Why Having a Digital Dollar is Good for Cryptocurrency
This year, US President Biden signed an Executive Order on Cryptocurrencies, setting a 180-day deadline for a series of reports on the “future of money”, a move that could determine the financial future of the US. . If the government messes with this, the dollar will likely lose its status as the world’s reserve currency.
Referring to stablecoins, a cryptocurrency that is pegged to a real-life asset, usually the US dollar. The top three dollar-pegged stablecoins now have a combined market capitalization of over $140 billion, serving as the backbone of decentralized finance (DeFi). For crypto users, stablecoins are safe haven assets, and since most cryptocurrencies trade with stablecoins, stablecoins are an easy way to move in and out of investments.
The nightmare of stablecoin demise haunts the minds of regulators and crypto enthusiasts alike. The leading stablecoin, Tether (USDT), has been plagued by rumors of financial flaws while the UST algorithmic stablecoin briefly lost value last year (trading at $0.96) in a market crash in May. Regulators are particularly concerned because the crypto equivalent of banking could spill over and destabilize other markets.
Thus, faith inspired by the Federal Reserve’s CBDC (Central Bank Cryptocurrencies) will be advantageous for crypto and the US government. A crypto-compatible dollar would be a foundational asset that could be used as a store of value, providing ownership of the dollar to the unbanked worldwide, provides convenience to transfer funds between crypto and legacy systems. The benefits to the US dollar are simple: become the reserve currency for the metaverse.
Cryptocurrencies are used all over the world and there are “onramps” for currencies from the Lao Kip to the Nigerian Naira. In countries with high inflation, the ability to buy dollar-pegged stablecoins is invaluable; while rich countries are used to dealing in dollars. In a nutshell, the world voted for crypto reserve currencies and USD.
Now, the US government should push and give the world what it wants: a stable currency backed by the Federal Reserve itself. Seizing this opportunity will give an edge to competitors such as China, which has been doing well in developing its own digital yuan, but with less democratic oversight. many, with important issues like privacy. Or maybe the world uses gold as a reserve currency.
In a January report on the digital dollar, the Fed noted the risks associated with current stablecoins and mentioned, “US CBDCs could mitigate some of these risks while supporting regional innovation private”. The report also notes the importance of CBDCs in “maintaining the dominant international role of the US dollar.”
It is a win-win for the US government. The CBDC is backed by the Fed to stabilize DeFi, broader crypto markets, and the US government to keep the status quo as the world’s reserve currency. But there is still an obstacle: commercial banks.
If citizens turn to digital dollars as a store of value and deposit assets into DeFi protocols, this could deplete banks’ reserves and increase borrowing costs. As bank loans become more expensive, people will switch to established DeFi protocols for lending products and banks will suffer even more. Obviously, banks have to convert or they will go the way of all telecommunications companies in the 2000s.
According to a report by New York Digital Investment Group (NYDIG), banks that choose the direction of development will be rewarded. “Our research shows that currently 46 million US citizens own Bitcoin. More than 22% are adults over the age of 18,” the report revealed. “The data shows that consumers will not only feel more comfortable buying and holding Bitcoin at the bank, but also crave BIGGER and Bolder opportunities.”
When defining crypto-regulatory policy, the United States must clearly outline its plan to create a dollar-denominated stablecoin backed by the Fed to simplify trading in the cryptocurrency market. Without raising the bar and leading the way, there will be many competitors to become the world’s reserve currency.