A United States Blockchain-Based ‘Digital Dollar’ Would Be Pointless

October 17, 2019 / by Zachary Mashiach

There has been sporadic talk about creating an official national cryptocurrency for the United States, dubbed the digital dollar. 

We have not at the Fed decided to pursue or drive to develop a digital currency, but it’s something we’re actively looking at and debating,” Rob Kaplan, president of the Federal Reserve Bank of Dallas, said this week.   

Also this week, the Former Commodities Futures Trading Commission Chair, J. Christopher Giancarlo, published a piece in the Washington Post titled “We Sent a Man to the Moon. We Can Send the Dollar to Cyberspace,“ declaring that the United States needs to develop a digital dollar in order to prevent the US Dollar from losing its global reserve currency status. 

The fear is that cryptocurrencies like Bitcoin (BTC) and Libra, if it ever launches, will erode the US Dollar’s power and dominance. If this happened, the interest required to pay the national debt could jump by hundreds of billions of dollars per year. And that’s aside from the US economy weakening and the United States losing power in general. 

These fears may be grounded in truth, and indeed, Bitcoin (BTC), Libra, or perhaps other cryptocurrencies could threaten the US Dollar’s power in the future. 

However, a digital dollar will do nothing to prevent that. Indeed, a digital dollar would not change anything. 

In order to understand this, let’s pretend a digital dollar currently exists. It would run on a blockchain with each token representing a US Dollar. The Federal Reserve would have the power to print and burn these digital dollars at will, and the blockchain would be centralized, meaning transactions could be reversed. 

Essentially, the only difference between a US Dollar and a blockchain-based digital dollar is the blockchain technology behind it. In this case, blockchain technology would give the digital dollar no additional advantage, since most US Dollars in circulation are already digital representations of dollars. 

For example, the current M0 money supply in the United States is $3.2 trillion, and this includes all physical cash and coinage. Meanwhile, the M2 money supply, which includes checking accounts, savings accounts, money market accounts, mutual funds, and physical cash/coinage is $15 trillion. 

Subtracting M0 from M2 reveals that $12 trillion US Dollars exist only digitally and not physically.

Therefore, it is clear that the ‘digital dollar’ has actually been around for a long time, and there are already systems in place to secure these digital dollars and to send them between banks. 

Creating a blockchain-based digital dollar would not change the situation. Perhaps it can be said that blockchain technology is instant and offers transparency and security, but those things are also true about the current system. 

‘Digital dollars’ can be sent between banks and via PayPal and Square instantly. Basically, it is already easy and fast to send dollars digitally, and creating a blockchain-based digital dollar run by the Federal Reserve would not change anything. 

Back to the original argument that Bitcoin (BTC) and Libra are threats to the US Dollar. Bitcoin (BTC) is a threat to the US Dollar since it has a fixed total supply of 21 million coins, cannot be printed at will, and is completely decentralized. 

In the scenario that the US Dollar experiences severe inflation, it could cause people to flock to Bitcoin (BTC) to preserve their wealth. Also, people can send and receive Bitcoin (BTC) without worrying about it being frozen or reversed, which is another reason people may choose Bitcoin (BTC) in the future. Creating a blockchain-based digital dollar, which has the same shortfalls as the regular dollar of being printed at will and not being immutable, does not change this picture. 

As for Libra, it represents an attempt by Facebook and a consortium of major corporations to create their own central bank and currency. This would perhaps be a threat to the US Dollar since the major corporations of the world have trillions of dollars of assets and the power to spread such a currency to billions of users. 

That would only be true if Libra were to somehow launch with its original vision intact, which seems unlikely due to its centralized nature that makes it prone to regulation as explained in a previous CryptoIQ article. That being said, if Libra somehow did launch, it seems unlikely that having a blockchain-based digital dollar would preserve the US Dollar’s power in any way. 

Additionally, blockchain-based digital dollars already exist and are widely used in the crypto space, such as Tether (USDT) and USD Coin (USDC). Of course, a blockchain-based digital dollar operated by the Federal Reserve would have an advantage since its official status would likely lead to it being quickly adopted across the financial sector. However, this does not change the fact that blockchain-based digital dollars already exist in the form of stablecoins, meaning if the Federal Reserve made one it would just be a copycat and nothing new. 

If the United States government truly wants to preserve the power of the US Dollar, a blockchain-based digital dollar is not the answer. Indeed, it is just a distraction. The real answer is to stop printing US Dollars in excessive amounts and to stop accumulating debt, which is already a ridiculous $22.9 trillion

In fact, as of now, the US Dollar is still by far the most powerful currency in the world, and it is up to the government to preserve that position by not destroying the US Dollar via money printing and inflation. 

A theoretical blockchain-based digital dollar could be just as easily printed as the non-blockchain-based digital dollars that the Federal Reserve regularly clicks into existence, so once again, it is not a solution to preserving the US Dollar’s power. 

A theoretical -based Digital Dollar could be just as easily printed as the non -based Digital Dollars that the Federal Reserve regularly clicks into existence, so once again, it is not a solution to preserving the US Dollar’s power.