The Digital Dollar Foundation, a U.S. thinktank backed by a coterie of former executives of the Commodities Futures Trading Commission, and Accenture have formed a partnership to advance the exploration of an American central-bank digital currency.
The backers of the initiative, called the Digital Dollar Project, said they are about to release a white paper making the case for Uncle Sam to digitize the dollar, and offer a range of trial use cases and design scenarios. They announced this on May 11 online at Consensus, a cryptocurrency conference.
Although the backers have been working on this for some time, the Covid-19 pandemic and the huge response it has triggered from the Federal Reserve Bank and others has made questions of the dollar-based world order even more relevant.
“Over the last eight weeks, the entire globe has been dollarized,” said Chris Giancarlo, former chairman of the CFTC (which under his term authorized the first bitcoin futures contracts) and now a lawyer and co-founder of the Digital Dollar Foundation.
“Is this a blip, and the beginning of a trend away from the dollar – or is this taking us into the future? Right now, as a global reserve currency, the dollar is unassailable. But times change, and this crisis has shown the limitations of its analog nature, format, and delivery system.”
One of his project co-directors, Daniel Gorfine, a fintech consultant and previous chief innovation officer at CFTC, said digitizing the dollar now was a way to “future-proof the dollar and enhance its status”.
The space race of money
Giancarlo says the approach should be a private-public partnership akin to the space race and the creation of the internet. “In the U.S. when we do a big project, it’s through public and private partnerships, to make sure the values of a free society are brought to bear.”
David Treat, senior managing director at Accenture, says it’s time for money to innovate in line with other digital advances, and tokenize fiat currency – but as simply as possible, without changing the roles of the Federal Reserve or the Treasury.
“We see a phenomenal use case…in the notion of central banks and the value of the programmable nature of money,” he said.
Applications could include a better way to transmit government benefits, and get money to the underbanked (about 25% of Americans lack a bank account or otherwise are relegated to cash and payday lending). Digital custody wallets could be preloaded onto smartphones, and activated with digital identity verification tools, thus helping pull the underserved into the formal financial system.
In response to Covid-19’s harm to the economy, the government has been mailing millions of checks, but these have to be cashed at a bank – at a time when people are supposed to be avoiding social contact. A CBDC could address that too.
Principles of innovation
The Project advocates maintaining the two-tier banking system, with a clear division between the central bank that mints dollar tokens and distributes these through a commercial banking system. There remain questions of how far into merchant and individual affairs the central bank might reach, but Treat says designs should be careful not to harm commercial banks’ role.
A third principle, he says, is to maintain privacy in financial transactions. In the U.S., cash transactions under $10,000 don’t need any reporting, above which there is a mechanism for KYC and anti-money laundering compliance. Treat says such freedoms, or obligations, should be encoded into digital dollars.
To make this work will require a careful design for digital identity and verification. It will require creating a wallet infrastructure for banks, businesses and individuals to hold and transact digital dollars. This will necessitate thinking about features such as whether to pay interest on a CBDC, but Treat says the ideal would be to make the experience as close as possible to physical cash, both to let individuals make payments and deposits, as well as to enable commercial banks to accept digital deposits and use that capital to extend loans.
The U.S. dollar is the world’s primary reserve currency, so any innovation will impact the rest of the world far more than with any other currency.
This primacy is not a function of America forcing others to use the dollar, but of governments, corporations and investors choosing to use the dollar. This is partly because of a network effect: it’s just very convenient to transact in dollars even if governments would prefer to advance the use of their own currency.
It is also however a reflection of American financial stability, rule of law, free-market capitalism, as well as the depth and openness of its capital markets – values that the Digital Dollar Project backers say they want to see embedded in any CBDC design.