The term “digital dollar” refers to a possible digital currency issued by the US central bank (CBDC).
What Is a Digital Dollar?
A digital dollar is a form of currency that is only available in electronic form and the financial systems of many countries rely on the electronic form of US dollars which are held in various bank deposits in electronic or digital form. As the name hints, the digital dollar never takes physical form and is always stored on a computer network. All its trading activities are also done on the internet.
Back in May 2021, the Digital Dollar Project was announced, according to which five U.S. central bank digital currency pilots will be launched in the near future, in an effort to promote the US dollar as a form of digital currency around the world.
The concept of digital dollars has emerged after the eruption of cryptocurrencies in the world. With Bitcoin (BTC) emerging as the first and now the largest cryptocurrency in the world, authorities all around the globe are now considering launching their very own digital currencies with countries like China, the USA, and many others in the race of developing a stable currency that is considered as legal tender in the world.
The main distinction between the digital dollar and the various cryptocurrencies available in the market today is that the latter are decentralized assets with a different value than traditional currencies. Digital dollars, like all digital currencies, are managed by the Federal Reserve and are backed by the government, which means that they function like physical money and are worth the same.
The digital dollar is an intangible asset and is valued at acquisition cost. The world is shifting toward digitization as everything has gone digital.
Instead of using physical dollar bills, people can make purchases by transferring digital currency to retailers using their electronic devices. The transfer of digital dollars will work like popular payment apps, including Google Pay, Venmo, and PayPal.
Following the successful launch of decentralized cryptocurrencies, such as Bitcoin and Ethereum, which store value but aren’t limited to any authority, the world governments are investigating the possibility of developing their own digital currencies, also known as central bank digital currencies (CBDC).
Many countries are moving towards digital currencies, such as the Bahamas’ Sand Dollar project, which is currently in production, in addition to China’s digital yuan, a pilot project launched back in 2014.
Some advantages of the digital dollar include:
- International transfers will become more affordable
- The unavailability of a bank account would not affect your transactions
- Payments will become faster
- Tax refunds and other government payments will become efficient
- Its value would be exactly $1, backed fully by the US central banks
The digital dollar will compete with cryptocurrencies known as stablecoins (USDT, USDC, etc.), which are crypto-assets pegged to the US dollar to stabilize their value. The launch of the digital dollar is crucial because the current banking system is facing an existential threat due to the digital currency age started by cryptocurrencies.
