Digital Dollar but without blockchain?

Karthik Subramanian

A digital dollar is on the horizon and is being actively considered by the Fed and the SEC in a push towards digitalization of the financial ecosystem and also to stop the advance of crypto tokens and stablecoins but in a new twist last week, reports have emerged that it may not be based on the blockchain after all.

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When news of a digital dollar being in the works emerged, it was assumed that it would be on the blockchain, similar to the crypto stablecoins that are in circulation now, and there was also active discussion on whether it would use a private blockchain or whether the Fed would develop one on its own. But comments from the former Boston Federal Reserve President Eric Rosengren seem to be indicating something to the contrary.

Rosengren commented that blockchain would not be part of the picture “because we want to have sufficient throughput and speed of transactions,” adding that, “the distributed ledger is not as effective a mechanism for meeting kind of the operational needs that we think we will need.”

Rosengren has been one of the few who has read the yet unreleased paper issued by the Fed on the feasibility of CBDCs and he should be having an inside view on the thinking of the Fed on what technology is should be using for the digital dollar. This should be considered as a big setback for the blockchain industry as the assumption all around was that anything related to digital currencies would automatically be using the blockchain as the backbone. If Fed does go ahead with different technology and it proves to be a success, then it is quite likely that other countries and central banks would also like to piggyback on the same solution making blockchain irrelevant as far as digital currencies are concerned.

One of the main considerations for any CBDC would be the speed of transactions and the reliability of the network and the volumes that need to be handled by the network at peak throughput is likely to be much larger than what most of the blockchains have handled in real-time so far. This is likely to be the point of contention when the decision over the infrastructure to be used for CBDCs would come under discussion. Blockchain does have its advantages with regards to transparency and security but it remains to be seen what alternatives the Fed has under consideration for implementing the digital dollar.

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