Less than a decade since DigiCash, the world’s first digital currency, launched in 1989, it went bankrupt. Now the world continues to wait for the seemingly inevitable day when digital currency replaces cash. Will 2022 see that day?- Crypto Becomes Money
Bitcoin, the most well-known crypto, established in 2009, has no intrinsic value, yet it has nearly a $1 trillion market value. This equals nearly 40 percent of the entire digital currency market. Many developing nations, El Salvador most notable among them, have already begun accepting Bitcoin as legal tender. Its exchange rate in U.S. dollars, however, is extremely volatile. This makes it too unstable for most transactions. Bitcoin transactions process much more slowly than the traditional options; it can process around seven transactions each second versus VISA, which can do 1,700 in that time. And, while many Bitcoin miners are shifting toward renewable energy sources, the fact remains producing Bitcon consumes a great deal of energy. All this combined makes Bitcoin a less appealing alternative to the dollar and means the crypto industry appears to have its work cut out for it if crypto is going to be widely-accepted legal tender anytime soon.
Stablecoins, however, show more promise. These are closely linked to the dollar or other traditional currencies or baskets of them by placing stablecoins funds in quality, trusted assets, like U.S. Treasury securities. With fiat currency and major social networks like Facebook backing them, the potential user base could make stablecoins go global. One wrinkle to iron out from this possibility, however, is that it would link money to big data. There’s also the concern of how to deal with a stablecoin used in one country that is linked to a fiat currency in another country. – Crypto Becomes Money
One option is to let the private sector figure it out. Already, people have shown a liking for payment vehicles out of the private sector, like commercial bank deposits. If the private sector can develop a monetary system that’s designed and regulated well and linked to the dollar, people may voluntarily start using it.
For true economic stability, stablecoins require access to the liquidity facilities of the central bank. This way transactions can settle in any economic conditions, good or bad. Stablecoins also require access to deposit insurance to protect the currency in case of runs. Finally, there must also be a way to easily convert stablecoins to dollars without reliance on paper notes. A bank-issued digital currency in the form of digital tokens that serve as a cash alternative may offer solutions to these concerns.
Governments have tough choices ahead, but whatever they choose, they must always remember that their ability to encourage people to use stablecoins linked to the dollar does not extend to compulsory methods. People, ultimately, still have to make their own choice to make the switch. Vehicles for dollar-linked payments may appeal to consumers if the government permits sufficient innovation for transactions made with crypto or any other new payment technologies to be viable. For this to work for the long-term, however, banks and governments must work hard to keep the dollar attractive by keeping down inflation.