Following pressure from the Joe Biden administration to make policy regarding digital assets, the Federal Reserve Bank of New York and several US financial firms announced the first digital dollar proof-of-concept (PoC) project.

An initiative with the support of giants. Traditional financial players have often viewed cryptocurrencies with skepticism and have been cautious in assessing their adoption. But enthusiasm seems much higher when it comes to the digital dollar.

The first to participate in the first test of the digital dollar, which is closely watched by the Federal Reserve, will be BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, US Bank and Wells Fargo. They are some of the most influential companies in the financial world.

proof of concept. It is a key element to find the weak points of any project. In this case, there will be a reduced implementation of systems involved in the interoperability of the financial ecosystem with the digital dollar.

From now on, the Regulated Responsibility Network (RLN) will be tested for twelve weeks. On the platform, banks participating in the experiment will work with tokens representing customer deposits, which will be placed in a central repository on a common distributed ledger. All this will be done in a test environment and with simulated data.

Differences between digital dollar and other digital currencies. Unlike digital currencies like Bitcoin and Ether, the digital dollar will be centrally issued and backed by the Federal Reserve. From an economic perspective, the value of the digital dollar will depend on the value of the fiat dollar, not what is determined, among other things, by supply and demand.

Benefits of the digital dollar. According to the Federal Reserve, implementing the advent of the digital dollar, hand-in-hand with a network of regulated liability, will allow to accelerate transactions and “create innovation opportunities to improve financial deals.”

Earlier this year, the White House claimed that the digital dollar would have the potential to support low-cost and efficient transactions while promoting greater access to the financial system. Other advantages such as “consumer protection, financial stability and national security” were also mentioned.

Views behind closed doors. Christopher Waller, a member of the Federal Reserve Board, recalls that China is the main economy to bet on a national digital currency, and the reasons for this are nothing more than “closely monitoring the economic activity of its citizens.”

There is more and more talk about CBDCs. Digital currencies issued by a central bank are being investigated by dozens of countries. One of the most notable examples is China, as Waller mentions. The Asian giant is leading the adoption of the digital yuan, a reality in more than 11 regions. From the date of its implementation until the end of 2021, its transactions had reached the equivalent of 14,000 million euros.

Europe also has a place in this race.. The European Central Bank (ECB) studies and analyzes the formation of the digital euro. There will be a digital central bank coin that will report directly to the institution. If the project progresses at a good pace, the digital euro could arrive in 2025.

Where does the interest come from to launch the digital dollar? The US decision to bet on the digital dollar must be understood in the current economic context. Despite market volatility and currency woes, cryptocurrencies are a reality.

Failure to regulate the cryptocurrency market and abandoning the digital dollar could undermine the country’s leadership in world markets. In this sense, regulation seems to be approaching like the arrival of the e-dollar. The United States seems determined not to sit idly by.

We will not see any change in the short term. US requests to regulate cryptocurrencies and create a digital dollar will not take effect immediately. Numerous federal agencies will intervene in this project, which somehow touches the digital currencies universe. Therefore, they will have to agree to develop coordinated measures.

Images: Kenny Eliason | Jonathan Borba