Over the last year or more the focus of the cryptocurrency world has been on the collapse of crypto businesses, the plunge of crypto token values, and cases of fraud at the heart of major decentralized finance businesses. Regulation of everything crypto has gone from something the crypto world hated to a necessary evil to protect investors. Meanwhile, progression toward a US digital currency continues in the wake of President Biden’s executive order regarding the future of US money and payment systems. What is the future of digital currency and how will it affect existing cryptocurrencies?
What Is a Central Bank Digital Currency?
Dollar bills, euros, yen, and pound sterling notes are physical money. People with bank accounts in dollars, euros, and the rest already have digital currency according to the Federal Reserve Board of Governors. This digital money is held in accounts at the Federal Reserve by commercial banks. A central bank digital currency, on the other hand, would not be a liability of a commercial bank but rather a liability of the Federal Reserve itself.
The Current State of Cryptocurrencies
The original purpose of Bitcoin was to create an efficient and fair way to pay for things using the internet. It was designed to retain its value by having a maximum number of tokens embedded in its programming. One of the attractive aspects of Bitcoin and the entire cryptocurrency system was that it would allow for financial transactions free from middlemen taking their cut and excessive government interference. That was before crypto lost its way with speculation driving prices beyond what any fundamentals of the system would support and a wave of modern day robber barons exerting centralized control and manipulating crypto for their own benefits. Crypto tokens ceased to be a stable holder of value as speculation caused wide price swings. So-called stablecoins that were supposed to track the value of the dollar used computer algorithms to manipulate their price and this approach often lead to their collapse.
How Would a Federal Reserve Digital Currency Differ from Bitcoin or Ether?
Throughout 2022, as the Federal Reserve increased interest rates and cut back on their balance sheet, the US dollar rose in value against a basket of foreign currencies. Meanwhile, from its peak in November 2021 to the end of 2022 Bitcoin lost three-fourths of its value. A Federal Reserve digital currency would, in fact, have been the US dollar but in a digital form issued by the Federal Reserve just like it prints and issues paper currency. Anyone who could have used a US digital currency in the last few years would have had the ultimate stablecoin because it would not have needed a computer algorithm or dollar reserves to track along with the value of the US dollar because it would BE THE US DOLLAR. Although the greenback does go up and down against other currencies in the forex markets, it does not go up and down in multiples of five like has happened with the 2022 fall of Bitcoin and the rest of the crypto tokens.
The End of a Dominant Crypto Business Plan
Something that became abundantly clear as crypto business after crypto business collapsed was that the basic business plan of each and every one depended on crypto values going up against the dollar virtually forever. When the US starts issuing a digital currency through the Federal Reserve it will give the worlds of decentralized finance, the Metaverse, and even blockchain games a stable currency to work with if they choose to use it. For DeFi, especially, a truly stable central bank (Federal Reserve) digital currency will allow for borrowing in dollars, using as a crypto currency, and paying back in dollars much less risky than it has been over the last few years. Those who will be hurt by this are those who have manipulated crypto for their own gains. We do not see cryptocurrencies like Bitcoin and Ether going away once there is a US digital currency but we expect that the wilder price swings will be a thing of the past.
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