After the Joe Biden administration’s push to create policy on digital assets, the Federal Reserve Bank of New York together with several financial companies in the United States has announced the first digital dollar proof of concept (PoC) project.
An initiative with the support of giants. Traditional financial players generally have viewed cryptocurrencies with skepticism and they have been cautious in assessing their acceptance. However, when it comes to the digital dollar the enthusiasm seems to be much higher.
The giants BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, US Bank and Wells Fargo will be the first to participate in the first test of the digital dollar. We are talking about some of the most important companies in the financial world.
Under the watchful eye of the Federal Reserve. The experiment will be led by the Innovation Center of the Federal Reserve Bank of New York. It is the largest and most important bank of the 12 that make up the United States Federal Reserve System.
proof of concept. It is a key element to find the weak points of any project. In this case, a reduced implementation of the systems involved in the interoperability of the financial ecosystem with the digital dollar will be made.
Starting now, the Regulated Liability Network (RLN) will be tested for 12 weeks. On the platform, banks participating in the experiment will operate with tokens representing customer deposits that will be settled into a central pool on a shared distributed ledger. All of this will be done in a test environment and with simulated data.
Differences between the digital dollar and other digital currencies. Unlike digital currencies like Bitcoin and Ether, the digital dollar will be centrally issued and backed by the Federal Reserve. From an economic point of view, the value of the digital dollar will be tied to that of the fiat dollar, and not to that determined, among other things, by supply and demand.
The benefits of the digital dollar. According to the New York Federal Reserve, the implementation of the arrival of the digital dollar in the hands of the regulated liability network would speed up transactions and “create innovation opportunities to improve financial agreements.”
Earlier this year, the White House had affirmed that the digital dollar would have the potential to support efficient, low-cost transactions while fostering greater access to the financial system. He also mentioned other advantages such as “consumer protection, financial stability and national security.”
not everyone agrees. Political scientist James C. Scott, interviewed by The Wall Street Journalnotes that state-backed digital currencies such as the digital dollar would give central banks “unprecedented power over the financial system.”
Opinions against the digital dollar, also indoors. One of the members of the Federal Reserve Board, Christopher Waller, remember that China is the main economy to bet on a national digital currency and the reasons are no more than “closely monitoring the economic activity of its citizens.”
There is more and more talk about CBDCs. Digital currencies issued by a central bank are being explored by dozens of countries. One of the most notable examples, as Waller mentioned, is China. The Asian giant is driving the adoption of the digital yuan.
The Chinese CBDC is already a reality in more than 11 regions and since it began to be implemented until the end of 2021, total transactions had reached an equivalent of 14,000 million euros. This is, for many economists, staggering growth.
Europe also has a place in this race. The European Central Bank (ECB) is studying and analyzing the creation of the digital euro. It would be a digital form of central bank money that would report directly to the institution. If the project progresses at a good pace, the digital euro could arrive in 2025.
Where does the interest come from to launch the digital dollar? The decision of the United States to bet on the digital dollar must be understood in the current economic context. Despite market volatility and exchange woes, cryptocurrencies are a reality.
Do not regulate the cryptocurrency market and give up a digital dollar could end up undermining the country’s leadership in world markets. In this sense, regulation seems to be getting closer, as is the arrival of the e-dollar. The United States seems determined not to sit idly by.
We will not see changes in the short term. The wishes of the US to regulate cryptocurrencies and create a digital dollar will not take immediate effect. A large number of federal agencies will intervene in this project that, in one way or another, touch the universe of digital currencies. Thus, they will have to agree to develop coordinated measures.
Images: Kenny Eliason | Jonathan Borba
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