The discussion around the digital dollar fired up again lately, with the Yahoo Finance report yesterday, that FED launches a pilot program to explore the digital dollar.
What people don’t know well today, the dollar is already digital. There are various studies of what are called M1 and M2 money types. One of the most prominent articles is from independent. The study shows that only around 10% of all the dollars in existence are cash. The rest is digital, you can see it on a bank account, but it exists only as a digital number in the database.
The US dollar is not the only currency that is majority digital. Most of the bank account statements around the world are just digital. Even in a county like Germany, which loves cash, only around 10% of the Euros are cash.
So what is central bank digital currency?
Central bank digital currency is electronic cash. Just like the cryptocurrencies today, it is an entry in some database and does not exist in physical form. Unlike cryptos, the currency is government-backed. This means that it would be recognized as “money” and allowed for broad use. You can use it to buy goods, services and pay your taxes.
How is that different from regular bank account?
The major difference would be that this is government, central bank money. It is basically a direct claim to the central bank that allows instant electronic payment. Currently, the central banks distribute the money to the banks. The banks act as middlemen. But with the digital dollar or cash, money will be converted to a digital code. This unique code can be stored in several different ways, like on a mobile phone, digital tokens, on your computer, etc. It doesn’t require a middleman for distribution anymore.
While today’s transactions are digital too, those transactions are operated by the banks. They are not fully government-backed and can take a long time to proceed. You can see it as a response to cryptocurrencies to improve banking and payment systems.
Why not using cryptocurrencies?
Cryptocurrencies are backed by the private sector and that is seen as a problem by the governments. There is an additional challenge, the cryptos are not efficient. To prevent double spending, they utilize blockchain or other types of cryptographic tech. This makes them slow and consuming a lot of energy. Distributed databases today are especially well suited to handle a high volume of transactions. Bitcoin, as the most popular cryptocurrency, can process only around 4 transactions per second on average. In comparison, only Visa requires up to 20000 transactions every second, and that’s not the pick.
Does it mean cryptocurrencies are dead?
Nobody knows for sure. More and more governments around the world are making payments with cryptos illegal. We do not believe in crypto’s long-term and especially now, it is unclear which one will survive. We can consider the Digital Dollar and Cash as the beginning of the end of the cryptocurrencies.
Is it good or bad?
As you can imagine, banks would not like the idea. This would basically disrupt their business. The central banks see it as a way to distribute cash directly. Currently, they are lending cash to the banks at unprecedented low rates, but it is not clear how much of it goes to businesses for example.
Digital Dollar or Cash could have also privacy issues. It may result in better control on spending for example, or instance invalidation of cash at will.
What it means for stocks and trading?
Generally, nothing changes. We continue with our investments and trading as usual. Whatever you have invested long term, stays so. In most cases, a stable business would be the better option to hold than digital cash anyway.
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