Cryptocurrency changed the game when it first appeared in 2009. In the years since then, more and more energy has been put into the idea of digital fiat currency, which would combine the benefits of cryptocurrency with the properties of fiat currency. What is digital fiat and how does it work? Does it compare favorably with cryptocurrency?
What is Digital Fiat?
Digital fiat is essentially a digital equivalent of the paper money and coins that characterize fiat currency today. Digital fiat doesn’t yet exist on a permanent full-scale basis, but it has been proposed several times since the advent of Bitcoin. The Bank of England discussed a central bank currency based on the blockchain in a speech given by chief economist Andrew G. Haldane in 2015.
Several proofs-of-concept versions of digital fiat currency exist. The central bank of Sweden has developed an e-krona, which began testing in 2020. Uruguay announced in November 2017 that its central bank would begin to test digital Uruguayan pesos. The European Union has also been evaluating the idea. In December 2019, the ECB said that they would “continue to assess the costs and benefits of issuing a central bank digital currency (CBDC).”
In July 2020, mention of a “digital dollar” was brought up in a hearing of the U.S. Senate Banking Committee. The lawmakers posed questions to several expert witnesses, including CBDC advocate Chris Giancarlo and Paxos CEO Charles Cascarilla. U.S. Senator Tom Cotton, Republican from Arkansas, stated, “The U.S. needs a digital dollar. The U.S. dollar has to keep earning that place in the global payments system. It has to be better than bitcoin… it has to be better than digital yuan.”
The Chinese have been at work on a digital yuan for at least five years. It is currently in the testing phase and would allow payments to and from China that completely bypass the traditional international financial infrastructure.
Why do Governments Want Digital Fiat?
Governments tend to relish their role as holders of the money monopoly. Being able to control monetary policy brings with it vast power to control almost every facet of any society.
While paper money has serial numbers that can be traced, a digital fiat currency would be able to track the exact location of every unit of currency. This would make tax collection much easier and make tax avoidance and evasion extremely difficult. Furthermore, crimes like money laundering can be more easily detected. This detection of malicious activity could be automated, as well as the transmission of monetary policy.
The ability to control their national currencies, curtail tax avoidance and evasion, detect financial activities that it considers illegal are a short summary of the reasons why governments are favorable toward digital fiat currency.
Why Digital Fiat Can’t Replace Cryptocurrency
The problems with digital fiat are the same problems that exist with fiat currency today. When examining the way central banks use fiat currency to manipulate economies and the consumers within them, digital fiat currency is simply a digital version of the same old fiat currency.
If you like this article, check one of our previous in-house articles, “Can You Trust Crypto Credit Cards?”
Not only does digital fiat carry all of the baggage that traditional fiat currency brings, but most proposed implementations call for a design that eliminates many of the primary benefits of cryptocurrency—such as privacy, immutability and decentralization.
Since fiat currencies are controlled by central banks, it should come as no surprise that decentralization is not in the cards. Central banks are, by definition, a centralized power governing a national currency. This central control of a proposed digital fiat means that the blockchain, perhaps the most visible contribution of cryptocurrency to the world, would be totally missing from these digital national currencies.
With central banks in control of their own digital currencies, there would be nothing preventing these central banks from increasing its supply, just as they do with fiat currency today. This manipulation would lead to the inflation of the value of a digital currency, something the strict supply schedules of cryptocurrencies are specifically designed to avoid.
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Cryptocurrency has been a powerful force in the world since it first appeared. Cryptocurrency has also inspired the governments of the world to propose their own digital fiat currencies. These currencies would be digital but would bear little resemblance to the openness, privacy, decentralization and immutability that make cryptocurrency so popular.
Digital fiat currencies are just a digital extension of conventional fiat currencies. The governments of the world want a currency with all the accessibility and convenience of Bitcoin, but they want to control it just like they do fiat currency. Governments’ desire to monitor their currencies and regulate their use will be a privacy nightmare. And the same manipulations of a currency’s supply that occur today will be in effect whenever the central banks decide that more money is needed. All these facts add up to the conclusion that digital fiat is no alternative to cryptocurrency.