Will The Upcoming Recession Spark The Creation Of An Official Crypto Dollar?

Will The Upcoming Recession Spark the Creation Of An Official Crypto Dollar?

With the inherent currency instability that a looming recession causes, it makes one wonder whether countries will take a more serious look at adopting virtual currencies as viable financial alternatives. Moreover, a new upcoming recession may serve as an impetus for nations to accelerate their work on virtual currencies.

While an official virtual dollar may seem far-fetched (though the popularity of stable coins has been growing), such a move is not without precedent. Similar dynamics can be traced back to early 20th-century financial doctrines embraced in the United States during its recovery from the Great Depression.

The Rise Of Fiat Currency And The End Of The Gold Standard

Before the Great Depression, the U.S. dollar was representative money – it had value backed by a commodity for which the currency could be exchanged. That commodity was gold and, before that, silver. The United States left the gold standard in 1933 when the Great Depression’s economic uncertainty caused a run on banks to trade in U.S. dollars, threatening the Federal gold reserves. By an act of Congress, banks would no longer be permitted to pay out gold currency for bank deposits.

This decoupling of currency and commodity allowed the Federal government to print more dollars as well as manipulate interest rates, which modern economists largely credit with helping the United States recover from the Great Depression. While the United States did not completely walk away from gold until 1971, the dynamics gradually led to the creation of the modern fiat currency, which is not backed by any commodity. The fiat currency’s worth is based on the economic strength and stability of its issuing nation.

Nothing stops the United States from printing more cash. However, with cryptographic currency, the control of the money supply could be introduced in a decentralized fashion through smart contracts. Should the United States introduce its official virtual currency, the move potentially could strengthen the country’s economic position.

Cryptocurrency – Fiat Currency On Steroids?

To consider what exactly it is that China is proposing as virtual currency, it is helpful to look at a well-known example of a digital asset, bitcoin. This cryptocurrency’s worth is not backed by the strength of any nation’s economy; instead, its value is backed by its scarcity.

While bitcoin mining is currently increasing the number of cryptographic coins in circulation, there is a pre-determined, finite limit to the number of bitcoins that could ever be mined. By design, this scarcity is what gives a bitcoin its inherent value. In fact, it is that very design that has caused investors to look at cryptocurrency as a potential safe haven in the face of a recession.

It is also important to note that a bitcoin is a decentralized store of value, meaning that all records regarding the relevant transactions and their respective owners are managed in a distributed ledger, part of the supporting blockchain technology. Instead of one central authority that records when a bitcoin changes hands, there are multiple ledgers across the Internet that are maintained, making it practically impossible to hack the ledger and fraudulently duplicate a digital asset.

China and United States Step Into The Crypto World

The Virtual Yuan

China has made no secret of its virtual currency ambitions. However, the country’s goals and methods are not the same as those of the creator of Bitcoin. China is pegging the value of its virtual currency to that of its hard currency, the yuan. The People’s Bank of China has confirmed this.

China’s goal for its digital money is to expand the influence of the yuan and the nation by using the virtual currency to make inroads in markets where access to American currency is difficult. Additionally, China is hoping that the adoption of a decentralized ledger system will generate confidence in the virtual yuan. Such confidence has been lacking in the country’s hard currency, due to the nature of China’s totalitarian governance style.

The Digital Dollar

Recently, the idea of a digital dollar was revived in the United States due to the economic crisis caused by COVID-19. A draft stimulus bill in Congress floated the idea of creating a digital dollar to speed relief payments to people and businesses. However, the proposed concept does not qualify as a cryptocurrency (due to its limited scope and use).

Still, there are growing calls for the United States to create an actual full-fledged digital currency. As Christopher Giancarlo, the former chairman of the Commodity Futures Trading Commission, stated, those using the U.S. dollar are “underserved by an analogue currency in a digital world.”

What Has The White House Signaled?

President Trump hosted Mark Zuckerberg, the CEO of Facebook, privately at the White House last October when Zuckerberg was summoned to testify to Congress about Facebook’s proposed Libra cryptocurrency. Trump found the conversation with Zuckerberg, who was lobbying Trump, to be “constructive,” a statement, which gave hope to the crypto world. However, since then, the President has signaled a distrust of cryptocurrencies in his proposed budget for the Fiscal Year 2021, assigning more power over cryptocurrency to FinCEN, a part of the Department of the Treasury, to “combat emerging virtual currency and cybercrime threats.” So, it has been difficult to determine where the White House might fall on the issue of creating a U.S. virtual dollar. Thus far, the President has been unpredictable on the subject.

So What Is The Future Of The Digital Dollar?

In a recession, both the virtual yuan and the digital dollar are to be pegged directly to their respective hard currencies. Both of these currencies will lack the advantage that Bitcoin has of not being so directly subjected to centralized forces.

However, that is not to say that a recession will not have an impact on whether or not the United States will adopt a digital dollar. A recession will only add to the movement in favor of cryptographic currency. But, China may be the nation that starts the domino effect first, ahead of the United States.

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