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How the digital dollar would work and what implications it would have on the global economy

Por: Edward Rueda

18, June, 2022 en Business Concept

How the digital dollar would work and what implications it would have on the global economy

This virtual currency would not be affected by the volatility in the price of cryptocurrencies, since its value would be the same as that of the physical dollar

This week, U.S. President Joe Biden ordered the Treasury Department to assess the benefits and risks of creating a digital dollar. This initiative would be backed by the Federal Reserve (FED) and would seek regulation of cryptocurrencies.

All U.S. coins and bills are issued by the Fed, and this digital dollar would be no exception, as it would be recorded in Federal Reserve accounts and not directly in a bank, which differentiates it from money that is deposited in bank accounts or spent through Marketplace apps.

However, a digital dollar, unlike cryptocurrencies, would have the same value as the physical dollar, so its price would not have as high volatility as crypto. However, it is unknown if this virtual currency would be developed through blockchain technology or if on the contrary, it would be linked to some means of payment.

What benefits would a digital dollar have?

Some experts point out that it would help financial inclusion, since 5% of households in the United States do not have bank accounts, which would allow social benefits to be transferred more effectively.

On the other hand, it would help reduce transaction costs, since the accounts are registered directly with the Fed, so they would not have to pay the commissions charged by banks, bank cards or applications.

However, financial institutions do not welcome the implementation of this currency. This, because the banking system uses customer deposits to lend money to others, which could decrease the amount of money they have.

In addition, issues related to privacy and security remain an unknown. First, because a flaw in the system would allow cyber attacks; and second, because the Government would have access to all transactions and financial information.

As for international finance, the benefits could be reflected in the speed of transfer operations, since processes that take days to be validated, would be done in an hour, optimizing time. Currently, more than US$6.5 trillion is exchanged electronically in the foreign exchange market.

While some currency experts such as Marc Chandler of the brokerage Bannockburn point out that the US dollar would not be altered by the entry of the currency digitally, others think that the North American country should continue to benefit from the dominant currency of central banks and international transactions being the physical dollar.