I have been hearing a lot of buzz about the government introducing a “digital dollar”. But isn’t most money already digital? What would be the big difference in this system?
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All the answers I’ve read so far are highly politicized or overly complicated so here goes…
Most money today is already digital (I.e. most money exists as numbers in a computer without any physical counterpart). Physical cash only makes up a small amount of the actual currency in circulation. However, unlike physical cash, it is not currently possible to ‘hold’ today’s digital money without a bank account / an intermediary institution. Nor is it possible to transact with today’s digital money outside of the confines of the banking system. If you want to buy something online and you only have cash, you need to deposit that cash at a bank in order to send it to whoever is selling what you want. You can kind of get around this with purchasing gift cards / prepaid visas, but even in this scenario the principle is the same — you must convert cash into a form of currency that is managed by an intermediary (e.g. visa or the store selling gift cards). Obviously this wouldn’t work for *receiving* money.
The idea of digital cash / crypto is a digital representation of value that can be held *like* cash. As in, by individuals without need for a bank account or any kind of ‘account.’ There are numerous ways to go about setting up such a system, but without getting into the nitty gritty, the idea is that individuals have primary custody of their digital cash, meaning 1) It can be stored (in a software or hardware wallet) and spent without a financial institution to act as an intermediary/guardian; 2) It can held/be used relatively anonymously (again like cash); 3) The holder theoretically has full control (e.g. can choose how it’s lent out, can choose not to lend it out, and can effectively ‘destroy’ it by putting it in a wallet nobody has access to.
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