The US Senate Banking Committee held a second hearing yesterday on the mechanics of creating a blockchain-based US dollar. The discussion centered on what would need to happen for a digital currency
The US Senate Banking Committee held a second hearing yesterday on the mechanics of creating a blockchain-based US dollar.
The discussion centered on what would need to happen for a digital currency backed by the federal government to work. When officials talk about a "digital dollar," they mean a blockchain system that stores US currency. This is distinct from the decentralized cryptocurrencies that sparked crypto's initial wave. All major currencies already exist in digital form through bank accounts and electronic transfers.
The Fed has expanded its balance sheet to over $7 trillion this year from less than $4 trillion at the start of 2020. The central bank pulled this off by printing more dollars. Bitcoin can't do that, as its supply grows according to a fixed algorithm.
Stablecoins and government-backed digital currencies both came up during the hearing. Tether, which pegs its value to the US dollar, ranks third in market capitalization among all tokens, behind Bitcoin and Ethereum. The crypto market's volatility over recent months has driven demand for stablecoins as a way to park value without gambling on price swings.
A government-issued blockchain currency wouldn't resemble Bitcoin. The version under Senate discussion would likely run on a blockchain that the government controls. China's digital Yuan follows this model. The People's Bank of China will manage the digital Yuan's supply and have access to all transaction data. Citizens who wanted anonymity or transactions outside government oversight had nothing to gain by switching from cash to digital Yuan.
Early Bitcoin adopters came to the space because the network operated without any central authority and transactions left no paper trail. A government-backed digital token may struggle to attract the same users, though no one has put this to a large-scale test.
Venezuela's government launched the Petro as its national digital currency, but outside the country almost no one uses it. Within Venezuela, Bitcoin and other decentralized cryptocurrencies have become more popular than the Petro for actual transactions.
As central banks roll out their own digital currencies, the market will eventually signal what features matter most. That test will show whether government-issued tokens can compete with Bitcoin on any meaningful dimension.
