The New York Federal Reserve is launching a 12-week digital dollar pilot in partnership with some global banking giants. The New York Fed’s Innovation Center will lead this program, which involves testing how banks will incorporate digital dollar tokens into their day-to-day activity. The banks involved in the experiment include Citigroup, Mastercard, Wells Fargo and others. This news exemplifies the real-world use cases for blockchain technology and is timely, considering that it is coming at a time when consumer confidence in the crypto space is at a low.
As reported by Reuters, the New York Fed noted that the project, called the regulated liability network, will be conducted in a test environment and use simulated data. The New York Fed, alongside the participating banks, will specifically run this program to note the impact of digital dollar tokens and how they can help to process payments faster. The report didn’t not include the timeline for the experiment’s operation.
A Digital Dollar?
While this program is definitely a good move by the US Federal Reserve, it is currently playing catch-up with other countries that have developed their Central Bank Digital Currency (CBDC). According to the Atlantic Council, 10 countries have fully launched a digital currency. CBDCs are digital monies that are backed and issued by a central bank. You can think of them like stablecoins, which are pegged to the dollar for example. However, in this case, CBDCs are less likely to depeg considering they have the backing of the government.
The digital dollar is like all US bills and coins that we currently use but in a digital form that everyone can access, not just financial institutions. It will have the same value as its paper counterpart.
The Impact of CBDCs and a Digital Dollar
A digital dollar, like other CBDCs, has a significant role to play in bridging the gap between traditional finance and decentralized finance (DeFi). Furthermore, if done rightly, these digital currencies provide users the opportunity to carry out transactions without the need for intermediaries. Using digital currencies is also a faster means to make payments and allows people without bank accounts to send and receive money.
Digital currencies will also have a great impact on global finance as we are likely to see international transactions being processed faster. It makes global remittance easier and cheaper than the transfer modes we currently have at our disposal.
There are undoubtedly risks and concerns about the use of CBDCs. Security has been a major concern in the space as these digital currencies are susceptible to cyberattack. Another major concern is the issue of privacy and decentralization. Banks are obviously adopting CBDCs because they have realized that digital assets are the future of money. However, the government’s involvement could pose a threat to the idea of privacy and decentralization as they would have access to all transactions involving these CBDCs.
Digital currencies also pose a threat to the banking system as the use of these CBDCs could mean less liquidity for banks who use customers’ funds for lending and other transactions.
How Will a Digital Dollar Affect Stablecoins?
Many believe that a digital dollar could be more preferable for domestic use than stablecoins. Although that is uncertain, there is no doubt that a digital dollar is more secure and less volatile than the stablecoins we currently use. Privacy is an issue that will be on the mind of users as regards the use of a coin backed by the government. However, stablecoin issuers like Tether have shown in the past that they are at the beck and call of regulators and law enforcement agencies which means that these stablecoins may not be much different from CBDCs or a digital dollar in terms of privacy.
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