The year is 2023. Blockchain technology has reached unprecedented heights. DeFi is mainstream. Gas fees are negligible now. Your memecoins alone are worth millions of dollars. You’ve reinvested half of your net worth in NBA Top Shots, and you’re confident that this is the best financial decision you’ve ever made.
And then the US government makes an official announcement:
“So, yeah, fiat currency was kind of a bust. And cash is so… untraceable. But we really love what you’ve done with this whole blockchain thingie, and thanks for making so much of it open source! You can move along now, we’ll take it from here. We’ll be making a digital dollar so you can get rid of your Bitcoins now. Sorry, that made it sound like you have a choice. You don’t. It’s illegal to own Bitcoin. But don’t worry. All of your new digital dollar transactions will be fully traceable in our new immutable chain. See? We totally love the benefits of blockchain now!”
I’m joking, but only a little.
The Digital Dollar
An official US digital dollar is almost certainly going to be a reality within the coming years.
Despite her vocal criticism of Bitcoin as “extremely inefficient,” Biden-appointed US Secretary of the Treasury Janet Yellen has shown interest in backing a central bank digital currency in order to help give more Americans easy access to payment systems and banking accounts.
Meanwhile, Trump-appointed Federal Reserve Chair Jerome Powell said on Tuesday that creating a digital dollar was a “high priority project.”
Bipartisanship is almost nonexistent in the US right now, so when the government’s highest financial officers are all looking towards the digital dollar from across the aisle, it’s practically inevitable.
An official US government-backed cryptocurrency is bound to have unpredictable regulatory implications for DeFi and the larger crypto space. It could prime a mass mainstream market for crypto adoption or, as hinted in our doomsday scenario above, it could mean that Americans are only allowed to transact with a US-issued digital coin, on what could be a permissioned chain.
Rules and Regulations
Current laws around creating your own physical currency is a bit of a minefield. Local currencies, like the now-defunct Ithaca HOUR (which was designed in 1991 to support local businesses in Ithaca, New York and backed on communal trust that one HOUR would be redeemable for one hour worth of work), are generally considered legal. Minting your own metal coin-based currency, on the other hand, is a federal crime punishable by up to five years in prison.
Cryptocurrency is a very new sector of the financial market, and laws and regulations have not caught up to the technology…yet.
An Asset by Any Other Name
Right now, the IRS classifies crypto as a property-type asset, meaning that gains must be reported and are subject to capital gains taxes. At the same time, payments made through crypto are supposed to be taxed just like regular income. Which is to say, the laws around crypto and its categorizations are already nebulous.
The US Treasury Department has been actively attempting to further regulate crypto with a particular focus on the legality of private wallets. Know Your Customer (KYC) laws have already crept into DeFi, chipping away at the permissionless, trustless, anonymous ethos that has traditionally driven the space.
As crypto markets continue to grow and captivate more of the mainstream financial market, new regulations are sure to follow.
The Future of Crypto
The advent of a federally-backed digital dollar will almost certainly speed up crypto regulation.
Keep in mind that from 1933 through 1974, it was illegal to own gold coins, gold bullion, or gold certificates in the United States due to President FDR’s Executive Order 6102 which reasoned that private hoarding of gold stalled economic growth. The US government has historically gimped threats to its capitalist hegemony, and it would be foolish to believe that they couldn’t find a way to try to do the same thing to crypto.
What a cruel twist of irony it would be for a technological movement aimed towards decentralization to be co-opted by a powerful government entity with the ability to track, monitor, and regulate people’s finances like never before.
To be sure, this isn’t necessarily what the future holds. It’s just one possible outcome. There’s also a distinct possibility that a federal-backed digital dollar could exist hand-in-hand with DeFi. Government attention towards crypto could even spur a new stream of innovation for the space, with more and more top technological minds focusing on advancements for blockchain.
“It really all depends on what the design of [a] digital dollar looks like,” said Jerry Brito, Executive Director of Coin Center, to The Defiant. “Will it interoperate with public blockchain networks? Maybe a way to bridge? Will it be anonymous like cash? We need to know more about it before we can know what effect it might have.”
Only time will tell, so for now, keep hoarding those Top Shots.