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Do crypto holders need to fear the digital dollar? |

The value of cryptocurrencies has become increasingly unstable, with the value of Bitcoin dropping by nearly 40% in 6 months. However, many people are still hopeful that cryptocurrency will continue to increase in value. This is because their return on investment (ROI) was exponentially higher than other investments like stocks or real estate during this period. Experts say that while it’s true not all cryptocurrencies went up- but most did, and ROIs were better for coins like Ethereum and Monero than others., so crypto holders should remain optimistic about what could come next

The “digital dollar project” is a cryptocurrency that will be backed by gold. The digital dollar will be released in 2020 and will be worth $1 per token.

The US government has previously proved that it has access to infinite money production via central banking. What would it entail for the value of crypto assets if it launched a CBDC (central bank digital currency)?

What Is the Use of a Digital Dollar?

Have you ever wondered why you can make bank transfers using your banking app during business hours but not on weekends or holidays? After all, the smartphone app – and the internet – are both available 24 hours a day, seven days a week. To grasp this, you must first comprehend the essential distinction between an electronic dollar (the one you get via your bank’s app) and a digital one (a CBDC). This elucidates why the digital dollar is even required in the first place.

Your cash deposits may have been digitized via the banking app, but the connection between the Federal Reserve and commercial banks remains the same:

  • The Fed ensures liquidity and financial stability by settling interbank payments risk-free.
  • Accounts provided to commercial banks act as monetary bridges between the Fed and the general population.
  • Commercial banks may issue electronic money for cash under their control, but they must redeem USD in a 1:1 ratio.

In other words, money produced by commercial banks to the general public might be considered a stablecoin, fixed to the US dollar. This fixed exchange rate gives the monetary system its legitimacy. Furthermore, deposit insurance and regulation ensure that Fed money and commercial bank money are interchangeable.

However, since there are so many intermediates in the process, there is a lot of friction. The ACH (Automated Clearing House) Network, for example, cannot settle payments over the weekend since the Federal Reserve is closed.

As a result, despite the fact that companies may take payments 24 hours a day, 7 days a week with software like Wave, your mobile app does not have 24/7 access to electronic money transfers.

What Problems Would the Digital Dollar Address?

Banking hours are clearly obsolete in this era of global interconnection and 24/7 internet services. This custom would be completely replaced by the digital dollar.

Similarly, since there would be fewer middlemen, local and international payments would be handled quicker and for less money. Most crucially, accessing digital currency would not need a bank account, but rather a mobile app wallet.

Finally, the digital dollar would become the most potent monetary weapon ever devised in the fight against money laundering and tax avoidance. The reason for this is simple: all transactions would be able to be traced at any moment.

What Would Be the Function of the Digital Dollar?

86 percent of the world’s central banks are looking at CBDCs, according to the BIS (Bank for International Settlements). China, however, is the only country that has put it to the test. China’s digital yuan (e-CNY) has been utilized in approximately 1.32 million payment situations, resulting in a total transaction volume of $5.4 billion.

Without a doubt, major central banks, like the Fed, are keeping a close eye on how e-CNY functions, so learning more about how it works is really beneficial. To begin with, e-CNY looks to be built on DLT (distributed ledger technology), rather than blockchain. The distinction between DLT and blockchain is that the latter uses cryptographically linked data blocks to produce immutable records.

DLT, on the other hand, does not have to employ this mechanism, although it does make use of numerous data nodes (computers on a network). Simply put, blockchain is a sort of distributed ledger technology. The People’s Bank of China (PBoC) chose a permissioned DLT-based currency produced as M0 money supply for the digital yuan.

Do crypto holders need to fear the digital dollar? |Deutsche Bank provided this image.

This implies the PBoC will be directly responsible for e-CNY issuance. In the United States, for example, the Federal Reserve distinguishes between M1, M2, and M3 money supply, each corresponding to a distinct sector of the economy. It is a risk-free system because of the efficiency of having a M0 money supply.

Furthermore, since just a mobile phone number is necessary, an e-CNY digital wallet is not considered a bank account. The PBoC has the option of designating e-CNY as M0 digital cash, which would prevent it from accruing interest. Finally, it is the responsibility of commercial banks to withdraw e-CNY and turn it into deposits.

In a nutshell, digital yuan, or e-CNY, is a hybrid digital cash that is account-based.

Will the CBDC structure be used in the Digital Dollar?

