Digital dollar: why is it in the news?
The United States of America has taken a step towards issuing its own digital currency to the central bank. The Federal Reserve recently announced this and also said it would launch the research article later this year.
The cryptocurrency market has recently dropped dramatically, with several cryptocurrencies falling by more than 25% in 24 hours, so the timing of the announcement has become important.
In addition, China has joined several countries that have closed the central bank’s space for digital currencies, raising concerns that the US dollar’s position could now be undermined.
What is the central bank’s digital currency (CBDC)
Unlike private cryptocurrencies, the central bank’s digital currency will always have the central bank on its shoulders and with it the government.
This can mean that only a fraction of your total dollar savings will be converted to digital format. It cannot be paid in cash.
According to the US Federal Reserve Jerome Powell, the central bank has closely monitored and adapted to recent technological innovations.
“This effective functioning of our economy requires people to trust not only the dollar, but also all the other payment networks, banks, and other payment service providers that make money flow daily,” Powell said.
Digital dollars: planning and execution
The US Federal Reserve will publish a timely document outlining the benefits and risks of a CBD.
2. They then request public comment on the plan, regardless of whether they want to implement it with the reported risks.
3. As in the case of Powell, the trial is deliberate and cautious, and it has been decided not to enter into force until a wide range of rumors about the case are considered.
4. Before the US decides to proceed, the US business community will also consider broader risks and opportunities.
5. The CBDC should be designed according to the wishes of the Fed for use by the general public and should be a compliment and not a substitute for money.
Cryptocurrency: Recent Shares in China
1. A week ago, China banned all financial institutions and payment companies from offering cryptocurrency services.
2. It can only mean that banks and other online payment channels do not have to offer their own cryptocurrency services.
3. This includes activities such as registration, trading, clearing, and establishment.
India’s position on cryptocurrency:
The Indian government has introduced cryptocurrency and regulated the official legislation of 2021 on digital currencies.
Private cryptocurrencies are expected to be targeted, a regulatory mechanism will be implemented and a new official digital currency will be launched.
It was presented during the parliamentary budget session but took place while the government was in discussion with stakeholders.
Benefits of digital currency
• Faster payments. With digital currencies, payments can be processed much faster than current means, such as ACH or bank transfers, which can take days before financial institutions confirm a transaction.
• Cheaper international transfers. Transactions in international currencies are very expensive; People pay high fees for transferring money from one country to another, especially when it comes to currency conversion. “Digital assets disrupt this marketing and make it faster and cheaper,” said Andrew Kiguel, CEO of Tokens.com.
• 24/7 access Existing transfers usually take longer on weekends and outside normal business hours because banks are closed and unable to confirm transactions. With digital currencies, transactions are done 24 hours a day, seven days a week at the same speed.
• No banks and no bank support. According to the FDIC, more than 7 million American families do not have a bank account. Eventually, they pay expensive commissions to receive their salaries and send payments to others via money order or bank transfer. If the country were to establish a CBDC, people without a bank would have access to their money and pay their bills at no extra cost.
• More effective government payments. If the government develops a city center, it can immediately send payments such as tax refunds, family benefits, and food stamps to people, instead of sending a check or discovering prepaid payment cards.
Disadvantages for digital currencies
• Lots of currencies to browse now. The current popularity of cryptocurrency is a drawback. So many digital currencies are being created in different blockchains that all have their limitations. “It will take time to determine which digital currencies are suitable for specific use cases, including whether some are designed to be widely accepted,” Tessler said.
• Do your best to learn how to use it. Digital currencies require the user to learn how to perform basic tasks such as opening a digital wallet and properly storing digital assets. In order to accept digital currencies more widely, the system must be simplified.
• Blockchain transactions can be expensive. The cryptocurrency uses blockchain, which requires computers to solve complex equations to verify and record transactions. It requires a lot of electricity and becomes more expensive the more transactions are made. It probably does not exist for a CBDC as it is likely to be controlled by the central bank and does not require complicated consensus processes.
• Large price fluctuations for digital currencies. The prices and value of cryptocurrencies can suddenly change. Cunha believes this is why companies are reluctant to use it as a medium of exchange. As a company, do I want to accept something fleeting? What if I own a Bitcoin for a week and it loses 20% of its value? However, with the CBDC, the value is much more stable, like paper money, and cannot fluctuate as much.
• The development of a CBDC takes time and effort. A US CBDC is still hypothetical. If the government decides to establish one, there will be costs associated with development.
How does digital currency affect you?
If the US adopts a digital currency it will be an alternative to money, but it also has the inherent advantage of a fast money transfer as it is electronic. Cunha has a number of ideas about what this will be like for the consumer. ‘Our suspicion is that it will be free or almost free, like money. Other private sector actors can also innovate and potentially add taxes, but more needs to be offered. “
Although digital currency is electronic, it must still be available in cash. “Everyone should be able to use it, not just those with the latest smartphones,” said Cunha. This suggests that disk cards, POS systems, and web accounts are alternative ways to access the CBDC. He also believes there should be a way to handle offline transactions so that two people can exchange CBDCs even when they are not on a cell phone or Wi-Fi network.
There is a lot to do and a lot of input is needed in the industry, Cunha admits, but it may be worth the investment. “While no decision has been made to go beyond this investigation, I believe that a CBDC should be thoroughly investigated and that it has great potential,” he said. Think about the internet and how it evolved from the start. With CBDC the possibilities are endless. “