Many finance experts believe that as the central banks worldwide consider digitizing their fiat currencies, this trend could lead to more investors adopting cryptocurrency.

Several countries are mulling to develop their own digital currencies, known as – Central Bank Digital Currencies (CBDCs), which will work as a digital version of their traditional (fiat) currency. For instance, in the U.S., it would be a digital version of the dollar – the digital dollar.

China was one of the first to consider a digital version of its currency. It has been working on the project since 2014 and presently piloting a digital Yuan in its ten cities.

Sweden is also piloting their digital currency, called the e-krona. European Union, too is not far behind and considering a digital Euro.

For the uninitiated, digital currencies can be broadly placed into three categories:

Bitcoin and altcoins: Bitcoin, which uses blockchain technology, is the first and most well-known cryptocurrency. The other cryptocurrencies that were launched after its success are known as altcoins. Most cryptocurrencies use blockchain technology. Some even aim to use the technology in new and more efficient ways and have added new layers, such as smart contracts.

Stablecoins: These are cryptocurrencies whose value is tied to an outside asset, such as the price of gold or the U.S. dollar. It is less volatile compared to other cryptocurrencies and has benefits like security and fast processing.

CBDCs: These are issued by the government, and like cryptocurrencies, they use the blockchain ledger. But, they are centralized, unlike bitcoin and other cryptocurrencies, which are decentralized. CBDCs are controlled by the central bank or the national government.

When can we expect the digital dollar?

As per Federal Reserve Chair Jerome Powell, it will take time before the U.S. introduces a digital currency. Currently, the Fed is exploring how CBDC could help improve an already safe, dynamic, efficient, and effective U.S. domestic payments system. If a CBDC is introduced in the future, it will complement and not replace current private-sector digital forms of the dollar and cash.

Why won’t digital dollar doom bitcoin?

The digital dollar will not displace or compete with decentralized currencies like bitcoin because of the following reasons:

• Bitcoin’s role as a store of value will be strengthened with the introduction of the digital dollar.
• The introduction of digital dollars would give governments even more control than they already have around their money supply, and many people don’t want that type of control. Cryptocurrencies are decentralized and do not require a government or central entity in the middle of transactions – and this is what makes them so popular.