The rapid rise of Bitcoin and its roughly 3,000 cousins has already begun disrupting payments and transfers around the globe, and brings with it the promise of faster, cheaper, and more convenient financial transactions. Bitcoin itself is not the answer, as we shall see, but the United States is taking a very hard look at an official Central Bank Digital Currency (CBDC) issued by the Federal Reserve that could provide the benefits of cryptocurrency with the necessary sovereign control and safety of the U.S. dollar.

Both the Federal Reserve and the Biden Administration are putting the finishing touches on major discussion papers to be released in October addressing the pros and cons of a U.S. digital currency, but its eventual adoption seems inevitable.

Fans of Bitcoin tout it as a replacement for government-issued fiat money. This is impractical for a host of reasons, not least because of its inherent instability. Bitcoin proponents frequently promote it as a “store of value” better than national currencies like the dollar, which are potentially subject to devaluation by governments or erosion by inflation. As anyone who lost half their value in Bitcoin last summer can attest, its promise as an inflation hedge proved only slightly less risible than the My Pillow guy. Furthermore, it is impractical to believe that countries would surrender control over their sovereign money supplies, through which most monetary policy levers are pulled.

But Bitcoin, Ethereum and other crypto currencies have served a valuable purpose in demonstrating the powerful utility of the Blockchain, the underlying technology platform that supports transactions in digital assets. The obvious next step is to apply the same technology to improving the antiquated and cumbersome payment processing and transfer system currently in place at commercial banks and the Federal Reserve. In fact, the U.S. is coming to the party fashionably late; China is already conducting cross-border financial transactions with its digital Renminbi and has outlawed private cryptocurrency exchanges. This crackdown by the Chinese triggered another dip in Bitcoin’s value but provided additional motivation for the United States to get it in gear. About three fourths of the world’s nations are looking at digital currencies or experimenting with them.

Aside from the cachet of the crypto craze, there is a real and immediate need for the United States to upgrade its financial transaction and clearing systems to remain competitive in an interconnected digital world. As most of us have experienced, even when we are not using paper money, it takes way too long to effect simple purchases or transfers. Checks take time to clear, deposits are impounded until funds clear, the system only operates for the most part during Bankers’ hours, and it all costs too much. All these drawbacks create frictional losses for businesses and individuals that should no longer exist in a digital age and could potentially be greatly reduced by applying the blockchain technology rails upon which existing cryptocurrencies presently ride. In addition, the adoption of a CBDC could address the serious issues facing the sector of the population which is currently unbanked or underbanked and pays significantly higher fees to transact routine business.

Perhaps the most prominent proponent of a Central Bank Digital Currency in America is Fed Governor Lael Brainard, noting China’s head start and the non-zero possibility that widespread adoption of non-U.S. CBDCs could endanger the dollar’s special role as the global reserve currency. It is this unique privilege that has allowed America to defer paying the inevitable price for our lack of fiscal discipline.

But not everyone agrees that a U.S. cryptocurrency is necessary. Fed Governor Christopher Waller noted that the Fed is getting close to deploying a drastically improved and streamlined 24/7 clearing mechanism called FedNow that would address some of the arguments for a CBDC. Others argue that the Blockchain could be (and is being) applied to dollar transfers and payment processing.

The momentum appears to be on the side of adopting a digital dollar. But there are significant implications, especially for commercial banks who presently serve as critical intermediaries, that must be addressed. With the release of the two pending government reports, the real work begins.

Next week: a closer look at practical implications of a digital dollar.

Christopher A. Hopkins is a chartered financial analyst in Chattanooga.