Why the government is rushing to regulate digital currency

Almost a third of Generation Z’s young Australians own a cryptocurrency. One in five coffees at Starbucks in the United States are purchased without cash or even a card transaction. Facebook is getting closer to releasing its private digital currency DIEM. Tesla talks about selling cars for bitcoin.

What we currently call “money” will soon be supplemented by new digital currencies that will change our lives in ways that we are only just beginning to struggle with. That’s why the government rushed this week to present a series of new proposals to regulate digital currency.

So what is digital money? How is this going to change our lives? And why are governments so afraid of it?

More and more people are turning to their cell phones for retail purchases.Credit:Simon bosch

When most people think of digital money, they think of bitcoin. But digital currency is actually much broader than cryptocurrencies. As crypto achieves cult status among a certain demographic of young people and gains massive media attention, it will not be the main game of digital money. This is because crypto is not very useful in transactions.

When we’re going to pay for something, we want money that has a stable value and is easy to exchange. Bitcoin is neither of those things, which is why you aren’t using it (and won’t be using it) for shopping. Cryptocurrencies will play a role in the financial system as a speculative asset and as a hedge against inflation. You can think of them as the digital equivalent of gold, which investors hold for the same reasons.

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Stable coins are another type of digital currency that has more potential to dominate day-to-day transactions. One of the advantages of stablecoins, the most famous of which is Facebook’s DIEM, is that they are tied to sovereign currencies. If cryptocurrency is the digital equivalent of gold, stablecoins will become the digital equivalent of cash, useful in daily transactions due to their stable value and immediate acceptance.

Soon the world will be inundated with stablecoins issued by all kinds of companies. In the Facebook ecosystem, you will use DIEM. In the Amazon ecosystem, you will use an Amazon coin. Businesses will make it very attractive to use their coins in their ecosystem by offering fabulously smooth discounts and features.

The third type of digital currency is central bank digital currencies (CBDCs), which will be official legal tender. This is the attempt by governments – now including Australia, following this week’s announcements – to meet the growing demand for digital currency functionality.

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