What to expect in this article?
– Ingenious setup put in place by the government to introduce digital dollar
– Two parts strategy to introduce digital dollar you should know
– Why introducing the digital dollar will be essential to keep the economy going?
– Why will this be a good thing for Bitcoin and few cryptocurrencies?
Nerds dream and capitalists reap. There is no bigger cluster of capitalists than in the US.
Blockchain and digital currency are one of the wettest dreams of the nerds and now the capitalists from the Capitol itself are going to reap the benefits of that dream. This is how the dream of anarchists is going to, yet again, hand the reins to capitalists.
Zero interest rates – ingenious set up to introduce digital dollar
Zero interest rates are the first step to a digital currency set up.
How? You may think.
It’s quite ingenious really: when you cannot lower the interest rates below zero – you make keeping (saving/hoarding) cash in the bank account burdensome and make it impossible to hide the money. When people are penalized/charged for keeping money in a bank account and when they cannot hide it – they end up spending it.
Spending stimulates the economy. Stimulus checks stimulate the economy for a little while but a whole country going on a spending spree because it is expensive to ‘keep’ money will stimulate the economy to new peaks.
Executing this digital dollar stimulation is a two parts strategy – pay attention.
Part one: In general, when banks start charging fees to keep our money in the account – we’ll take it out of the bank and shove the money in a mattress or buy precious metals and then shove them somewhere.
Here comes part two that involves making the money impossible to hide by making it digitally traceable so that its every move is traced, tracked, tagged and taxed.
Premise for the Execution: Health is the new patriotism
The US Congress has already tinkered with the idea of the digital dollar in the first draft of the stimulus bill, however, they dropped the idea on the final version. So we know that it is in the works.
To introduce a nationwide digital currency mandate – the government may use health as the primary reason.
Health will be to Digital Dollar what patriotism was to the patriot act.
Here is how it might be presented: Physical money is spreading the COVID-19 (or some other) virus and we need to shut down the entire paper money from circulation ‘to protect our people’.
You might think that such a thing would never happen. Government may never shutdown paper money.
India had demonetized their 500 and 1000 denominations overnight in 2016. Many people who were ready to make deals the next day using their big bills were left with color paper which became useless overnight.
And, India is primarily a cash economy.
Cash to GDP in India is 11% vs. 7% in the US. More and more people in the US are going cashless. Even those who carry cash only carry a small amount in their wallets and what exists in their banks is in ‘digital form’ anyway.
Adding a health stigma to the already dying paper money will make it easy to ‘put it to sleep’.
Conditions are ripe for a total take down of ‘hard-cold-paper’ money.
Execution will happen in phases. We speculate that taking entire economy cashless will involve:
PHASE ONE: Limit on withdrawals: whenever the date to go digital is declared we anticipate a limit on withdrawals from banks. There will be no point of going digital if everyone simply takes the money from the bank. To curb this issue, there may be limits imposed on how much money you can take out in a day or week or a month.
PHASE TWO: demonetize the bills: Those who thought they could take their money from the banks and stash them in their mattress will be forced to bring those bills back to the bank when the bills are declared ‘illegal tender’. If a country like India where a major part of the economy runs on cash can void its currency overnight then a country like the US can definitely do it.
PHASE THREE: window to exchange your paper money with digital dollar: Once the bills are declared useless – people will be given the opportunity to deposit their ‘bills’ back into the banking system. Only this time, bills so deposited back will be destroyed and converted to digital dollars. During this window, governments across the world will be able to surrender their US Dollar bills to local US embassies (or other representative agencies/banks) in exchange for digital dollars.
PHASE FOUR: taking care of the elderly: Those who are at a certain age and protest this move from paper money to digital currency will be given few choices in our view. One, senior citizens may be exempt from the digital currency mandate. Or, two, they may be special digital dollar cards (similar to debit cards but loaded with digital dollars) that will be loaded with the spare change every time the elderly transacts at a store, thus facilitating a slow conversion of their paper money to digital form.
PHASE FIVE: All systems go: even with 80% of the paper bills in circulation converted to digital dollars – all systems will have been put in place to move forward. At this point, every single digital dollar will be easy to trace, track, tag and tax, in real time.
The US Dollar is already digital, how is digital dollar different?
