The FED’s digital currency and what that means for cryptocurrencies

The United States Federal Reserve announced through Governor Lael Brainard that they are conducting tests with digital currency, no commitments to adoption has been stated at this time. The rebirth of looking at government-backed digital currencies has been directly related to the failures of the existing financial system that have been exposed via the shoddy distribution of stimulus cheques; with many still waiting to receive the first and well over one billion dollars sent to deceased persons (not even for the first time) the cracks are widening. At this stage, the assumption is that the digital dollar will operate in parallel to the fiat currency, meaning it will not be a decentralised currency and will be open to FED influence.

So, what is a digital currency? Digital money is as it sounds, it only exists in a digital format, not the physical, and while it will have characteristics of fiat money. When it comes to digital currencies, most think of cryptocurrencies, which while is accurate as cryptos are a type of digital currency, there are some key differences.

Most of the obvious differences come from the comparison between centralised vs decentralised network structures, the level anonymity, and the level of transparency. Much of what attracted and continues to attract individuals to cryptocurrency is its decentralised structure, which offer high levels of anonymity and transparency, and also makes it difficult to regulate or manipulate. Digital currencies are effectively the polar opposite, they are centralised with a central authority or regulator, with legal frameworks that enable some level of control over payments and systems and users.

It is interesting to see the FED change its tune on digital currency, not 12 months ago they where overly critical of Facebook Inc and the Libra coin, and notably bitcoin before that. In both instances the FED was concerned with security, privacy, money-laundering, and financial stability. I can only imagine that much of their testing is to be on those very same issues, to create a dollar-backed digital currency that can be widely adopted.

The bigger picture question for me is what happens to the values of existing cryptocurrencies? There is really no underlying asset for a cryptos to derive the value from, so if we incorporate a digital, government-backed and regulated currency, what happens to bitcoin, Ethereum or Ripple? They wont disappear, but will the same value they have today remain, its not hard to see that even the regulators in a move to have more digital users they may impose further restrictions or tighten the reins further than they already have.

Bitcoin vs USD - 4Hr – will bitcoin perform the same against a Digital USD?