By: Moshe Coronel  | 

What’s a Digital Dollar?

By now, we’ve all heard of Bitcoin and other cryptocurrencies and their potential competition to centralized currencies such as the US Dollar or the Euro. However, there appears to be a compromise on the horizon: a digital centralized currency. So the question becomes, what could that be and what are the potential monetary implications of these new developments?

Conceptually, money, or units of exchange more broadly, have been around for a long time. Starting from bartering, then developing into coins and paper bills, and today moving into cyberspace, money has become increasingly fast in its transaction abilities. But what is money even worth? A $20 dollar bill is just a piece of paper and an electronic transaction isn’t even that. The answer lies in the dollar bill’s history. The US Dollar started out as a gold-backed currency; that is, every dollar issued by the government had an equivalent value in gold. There was a concrete valuation to each dollar, and the dollar was merely a more convenient method of trading than carrying around gold all day. As time went on, there was an increasing need to print more currency to facilitate more transactions and using gold became untenable as a basis for the currency. In the 1970s, the United States took the dollar off the gold standard, and the currency lost any sort of connection to a tangible item. If the currency is effectively devoid of intrinsic worth, what are we trading and using everyday to buy our mint Milano cookies? The answer is that it is a self-fulfilling prophecy: the dollar and any other non-backed currency has value because we believe it has value. This sounds simplistic but indulge me for a moment. What gives anything value if not our designation of value to it? Even gold is just an element but society deems it valuable and so it is. A dollar or any currency for that matter is just an extension of our confidence in its societal acceptance.

Once we’ve established that there is no intrinsic significance to the dollar, we can now understand how other sorts of currencies develop. The dollar is backed by the “full faith and credit of the United States” government, which is a fancy way of saying nothing. We believe that the United States government and economy will provide a strong perception to the world of the dollar’s soundness and so we use it as a medium of exchange. That perception can be challenged in a number of ways, such as global instability, fear that the government will not pay its debts, or because the real value of each dollar has decreased over time. This has led to the creation of currencies not tied to a central bank or other institution that can regulate it, commonly known as cryptocurrencies. There are a number of advantages of cryptocurrencies like Bitcoin over central bank-regulated currencies such as the dollar or Euro. Firstly, because currencies like Bitcoin are unregulated by the government, it is both effectively anonymous and very accessible. It can take days for wire transfers done in dollars to take place. It takes seconds for bitcoin. Secondly, there are a finite amount of bitcoins, and so their value is secured. Traditional currencies on the other hand are printed at the will of the Federal Reserve or other central banks,and there is no real limit to how much they can print which leads to constant concerns of devaluation. Thirdly, cryptocurrencies are much more transparent. Whereas dollars can be forged or stolen, transactions executed using cryptocurrencies are tracked by a technology known as blockchain which makes it virtually impossible for transactions to be faked or bitcoins stolen.

With all those advantages being true, there are some fairly intuitive reasons why Bitcoin and the like haven’t yet replaced the greenbacks. As  mentioned before, the whole value of a currency is in its stable ability to provide value, something which traditional currencies like the dollar are good at doing and Bitcoin is not due to its constant volatility. Secondly, even though there are benefits to currencies being unregulated such as speed and efficiency, there are potential risks of scams which happen quite often. Finally, currencies such as the dollar provide guaranteed insurance even in downtimes up to a point; in the US, deposits are insured up to $250,000. With cryptocurrencies, that kind of assurance does not exist. 

So we’ve discussed why money exists, why cryptocurrencies exist and why they haven’t replaced traditional currencies yet. Now we can answer the title of this article: what is a digital dollar? There are organizations currently lobbying for a digital dollar: like the dollar, a currency backed by the full faith and credit of the United States, and like cryptocurrencies, completely online and easy to use. A complementary online system to the current form currency sounds difficult to implement even in theory, all the more so in practice. There are a number of technical questions that need to be answered, such as if there can be adequate protections of consumer privacy in the use of a online-monitored currency, if there can truly be seamless interchange between physical dollars and digital dollars and if it will complicate existing policies designed to stabilize the dollar’s value by adding another monkey in the wrench. The United States isn’t alone in answering these questions. Currently, 11 countries, mostly based around the Caribbean, are experimenting with some sort of digital currency and another 100, including the world’s most advanced economies, are in the process of hammering out their technical and policy challenges. There is some pushback, however, as Federal Reserve Governor Michelle Bowman gave a speech that highlighted many of the aforementioned concerns. Bowman discussed “the risk that a CBDC would provide not only a window into, but potentially an impediment to the freedom Americans enjoy in choosing how money and resources are used and invested.” A number of Republican politicians, including Sens. Ted Cruz, Mike Braun, Chuck Grassley, Rep. Tom Emmer, and Florida Gov. Ron DeSantis have also openly opposed a digital dollar citing privacy and effectiveness concerns.

How this all plays out will remain to be seen.What is certain is that whether or not the US decides to go forward with a digital dollar, it will have to grapple with a constant battle to keep up with ever-advancing technology, and maintain the dollar as the reserve currency of the world.

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Photo Caption: Digital Currency

Photo Credit: Pixabay