debit card or payment apps are linked to your bank account. These are just alternatives to withdrawing physical cash. But China’s new currency has no physical form. That means that it must always be exchanged electronically.

The first digital currencies to gain popularity were cryptocurrencies. One of them, Bitcoin, was created in 2009. It uses complex technology to protect users’ privacy. As cryptocurrencies have taken off, dozens of countries have considered creating their own official digital currencies. Unlike cryptocurrencies, digital currencies are backed by a government’s central bank. Central banks manage the monetary system for the entire nation. Government-created digital currencies are more likely to be universally recognized as “money.” In other words, they’re likely to be considered something you can use to pay for goods and services. Most businesses still don’t accept Bitcoin.

The U.S. is in the early stages of developing a central bank digital currency (C.B.D.C.). Some experts are excited about the idea.

“For hundreds of years, governments have made money to help people buy and sell things . . . but technology is moving, and the governments have fallen behind,” says Tadge Dryja, a research scientist at the Massachusetts Institute of Technology’s Digital Currency Initiative, which is researching C.B.D.C.s with the Federal Reserve Bank of Boston. “This is like updating cash for the era of the internet.”

China isn’t the first country to explore a C.B.D.C. In fact, more than 60 nations have recently looked into them, according to the Bank for International Settlements. The Bahamas was the first to launch a C.B.D.C., called the Sand Dollar, making it available to all citizens in late 2020. Sweden is conducting real-world trials of a digital krona, while Thailand is in the development process.

But China’s experiment has earned more headlines than any other. That’s partly because no other major power is as far along, and China’s moves could signal where the rest of the world goes. The country has been testing eCNY in cities such as Beijing and Shanghai.

Privacy experts are worried about eCNY, because the Chinese government has a history of spying on citizens and cracking down on dissidents (see Debate). C.B.D.C.s make it easier for governments to see financial transactions and keep tabs on what people are up to.

“If I cannot buy you a coffee without the government knowing about it, I do worry about what this could mean,” says Eswar Prasad, former head of the International Monetary Fund’s China division.

China isn’t the first country to explore a C.B.D.C. In fact, more than 60 nations have recently looked into them, according to the Bank for International Settlements. The Bahamas was the first to launch a C.B.D.C., called the Sand Dollar, making it available to all citizens in late 2020. Sweden is running real-world trials of a digital krona. And Thailand is in the development process.

But China’s experiment has earned more headlines than any other. That’s partly because no other major power is as far along. China’s moves could signal where the rest of the world goes. The country has been testing eCNY in cities such as Beijing and Shanghai.

Privacy experts are worried about eCNY. That’s because the Chinese government has a history of spying on citizens and cracking down on anyone with opposing views (see Debate). C.B.D.C.s make it easier for governments to see financial transactions and keep tabs on what people are up to.

“If I cannot buy you a coffee without the government knowing about it, I do worry about what this could mean,” says Eswar Prasad, former head of the International Monetary Fund’s China division.

Those concerns would apply to a U.S. digital currency too, experts add. Under the Fourth Amendment, which protects against unreasonable searches and seizures, the government has to get a warrant if it wants access to someone’s private information. But the records from a C.B.D.C. would allow it to gather data on everyone without a warrant.

“Financial transactions paint a really detailed, intimate portrait of your life,” says Marta Belcher, special counsel to the Electronic Frontier Foundation. “[The government] shouldn’t be gathering information by default on all citizens.”

 Despite the privacy concerns, proponents say C.B.D.C.s provide many benefits. A digital currency might save taxpayers money if a government no longer needed to print as much cash. The government would also be able to issue payments such as tax refunds instantly. And it could be easier for people with low incomes to use a C.B.D.C. rather than traditional bank accounts, which often charge fees and have high minimum-balance requirements.

Those concerns would apply to a U.S. digital currency too, experts add. The Fourth Amendment protects against unreasonable searches and seizures. Under it, the government has to get a warrant if it wants access to someone’s private information. But the records from a C.B.D.C. would allow it to gather data on everyone without a warrant.

“Financial transactions paint a really detailed, intimate portrait of your life,” says Marta Belcher, special counsel to the Electronic Frontier Foundation. “[The government] shouldn’t be gathering information by default on all citizens.”

Despite the privacy concerns, proponents say C.B.D.C.s provide many benefits. A digital currency might save taxpayers money if a government no longer needed to print as much cash. The government would also be able to issue payments such as tax refunds instantly. And it could be easier for people with low incomes to use a C.B.D.C. rather than traditional bank accounts, which often charge fees and have high minimum-balance requirements.

Compared with China, the U.S. has moved slowly to create a C.B.D.C., but the fact that other countries are making progress will likely speed things up. Although there’s still a lot of research to be done, Dryja notes that young people can have a say in what an American C.B.D.C. might end up looking like.

“If you’re a senior in high school, you can probably work on this technology before it gets widespread,” he says. “It’s all still up for grabs.”

Compared with China, the U.S. has moved slowly to create a C.B.D.C., but the fact that other countries are making progress will likely speed things up. Although there’s still a lot of research to be done, Dryja notes that young people can have a say in what an American C.B.D.C. might end up looking like.

“If you’re a senior in high school, you can probably work on this technology before it gets widespread,” he says. “It’s all still up for grabs.”

With reporting by Nathaniel Popper, Cao Li, and Jeanna Smialek of The New York Times.

With reporting by Nathaniel Popper, Cao Li, and Jeanna Smialek of The New York Times.