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- [Narrator] The Federal Reserve might want to fix your wallet by turning it from this into this. (phone beeping) Though your wallet is still designed for dollar bills, Americans have been using cash to buy things less and less over the years. (till dinging) That's part of why the Fed is considering digitizing the US dollar, giving people money they can access on their phone and bypassing electronic payments that can be slow and costly for businesses. Some see this as a necessary upgrade to the US financial system but others worry it could potentially upend commercial banking. - There's some very, very difficult questions to answer but I think we, and we are engaged in a serious program to understand both the technology and the policy issues. - [Narrator] A central bank digital currency, or CBDC, is exactly what it sounds like, a purely digital form of a country's money issued by its central bank that people can use just like cash. It's true that cards and apps already allow for electronic payment but behind the scenes, these financial transactions involve several steps, settling payments over a patchwork of systems. - The plumbing of the system is still based on a cash system. - [Narrator] Josh Lipsky is the director of the Atlantic Council's GeoEconomics Center and says the US financial system is still pretty old school when it comes to moving money around. - It's based on banks talking to banks, saying hey, I need you to transfer this to me. We've updated some of that over the years but actually, if you were to look back, a lot of it dates back to the 1950s and before. And that's not a great way to run a modern global economy. - [Narrator] After a debit card is swiped, the transaction can flow through several entities, including point-of-sale systems, payment networks like Visa and Mastercard, your bank and the merchant's bank. The system can take up to three days to move money between accounts and often comes with transaction fees that can weigh heavily on small businesses, who experts say may have to pass the cost onto customers or put restrictions on card usage. These extra costs can limit their revenues and customer base. CBDCs could bypass this system, allowing digital money to flow directly between two people, in the same way you hand over cash at the register. One method the Fed is considering is issuing digital wallets to Americans directly or through commercial banks or other financial service providers. The digital dollars themselves would be no more than computer code, possibly stored on a central ledger at the Fed or on a distributed ledger, like many cryptocurrencies. When you use your wallet to pay for something, the Fed would take the digital cash out of your wallet and deposit it into the merchant's, simplifying the process and doing it without fees. These could be done through an app on a phone or for those without smartphones,...