As you can see, a CBDC may be altered in a variety of ways. Its key strength is its programmability. The key distinction between account-based and tokenized is this:

  • Accountability – Instead of using commercial banks, FedAccounts would enable ordinary users to access the Fed’s M0 money supply. Professor Morgan Ricks of Vanderbilt Law School introduced the FedAccounts idea.
  • The Dollar Has Been Tokenized — The Digital Dollar Project, proposed by former US Commodity Futures Trading Commission (CFTC) Chairs J. Christopher Giancarlo and Daniel Gorfine, would be a digital version of real currency. Commercial banks would distribute it, and it would function alongside commercial bank money and conventional currency.

Unfortunately, the programmability of CBDC is a double-edged sword, with serious drawbacks such as:

  • Loss of privacy – unless particularly designed not to, the central bank would be able to follow all transactions.
  • Businesses or individuals might be deplatformed by the central bank, thereby freezing their cash.
  • Negative interest rates might be implemented by the central bank.
  • To encourage expenditure, the central bank might set expiration dates for a specific amount of CBDC.

Finally, since a CBDC essentially creates a centralized spending record, the central bank might prohibit CBDC purchases of particular goods.

Implementing the digital dollar, if not done wisely, may lead to mind-boggling authoritarianism, in which every facet of monetary life might be monitored, sanctioned, controlled, or limited in some manner. This raises the most crucial question: how will CBDCs effect cryptocurrencies?

Cryptocurrencies vs. the Digital Dollar

When it comes down to it, the permission type is the key distinction between digital fiat currency and cryptocurrencies. A permissionless blockchain network is used by Bitcoin and hundreds of other cryptocurrencies. Anyone with a computer and internet connection may join the network as a validator or a miner in order to secure it.

As a result, a permissionless blockchain will result in decentralization and a trustless system. A CBDC, on the other hand, would depend on centralized trust. The general population would be cut off from it, basically renting digital money and relying on top controllers’ generosity.

Above all, unlike Bitcoin, which has a cap of 21 million units, a CBDC would be inflationary. This would be enough to keep it from increasing in value over time. In reality, the reverse would occur, precisely as it is today with rising inflation rates over the world, pushing people into deflationary cryptocurrencies such as Bitcoin.

These phony coins are getting out of hand. Someone recently shilled for me:

– 27 trillion in circulation – limitless supply – only one node – 25% of supply minted in the previous 6 months – 1% of holders possess 30%

That is, of course, the US dollar.

May 17, 2021 — Ryze (@joinryze)

As a result, the most probable effect of the debut of the digital dollar would be twofold:

  1. Getting through the mental hurdle of thinking of digital assets as “shady code with little value.” After all, if the US government establishes a CBDC, other digital assets will gain validity as well.
  2. CBDC would have a strong relationship with cryptocurrencies. VISA, for example, has already created a Universal Payment Channel (UPC) enabling cross-blockchain transactions. After that, leaving one digital environment and entering another would just take a few steps.

For example, when individuals learn that certain decentralized finance (DeFi) protocols beat the stock market by 6x to 20x, “high yield” banks accounts with 0.50 percent APY will no longer seem so appealing.

In a recent interview with ETF Edge, Michael Sonnenshein, the CEO of Grayscale, which has $43 billion in assets under management, provided the following assessment:

“I believe that all points to the digitalization of money as something that both investors and the ordinary individual… who isn’t in the investing market may benefit from.”

One might even argue that the sheer existence of Bitcoin, which just surpassed a $1 trillion market valuation, is constraining CBDC growth so that its monitoring capabilities do not terrify the public. Indeed, Philip N. Diehl, President of the United States Money Reserve, called for a similar method – establishing an anonymous digital dollar with the same usefulness as actual banknotes.

Shane Neagle of The Tokenist contributes a guest piece.

Since 2015, Shane has been a vocal advocate of the decentralized finance movement. He’s authored hundreds of papers on the topic of digital securities, which are the combination of conventional financial securities with distributed ledger technology (DLT). He is still enthralled by the expanding influence of technology on business and daily life.

Find out more.

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Do crypto holders need to fear the digital dollar? |

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The “when is the digital dollar coming” is a question that has been asked by many people. The answer to this question is not known, but it will be soon enough.

Related Tags

  • digital dollar 2021
  • federal reserve cryptocurrency 2021
  • digital dollar stock
  • government-backed digital currency
  • u.s. government-backed cryptocurrency

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