National Digital Currency
You could soon be paying your mortgage in bitcoin, or USCoin rather. Your groceries may be charged to your digital wallet, you may soon be able to enter your personalized account number into your children’s FAFSA for their student loans. There is no doubt that digital currencies such as Bitcoin have garnered the interest of everyday citizens and financial institutions alike. But what are governments doing to catchup to this trend? As you will soon see, the path is unclear and fraught with major policy and technological avenues that will need to be navigated. But first let’s explore the basics.
Bitcoin or other digital currencies are, as their name implies, currencies that reside entirely electronically. Currency; a system of money in general use in a particular country. Digital; involving or relating to the use of computer technology. The key point of these definitions is that currency is tied to a country or region in terms of its use and recognition. Currently, Bitcoin is a universal digital currency without ties to any government or backing organization. To better understand this topic, we need to first identify a few concepts and terms. Currency as we know is tied to a “backing system”. It used to be the gold standard, so for every dollar that was in existence the U.S treasury had a gold piece it represented. We abandoned the gold standard in August of 1971 and now, the U.S. treasury ensures that your dollar is worth what it is advertised as. Today, many other foreign currencies are tied to the U.S. Dollar as its reserve currency. So, what is Bitcoin/Digital Currency?
Bitcoin is a monetary value given electronically to its holders. The price of which fluctuates based on numerous macro and microeconomic forces that we won’t explore here. Bitcoin operates on the block-chain which is a decentralized leger made up of computing power. Think of it this way; if you went to a bank in 1860 to withdraw $5, the clerk would take out his “leger” and manually subtract the money from your previous total. His leger would then be the only documentation of how much money you possessed in that bank. Today, banks use a similar centralized leger but in electronic form. Just like your Bank of America account can be seen online, their leger is kept digitally, yet still centralized. On the block-chain, many different computers all over the world offer their processing power to help track different aspects of transactions so that no one transaction is entirely left up to one computer but rather a sum of a few different locations, thus a decentralized leger. This is better represented in that 1860 bank example as when you went to withdraw your money, the teller had a pen, you had the ink and a 3rd party had the leger. This way all three parties could verify the transaction and how it was completed if they were questioned later on. By using a variety of computers to track changes to a Bitcoin’s value and location the decentralized leger can at a moment’s notice detect if there has been an error, a security breach etc. For providing this service, each computer is awarded Bitcoin which can then be sold, traded or used to purchase items. There is a finite amount of Bitcoin to be had, and thus it derives its value from supply and demand market forces.
The issue with digital currency is that it is not ensured and fluctuates in value more like an equity (stock) than the value of the dollar. You can use a Bitcoin to purchase a $5 sandwich today but that coin you gave the sandwich shop might be worth $10 tomorrow and therefore you would be displeased with your choice to depart with it. This is where a National Digital Currency (NDC) comes into play! If a nation can ensure a digital currency, they can prevent market fluctuations (inflation/deflation) of its value through their economic policies (supply and demand). The benefits to moving to digital currency are tenfold but complicated. According to The Wall Street Journal, many proponents of an NDC say it would be easier, cheaper and faster to move money. Digital currency allows for more person to person movement of money and would help propel small business commerce. It is also touted as a way to help developing nations secure their economic status. Many in impoverished countries and communities do not have access to traditional banking systems and therefore are not able to participate in modern economic systems. By providing a National Digital Currency these people would be able to use their phones as digital wallets, accessing modern markets and financial institutions in a secure and efficient way.
Just recently popular tech company Venmo, known for making peer to peer money transactions easy, announced they would soon support Bitcoin and other popular cryptocurrencies on their platform. So instead of paying your friend back for that coffee with a dollar you can send them a Bitcoin instead! Many national central banks view these transactions as missed opportunities they will soon need to capitalize on. Middlemen transactors such as Paypal and Stripe, which take portions of every digital transaction online, may soon be irrelevant as block-chain technology and a decentralized leger will provide the bookkeeping and middleware for these new Digital Currency transactions. Finally, many central banks see this as an opportunity to track currency locations, market stabilization and other economic forces allowing them to more accurately implement real-time economic policy. Perhaps in the biggest advance for NDCs, China has announced a second stage of testing for a digital yuan (their national currency). There remains some concern about the impact of a digital currency through the national central bank on retail and investment banks which would then largely be seen as outdated and not needed. These banks rely on citizens storing their cash with them and using this money to loan out with interest to make their profits. This business model would immediately become antiquated if U.S. citizens no longer needed a bank to store their money but rather used the block-chain and a digital link to their account with the central bank.
Certainly, as we move forward, there are many unanswered questions surrounding digital currencies. The technology is quickly developing but has not yet reached a viable point where it could be implemented on a wide-scale basis. Jerome Powell, Chairman of the Federal Reserve, was quoted in an article by Caitlin Ostroff for The Wall Street Journal, as saying “It is more important to get it right than to be first”.
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Ben Velardi, Author/Founder