The Economic Impact of Digital Fiat Currency (DFC): Opportunities and Challenges

The huge rapid growth of using internet and technology has been affecting all economies whether emerging or developed across the world. The financial sector is one of the sectors that has been directly influenced by technology due to the growth of electronic commerce and electronic payments. The emergence of digital currencies such as Bitcoin and the underlying blockchain as well as the distribution ledger technology have attracted significant interest. These developments have raised the possibility of considerable impacts on the financial system and perhaps the wider economy. The huge price leaps that happened to Bitcoin towards the end of 2017 until it reached its highest ever price, (19000 USD) since the beginning of its trading, followed by the significant fall that took place afterwards till it fell under the level of 4000 USD in 2018, made the Central banks more worried about the future of this market. In addition to that, the increase of developing new cryptocurrencies as well as the lack of control over it, made the central banks very alert to the futuristic view of this sector keeping their eyes wide open to this rapid growth. As a result, over the past few years, public authorities and central banks around the world have been monitoring developments of digital currencies and studying their implications. A question that has been raised frequently is whether central banks themselves should issue digital currency that could be used by the general public or not. The legal status of cryptocurrencies was always in question. Some administrations have banned them and other had implicit bans. In many other countries they are still under study and only official warnings from using and investing in cryptocurrencies were announced. The idea of issuing the central bank cryptocurrencies or Digital Fiat currencies has been studied by central banks in order to offer a formal/legal substitute for the consumer that is trusted and protected by central banks. Transitioning from private Cryptocurrencies to a legally issued digital currency will enhance the suite of financial inclusion tools that are already in place, offer "cash"-only households a leap into digital transactions, and increase the consumer choices of how to manage their household income and expenditures.