Why A Digital Dollar Won’t Necessarily Be Good For Crypto

Ostensibly, this would be a central bank digital currency operated by the Federal Reserve. A digital representation of U.S. dollars, the Fed would have used it to deliver the $1,200 the stimulus package promised to American citizens.

Such a provision didn’t make it into the final stimulus package. However, now that Congress has floated the idea of a CBDC version of the U.S. dollar, commentators within the cryptocurrency industry believe it could only be a matter of time before the idea is revived and realized, providing the industry with a big shot in the arm.

However, it’s not really certain that a Fed-controlled ‘digital’ dollar would be a significant benefit to crypto. For one, such a dollar may end up having little or nothing to do with blockchain technology, instead being recorded on a centralized ‘ledger’ (i.e. a database). And secondly, the launch of a CBDC could result in the U.S. government becoming less tolerant towards decentralized cryptocurrencies such as Bitcoin, which it may increasingly view as a rival.

What Digital Dollars Would Look Like

The stimulus act that became law on Friday was preceded by various separate bills that were ultimately tacked together into a single package. Two of these – the Financial Protections and Assistance for America’s Consumers, States, Businesses, and Vulnerable Populations Act, and the Take Responsibility for Workers and Families Act – originally referred to the creation of a digital dollar.

While mentions of ‘digital dollars’ were expunged from the final bill that became law on March 27, the original draft of the “Financial Protections and Assistance … Act” had the following to say about creating a digital version of the U.S. dollar:

Source: U.S. House Committee on Financial Services

More interestingly, the draft also mandated the creation of digital wallets that individual Americans would hold with Federal Reserve banks and/or member banks. The U.S. Treasury would then deposit payments of $1,200 into these wallets, which would also “provide access to debit cards, online account access, automatic bill-pay and mobile banking services, [and] customer service.”

Basically, the digital dollar would have acted much like U.S. dollars in general, while the banking ecosystem surrounding it would also have acted much like the legacy banking system.

All of this led cryptocurrency industry observers to get very excited. Writing on Twitter, Morgan Creek Digital co-founder Anthony Pompliano claimed that the U.S. government distributing “stimulus money to Americans through a digital dollar … will onboard hundreds of millions of people to Bitcoin.” Many people within crypto took the same view:

Source: Twitter

‘Digital Ledger’ Doesn’t Necessarily Mean Blockchain

Meanwhile, another bill has emerged in Congress that also calls for the creation of digital dollars. Proposed by Democrat Ohio Senator Sherrod Brown, it’s currently being referred to the Senate Committee on Banking, Housing, and Urban Affairs. It’s not sure whether it would pass the Senate and proceed further in Congress, but the fact that it’s been proposed raises the probability that the United States might sooner or later introduce a digital dollar.

However, just because the U.S. creates ‘digital’ fiat money doesn’t mean Bitcoin or any other cryptocurrency will witness an explosion in adoption.

First of all, the draft legislation mentioned above makes explicit reference to “digital ledger entries,” but it’s in no way clear whether any such ledger would be a decentralized blockchain. And if a digital dollar ends up operating on a centralized database, it’s hard to see how this could have much if any relation to decentralized cryptocurrencies such as Bitcoin, Ethereum, and so on.

An entirely new infrastructure and ecosystem would need to be developed by Federal Reserve banks (and member banks) to process the digital dollar, so there isn’t likely any overlap between the new system and the current cryptocurrency ecosystem. For instance, someone receiving digital dollars in their ‘digital wallet’ wouldn’t be presented with the opportunity to buy Bitcoin, in the way that someone who goes on Coinbase or Kraken to buy Bitcoin is presented with the opportunity to also buy Ethereum, Bitcoin Cash, Litecoin, and so on.

Let posts like this serve as a reminder of how early we are.

Plenty of smart people still don’t understand what makes Bitcoin special. They think centralized tech like a ‘digital dollar’ might be competitive, even superior.

No. Not at all. Not even in the same league. https://t.co/IEImVYKzcB

— Stephen Cole (@sthenc) March 24, 2020

Source: Twitter

And even if we assume that a digital dollar might operate on an actual blockchain, we still can’t take it for granted that this would be a boost to crypto. States which have introduced or considered a CBDC – such as Venezuela, China, Russia, Iran – have also taken a harsh stance towards real cryptocurrencies.

Russia is on the cusp of banning cryptocurrencies as a means of payment, but may very well issue its own ‘crypto-ruble’. Likewise, China may soon introduce its own CBDC, but it has cracked down on cryptocurrency trading and ownership in recent years.

Indeed, by creating a CBDC, the U.S. government may begin to increasingly see Bitcoin and other cryptocurrencies as rivals. While it might continue to accept cryptocurrency trading (i.e. treating cryptos like speculative digital assets), it could conceivably take steps to limit or ban the use of cryptocurrencies as means of payment. And it could potentially take an even harsher line if a deep coronavirus recession causes the U.S. dollar to collapse while cryptocurrency prices rise, as the likes of Messari’s Ryan Selkis suspect.

I’d get your coins off third party custodians, my friends.

If bitcoin starts rallying, they will shut that shit down FDR style.

— Ryan Selkis (@twobitidiot) March 19, 2020

Source: Twitter

So don’t take it for granted that a U.S. CBDC would be a good thing for crypto prices and adoption rates. Because it could end up being the opposite.