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Will The US Digital Dollar, A Fiat Currency, Be Able To Ride The Crypto Wave?

Fiat and digital currency in a shopping cart

The US dollar has been the world’s most valuable reserve currency for decades, supported by the US government’s complete confidence and credit and the strength of its economy. However, the world’s most popular monetary unit has faced a growing number of concerns in recent years, ranging from its own inadequate financial infrastructure and the advent of the Chinese e-yuan to the specter of Facebook’s Diem and cryptocurrencies like Bitcoin.

As nations like the Bahamas, China, and Sweden put central bank digital currency (CBDC) to the test, officials in the United States are taking stock. In an era where cash is no longer king, two US-based initiatives are investigating the notion of a digital fiat dollar. In an experiment dubbed Project Hamilton, the Massachusetts Institute of Technology’s Digital Currency Initiative is collaborating with the Federal Reserve Bank of Boston on research to kick-start the potential monetary transition. The head of the Boston Federal Reserve has stated that a future “Fedcoin” will combine the characteristics of Venmo and Apple Pay.

In the coming year, the Digital Dollar Project, a cooperation between the non-profit Digital Dollar Foundation and consultant Accenture Plc, will conduct five trials. That initiative aims to spark public debate and take concrete actions toward establishing a CBDC. “Data collection and economic confidentiality, financial system modernization, financial inclusion, accuracy in the execution of welfare payments and monetary policy are all justifications why central banks around the world are taking CBDC seriously,” said Christopher Giancarlo, founder of the Digital Dollar Foundation and a former US government regulator.

According to Giancarlo, the United States is motivated by “geopolitical concerns, the rivalry of stablecoins with bank payment systems, and leadership in defining standards for global digital currency interoperability.” “For over a decade, the private sector has been investigating the potential of digital assets like Bitcoin, and now the public sector is catching up,” he added.

Mining blocks aren’t required

According to Chris Ostrowski, managing director of the Digital Monetary Institute in the United Kingdom, there is no assurance that the United States would effectively embrace a digital dollar. Progressives, libertarians, and business-oriented technologists all have various visions of what a CBDC should look like, with no consensus on objectives, design, or functioning. Advocates for a digital dollar, such as Rohan Grey, head of the Modern Money Network and a professor at Willamette University College of Law, say that a coordinated framework with numerous routes may be pushed forward by a whole-of-government approach.

Grey argues that US President Joe Biden should collaborate with Congress to develop a dollar digitalization strategy, similar to how government agencies collaborate, at least in principle to address difficult challenges like the coronavirus epidemic, economic recovery, and climate change. This can also be used by the traders to enhance their financial conditions while implementing CBDC in the industry. It will definitely require the same guidelines as to how to trade forex for beginners since the demand already shows that a lot of people are willing to become involved in it.  Grey told Al Jazeera, “We’re not talking about one instrument, platform, or technology; we’re talking about a whole set of legal reforms.” Senator Sherrod Brown, a Democrat from Ohio, has proposed creating a “FedAccount” digital dollar wallet for every American to receive benefits and make payments, which is one of the contentious alternatives proposed by progressives.

The technology would be simple to use and free of charge at local banks. Senators Bernie Sanders and Kirsten Gillibrand have co-sponsored legislation to allow the US Postal Service to conduct retail banking. Representatives Rashida Tlaib and Alexandria Ocasio-Cortez proposed the Public Banking Act, which aims to “enact banking as a public utility, a proven model globally, to keep money local and decrease costs by removing Wall Street intermediaries, stockholders, and high-paid executives.”

Grey views potential “eCash” solutions as a populist weapon for combating inequality and making money more democratic by providing token-based digital currency on stored-value cards, in addition to account-based ledger technology, in which people own assets directly at the central bank. Grey, like many other left-leaning advocates of the digital dollar, believes that blockchain, the technology that underpins cryptocurrencies, is unnecessary where centralized trust is sufficient.

