What Is Digital Dollar and How Will It Affect Bitcoin?
With the booming success of cryptocurrency in the last few years, it seems like countries launching digital versions of their own currencies is imminent. According to Federal Reserve officials, the U.S. is pioneering this movement by launching its own Central Bank Digital Currency. But what does this mean for Bitcoin and other cryptocurrencies?
The Digital Dollar Explained
The U.S. Dollar is the world’s dominant reserve currency. Launching a digital version of it could drastically affect the global financial landscape. While supporters of digital currency claim it will make electronic payments much easier and quicker — and who wouldn’t want that? — some critics fear for user’s privacy.
What Is the Digital Dollar?
Unlike the electronic dollar, which is the one we commonly use for online transactions, the digital dollar is a version of U.S. currency that never takes physical form. With the electronic dollar, you can simply go to the nearest ATM of your favorite bank and cash it out. However, the digital dollar is meant to be exchanged solely through digital means.
Digital Dollar vs. Cryptocurrencies: What’s the Difference?
The main difference between the digital dollar and the various cryptocurrencies available nowadays is that the latter are decentralized assets that have a different value than traditional currencies. Digital dollars — and all digital currencies for that matter — are managed by the Federal Reserve and backed by the government, which means they work much like physical money and are worth the same.
While no digital currency has been launched yet, it’s estimated that 80% of countries are already researching and developing suitable technologies to make this new trend a solid reality soon.
Digital Dollar Strengths
One of the main advantages of the digital dollar over Bitcoin and other cryptocurrencies is that it would be worth exactly one dollar. It wouldn’t gain or lose value and would be fully backed by the Federal Reserve. You wouldn’t have to keep questioning its value or fearing that one day it’ll just be sitting in your wallet with no worth.
Other potential strengths of the digital dollar are:
- More affordable international transfers
- Faster payments
- More efficient tax refunds and other government-related payments
- Access outside banking hours
- Support without a bank account
Digital Dollar Weaknesses
One of the main concerns regarding digital currencies is the potential personal privacy issues they might entail. Although otherwise highly convenient, the digital dollar would give the Federal Reserve total access to all of your transaction history. That’s already happening in China, another pioneer of the digital currency movement.
Other prospective weaknesses of the digital dollar are:
- The learning curve
- Potentially more expensive transactions due to blockchain
- The time and tax dollars that need to be invested in research and development
How Will the Digital Dollar Affect Bitcoin?
It’s true that Bitcoin and other cryptocurrencies are still highly confusing for the average person. The digital dollar would simplify the way people perceive online currencies because it behaves pretty much like traditional money. However, that by no means denotes that it would destroy Bitcoin. If anything, it might prompt more people to understand how cryptocurrencies work and encourage them to invest in their preferred ones.
The Future Is Here
Electronic currencies have been around for a while now, and people are little by little starting to learn more about them and adopt them. The digital dollar might not be a reality just yet, but it’s a natural step forward that the U.S. needs to take.
Good to Know
The digital dollar will invariably change the way we conduct transactions. However, these adjustments are potentially for the better. Using digital dollars won’t have the potential risks of investing in cryptocurrency, making it a safer alternative for online currency newbies.
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Digital Dollar FAQ
Here are the answers to some of the most frequently asked questions about the digital dollar.- Can the digital dollar destroy Bitcoin?
- The digital dollar will probably not harm Bitcoin and other cryptocurrencies. If anything, it might benefit them. The use of digital currencies might educate people to start to use cryptocurrencies more.
- How would the digital dollar affect you?
- If and when the U.S. government adopts the digital dollar, it would probably still work as an alternative to cash for a long time. However, it will have many built-in advantages for its users. Anyone with a mobile device or a computer with internet access would be able to use it, facilitating many types of transactions. As the technology develops, you'll probably start having access to your digital dollars offline via point of sale systems or cards.
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- Forbes. 2021. "Digital Currency: The Future Of Your Money"
- Bank for International Settlements. 2020. "Rise of the Central Bank Digital Currencies."
