The U.S. Federal Reserve (FED) Chairman Jerome Powell talked about consulting the public on the issuance of digital dollar. The central banking system of the US wants to discuss advantages and disadvantages of US Central Bank Digital Currency (CBDC). It handed out notes that outlined preconditions required to implement CBDC and wanted to know its implications on different consumer groups, businesses, and community organizations. FED will engage with these entities to assess the need for its digital currency and how it could be designed.
The move came after immense success of decentralized cryptocurrency like Bitcoin (BTC), Ethereum (ETH), Tether (USDT), etc. Even a currency meant to be as a joke, Dogecoin is rapidly picking up pace in the market. The freedom these coins offer in mining and trading has attracted more common users towards investing in cryptocurrency.
The discussion about a state-backed digital coin has raised many ears in the world of cryptocurrency. Many are asking questions about the nature of this new monetary policy.
Digital Dollar Will Be Centrally Controlled By Federal Reserve
The first alarming concept about the digital dollar is that the state can get transparent access to each of its user’s transaction history. Reportedly, US Congress would have to authorize FED to legally access financial dealings of all users and control digital dollar as a centralized property of its own.
The critics of a centralized system were not impressed by this proposal. It is because the current monetary system has caused more damage than the FED Chairman was letting on. A centralized digital currency offers no real freedom of economy for an individual. Instead it demands more access into user’s financial on-goings. This access, mixed with the ability to track detailed transactions, means unprecedented control for the banks and authorities. This has led many critics to proclaim that the government was trying to force users away from Bitcoin and altcoins; in order for digital dollar to make a ground breaking entry.
According to the reports, FED is also looking at blockchain technology and MIT Digital Currency Initiative to determine which platform will better support the digital dollar.
How CBDC Can Help Fix The Monetary System?
A government with CBDC can implement any kind of fiscal policy directly to the businesses and citizens. Moreover, governments would have the ability to set desired rate of taxes and interest rates. They could even have different rates for different elements, which could be both good and bad. From controlling the amount of an individual’s financial standing, the program seems to move towards regulating consumption.
CBDC will subsidize the purchase of certain products and add taxes to others. It means that, particular groups of people could be totally banned from buying specific products; such as cigarettes or alcohol for teenagers, or luxury goods for those who receive welfare. In the time of crises like coronavirus pandemic, it can allow governments to restrict the purchase of products from long distance. After that, the state could offer stimulus payments to force consumption again while preventing withdrawal of funds. This means that any remaining money in the digital wallet would be useless for the consumer. It will enable the government to conceal Inflation while making users’ transactions transparent. Yet, the users would not be able to spend more money than the government restrictions.
Restricting potential transactions will help the state in balancing the budget system with compulsory bonds instead of CDBC. It’s a long-term debt convertible bond that allows repayment of debt without cash. Governments can simply issue these bonds and temporarily stop individuals and businesses from using their remaining money in the wallet. In this situation, currency reform becomes simple which will force the value of user’s currency in the wallet to depreciate. Then eventually it would be forced to exchange at a rate set by the government. This new management control authority by CBDC could give massive powers to the governments, as if they don’t have them already.
How Is It Different Than Other CrypoCurrency?
A democratic senator argued whether the new plans of FED include the reforms for generational poverty and racial disparity. A concern that is more vital than centralizing digital currency for governments to regulate consumption and transactions. Banks have become extremely discriminatory with a focus on progressing selective population. As a result, a very large number of average people have been left behind in the economy.
On the contrary, decentralized digital currencies have been a solace for those who were left out by the IMF’s monetary system. Bitcoin, not so much as it has deviated from its original purpose to be an average man’s coin to an elitist attractor. As for many other digital coins, a manual labor, a low-skill worker, or even a 10-year old kid can mine their own currency. Users can even mine the cryptocurrency on their smartphone (slow) if they cannot afford a massive rig for speed-mining. This type of freedom in economy takes away some business from banks or may eventually drive them to issue their own digital currency. A number of people in the US still face problems in easy payment systems and FED thinks digital dollar can fix them.
Moreover, US dollar is already digital for a group of people. This new development just amplifies the US government’s plans to move away from the cash altogether. By promoting the term digital dollar, they just announced that people should stay in the centralized system because they got their own digital coin too.