“Blockchain is meant to represent a consensus among a group of peers on a shared state of affairs,” he added, referring to the way crypto networks authenticate transactions. “No mining blocks or proof of effort are required.” CBDC and decentralized crypto may coexist in the future. In any case, the private Bitcoin has accelerated the discussion about the latter partially replacing paper currency and physical coins.

Benefits and dangers

Whether a digital dollar ultimately depends on the blockchain or is just inspired by cryptocurrency ideas, US politicians of all colors appear to be unified by a desire to avoid being perceived as falling behind, in a competitive global race in digitizing the greenback. Many observers see a US economy that has always been at the forefront of the internet and fintech sectors, and they fear that Beijing will eventually shift its CBDC from a limited domestic implementation to a replacement for the popular Alipay and WeChat payment systems that already dominate much of Asia.

Despite worries about illegal financing and money laundering, US authorities criticize the Chinese model’s surveillance and consumer data-gathering implications. Both US Federal Reserve Chairman Jerome Powell and US Treasury Secretary Janet Yellen have shown growing support for a digital currency, while their comments regarding the lack of complete anonymity for users have raised concerns, particularly among conservative legislators.

Some US House of Representative’s libertarians are optimistic on cryptocurrencies but pessimistic on large government. At a Task Force on Financial Technology meeting on June 15, ranking Republican member Warren Davidson, an Ohio congressman, said that authorities are still in the “learning phase” for a digital currency. He called the present financial system “secure, effective, dynamic, and efficient,” and said the US should seek digitalization “for the right reasons, not just to put pressure on ourselves.”

The main point of contention for Davidson is “sound money,” or the fear that digital currencies would destroy stability and prosperity. However, he warns against straying too far from cash’s “permissionless” characteristics, which allow for anonymity in peer-to-peer transactions. According to Al Jazeera, the digital dollar should be established “not as a weapon for control, but as a store of value and a means of trade.” Patrick McHenry, the leading Republican on the House Financial Services Committee, called for a comprehensive examination of both the “advantages and dangers,” agreeing with the Fed’s aim to “doing it right rather than being first.”

Other Republicans are concerned about the inflationary risks of “printing” too much money, as well as the hazards of the government trying to do what commercial banks currently do. In addition, having the intermediate institutions in place might protect the Fed from cyber-attacks.

A convenient addition to cash

The 21st Century Dollar Act, a bipartisan law mandating the Secretary of the US Treasury to give status reports on the dollar’s supremacy and the progress of CBDC development, may bring Wall Street and financial technology businesses together. The European Central Bank and the Bank of England, which recently issued papers on the subject, are among the 80 percent of central banks actively investigating the CBDC concept.

The Bahamas launched the “sand dollar” in October, making it the first national rollout of such technology by a central bank. The Eastern Caribbean Central Bank launched DCash in April. Next year, the Bank of Jamaica intends to launch digital money. The technology supplier for the Jamaican initiative is eCurrency Mint Inc, located in Ireland. Miles Au Yeung, the company’s chief marketing officer, believes the United States may follow suit. Only the Treasury and the Federal Reserve, he said Al Jazeera, should have the right to create, issue, and circulate this new kind of legal currency.

Any CBDC must be able to function within the financial system’s traditional payment rails, such as bank accounts, applications, and payment cards, while also extending to smartphones, QR codes, and other creative methods to store digital objects, Yeung added. He said that the digital currency must accomplish quick and final settlement, as well as the ability to grow “massively with little energy usage.

Local business NZIA Ltd installed the new digital currency in the Bahamas, describing it as the most mature, advanced system of its type and adding that the CBDC they created is a convenient supplement to cash, according to general counsel John Kim. While the CBDC in Jamaica does not use blockchain, Kim claims that the Bahamas model is a “best of both worlds” hybrid that mixes blockchain and centralized systems. He also says that he is keeping an eye on the US digital dollar. Readiness is just as crucial as willingness when redesigning mission-critical national infrastructure.

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