A Digital Dollar Should Not Be a Knee-Jerk Response to a Crisis
Jay is CEO at OKEx, the world's leading cryptocurrency spot and derivatives exchange
Long before the coronavirus pandemic, governments around the world have been studying the role of a CBDC (Central Bank Digital Currency) in their economy.
China first began research into this as far back as 2014 and other countries are increasingly stepping up their efforts. Such a move could be very bullish for the crypto space as banks will further adoption by bringing the technology to the masses.
Yet, the latest talks of a digital dollar may be more cause for concern than celebration.
The Case for a Digital Dollar
With countries around the world ravaged by the effects of sweeping lockdowns and economic cessation, governments have offered unprecedented support.
Many have promised their citizens that together, they will get through this crisis and that no one will be left behind. In practice, of course, that hasn't been the case.
Livelihoods have been lost and help (if it has come at all) has been slow.
With the case of the U.S. especially, whose government pledged to send out aid in the form of stimulus checks for every citizen, efforts have been hampered by red tape, bureaucracy, and logistical challenges.
Millions of citizens have waited for their $1,200 support to arrive. But those who are unbanked, underbanked, or don't have an account on file with the IRS have yet to see a dime.
Under such circumstances, it's not hard to see the case for a digital dollar that would run on blockchain technology and could subsidize even the unbanked.
A digital dollar would overcome logistical problems and ensure that everyone received the funds to their digital wallet with no need for a bank account.
Payments could be sent instantly and at a minuscule cost ensuring that the funds could be redeemed by those in need. As a digital representation of legal tender, this form of money would also avoid the germ problem that exists with physical cash.
Since COVID-19 is known to live on certain surfaces for hours or even days, using cash as a payment method may be a further vector for disease transmission.
So, surely, a digital dollar solves all that? And, at first glance, might even seem like a government endorsement of Bitcoin and cryptocurrencies? Not so hasty.
Such a Bold Step Cannot Be Rushed
For a start, while digital dollars may seem like a panacea for helping those who need aid fast, advocates of it are overlooking the obvious fact that the infrastructure is not even in place yet.
The Federal Reserve does not have a centralized blockchain-based ledger that can expedite the sending of support through crypto and digital wallet technology.
While it may have tremendous merit as an idea, that's all the digital dollar currently is. The U.S. government would have to spend time and money building an entire robust blockchain that could withstand the necessary volume--or team up with a third-party solution.
That seems pretty unlikely given the size of the average crypto firm and the enormity of the task.
Even the co-founder of the Digital Dollar Foundation, J. Christopher Giancarlo, who was the former Chair of the U.S. Commodity Futures Trading Commission (CFTC) has warned that such a measure must not be rushed
nor "cobbled together" during a crisis.
There is a need for extensive research, planning, pilot projects, and scenario projections first.
Remember, China began investigating its CBDC six years ago and only today is piloting its DC/EP (Digital Currency/Electronic Payment) in four cities to see if it can replace cash.
We must also be mindful that many of the rushed measures we put in place today like social distancing measures and surveillance apps are likely to remain long after the virus fades.
Total Control to the Government
CBDCs may give governments more control over our spending habits and lead to the demise of cash. However, they will be rolled out using the existing network of commercial banks.
A digital dollar now, on the other hand, would give the Fed carte blanche to create consumer digital dollar Fed accounts and remove the commercial bank network completely.
This would give the government complete control. They could even apply QE directly into consumer accounts without even coordinating with multiple banking cores.
A carefully rolled out and planned CBDC could benefit many people, accelerate financial inclusion and draw more eyes to the cryptocurrency space. But not knee-jerk responses made in haste without careful consideration of citizens’ rights and needs for the long term.
The virus will eventually die out but the decisions we make will linger. A digital dollar rescinding total control to the government is a cure worse than the disease.
(Disclaimer: The author is the CEO at OKEX Exchange)
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