It is true that most of the US dollars in existence today exist as a mere digital number in the financial system. However, people can withdraw the money in paper bills. Once money goes into circulation as paper currency – it is almost entirely impossible to track its movement.
Almost all illegal activities take place only in paper cash.
When there is ‘no choice’ of paper currency and when every digital dollar in existence is traced through immutable technology (like blockchain) then those who exploited the system will find it difficult to circumvent it. If we can stop the spread of diseases in the process, well, that’s a bonus.
We also anticipate that the new digital dollar will have following features:
– Technology backed (blockchain or similar DLT based tamper proof technology)
– Portable to transact directly over private messengers (like WhatsApp/Facebook/etc.,)
– Digital dollar will be platform agnostic, that is, it will be seamless to track its movement over multiple platforms. For example, movement from bank to a messenger and then to a foreign bank, etc.,
– Every wallet that holds the digital dollar will add to the network strength making it almost impossible to hack with any amount of money
Advantages of digital dollar
Here is a short list of benefits from introducing a digital dollar that can be traced, tracked, tagged and taxed in real time:
– Avoid circulation of germs and viruses through contact of paper bills
– Transaction level tax system to impose and collect taxes in real time
– Curb the illegal activities that heavily rely on paper cash
– Curb money laundering and tax evasion
– Seize accounts of perpetrators in real time
Disadvantages of digital dollar
Not everything is rosy about the digital dollar. There are some pitfalls:
– Undue power vested in the government, what happens when few bad players in the government take advantage of the system?
– When every dollar can be traced, tracked, tagged and taxed in real time – what happens with the data collected on citizens of the country? Who will guarantee that data will not be used to manipulate people
– In a capitalist society, can we really trust private institutions (like banks) to play by the rules?
– People will lose alternatives
Why is it good for bitcoin?
Once the digital dollar is created and mandated, the government may be able to monitor spending habits of its citizens. Whether the banks and private agencies will get hands on these spending behaviors, and if so, how will that be used will not be known until some scam makes the headlines.
Those who care for their privacy (and are not committing criminal activities) will want alternatives.
Obviously, precious metals cannot be used for daily transactions but you can use bitcoin and cryptocurrencies for daily transactions. The ability to use bitcoin and cryptocurrencies to transact will actually work in bitcoin and crypto’s favor when digital dollar is rolled out.
Advantages of bitcoin (and other cryptocurrencies) over digital dollar
– You do not need a bank or third party to hold your own bitcoin
– It cannot be seized by governments or banks
– You can participate in transactions without someone mining your data
– Helps secure privacy
Disadvantages of bitcoin (and other cryptocurrencies) compared to digital dollar
– Bitcoin does not have a lot of history backing it
– While most cryptocurrencies (including bitcoin) can be tracked, some private cryptocurrencies are almost impossible to track and criminals may turn to these alternatives. This in turn will make the case against crypto stronger
– Less than 1% of global population actually uses bitcoin (or other crypto) and that means number of places where it will be accepted will be limited
Will the government create its own digital dollar?
We expect that the government will develop a private blockchain based system that is not open to the public. A collaboration between IBM (Hyperledger), Federal Reserve and major banks will likely be in the cards for this rollout.
We do not anticipate the government to tie up with Facebook’s Libra project. If they do – well – it’s shameful and blatant disregard to public interest.
We can see Coinbase playing some role.
Can Coinbase stand to gain with digital dollars?
There is an off chance that USDC from Coinbase will stand to gain traction acting as the bridge between crypto space and the digital dollar.
Coinbase has all the right infrastructure, connections and good reputation to form the alliance.
Will digital dollar be the end of crypto as we know it?
We think that the cryptocurrencies whose only value proposition is ‘transfer of value’ will probably bite the dust since people will rather trust a government backed digital dollar than a private cryptocurrency.
Bitcoin should hold its own.
Projects that develop a great utility on their platform might keep their crypto standing intact.
Government issuing digital dollars based on blockchain (or DLT) will be a great stamp of approval to the legitimacy of the technology and should help boost the space. Digital dollar will make many crypto projects obsolete. Those that stand on their own will thrive.
Thank you for reading and sharing this article. Stay safe and healthy!
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