US digital dollar: Will fiat currency ride the crypto wave?

Two major research projects are under way to see if the US central bank should begin minting digital money.

Two United States-based efforts are exploring the concept of a digital fiat dollar in an era when cash isn’t king anymore [File: Lee Jae-Won/Reuters]

The United States dollar has reigned for many decades as the top global reserve currency, backed by the full faith and credit of the US government and the value of its powerful economy.

But in recent years, the dominant monetary unit of choice worldwide has faced an increasing array of threats, ranging from its own inefficient financial infrastructure and the introduction of the Chinese e-yuan to the spectre of Facebook’s Diem and cryptocurrencies like Bitcoin.

So as countries like the Bahamas, China and Sweden test the viability of central bank digital currency (CBDC), policymakers in the US are taking stock.

Two US-based efforts are exploring the concept of a digital fiat dollar in an era when cash isn’t king anymore.

The Digital Currency Initiative at the Massachusetts Institute of Technology (MIT) is working with the Federal Reserve Bank of Boston on research to jump-start the hypothetical monetary shift in an experiment coined Project Hamilton. The Boston Fed president has said that a future “Fedcoin” would mix the features of Venmo and Apple Pay.

And the Digital Dollar Project, a collaboration by the non-profit Digital Dollar Foundation and consultancy Accenture Plc, is launching five pilots in the next year. That venture hopes to generate public discussion and take practical steps toward a CBDC.

“There are a number of reasons why central banks around the world are looking seriously at CBDC, including data capture and economic privacy, financial system modernisation, financial inclusion, precision in execution of government benefits and monetary policy,” said Christopher Giancarlo, co-founder of the Digital Dollar Foundation and a former US government regulator.

Giancarlo told Al Jazeera that “geopolitical concerns, competition of stablecoins [like Diem] with bank payment systems and leadership in setting standards for global digital currency interoperability” are also motivating the US.

“The private sector has been exploring the opportunities of digital assets like Bitcoin for over a decade and now the public sector is trying to catch up,” he said.

‘Doesn’t need mining blocks’

There is no guarantee that the US will successfully adopt a digital dollar, Chris Ostrowski, managing director of the United Kingdom-based Digital Monetary Institute, told Al Jazeera.

Progressives, libertarians and business-oriented technologists all have different ideas about what a CBDC should look like, without agreement on goals, design or functionality.

Advocates of a digital dollar like Rohan Grey, president of the Modern Money Network and a professor at Willamette University College of Law, argue that a whole-of-government approach can push forward on a coordinated framework with multiple avenues.

A number of US lawmakers have proposed digital wallets to help unbanked and underbanked Americans receive benefits and make payments [File: J Scott Applewhite/AP Photo]

Grey believes that US President Joe Biden should work with Congress to come up with a dollar digitalisation path just as government agencies combine forces — at least in theory — to tackle complex issues like the coronavirus pandemic, economic recovery and climate change.

“We’re not talking about one instrument or platform or technology but a comprehensive set of legislative changes,” Grey told Al Jazeera.

Among the suite of controversial solutions envisaged by progressives is a proposal by Senator Sherrod Brown, a Democrat from Ohio, to set up a “FedAccount” digital dollar wallet for every American to receive benefits and make payments.

The system would be easily accessible at local banks and have no fees. This also ties into a bill co-sponsored by Senators Bernie Sanders and Kirsten Gillibrand for the US Postal Service to provide retail banking.

A related idea is the Public Banking Act introduced by Representatives Rashida Tlaib and Alexandria Ocasio-Cortez and aiming to “enact banking as a public utility, a proven model worldwide, to keep money local and cut costs by eliminating Wall Street middlemen, shareholders and high-paid executives”.

Some digital tokens such as Bitcoin rely on energy-sucking proof of work (PoW) consensus mechanisms to validate transactions and mint new coins, which involves powering thousands of computers that labour in unison [File: Bloomberg]

Grey sees prospective “eCash” solutions as a populist tool to fight inequality and make money more democratic by offering token-based digital currency on stored-value cards, in parallel to account-based ledger technology where people hold assets directly at the central bank.

Like many left-leaning supporters of the digital dollar, Grey says blockchain — the technology underlying cryptocurrencies — is not needed where there is enough centralised trust.

“Blockchain is supposed to be a consensus amongst a bunch of peers about a common state of affairs, but that isn’t the question you’re trying to solve here,” he said, referring to the way that crypto networks verify transactions. “This doesn’t need mining blocks or proof of work.”

Decentralised crypto and CBDC might one day co-exist. But either way, private Bitcoin has sped up the conversation about the latter partially replacing paper notes and metal coins.

‘Advantages and risks’

Whether a digital dollar ultimately relies on blockchain or is just influenced by the principles behind cryptocurrency, US policymakers of all stripes appear largely united by the desire not to be seen as falling behind — in a competitive global race — to digitise the greenback.

Many see a US economy that has always pioneered the internet and fintech sectors and fear that Beijing will eventually pivot from limited domestic implementation for its CBDC to a substitute for popular Alipay and WeChat payment systems that dominate much of Asia already.

Broadly speaking, despite concerns about illicit finance and money laundering, US officials criticise the surveillance and consumer data-gathering implications of the Chinese model.

US Federal Reserve Chairman Jerome Powell and US Treasury Secretary Janet Yellen have both signalled increasing support for a digital dollar, though their remarks about the lack of full anonymity for users have highlighted doubts — especially for conservative lawmakers.

Some libertarian members of the US House of Representatives are bullish on cryptocurrency but bearish on big government. At a June 15 hearing of the Task Force on Financial Technology, ranking Republican member Warren Davidson, a congressman from Ohio, suggested officials are still in the “learning phase” for a digital dollar.

He described the current financial infrastructure as “already safe, effective, dynamic and efficient” and said that the US should pursue digitalisation “for the right reasons, not simply to pressure ourselves”.

Federal Reserve Chairman Jerome Powell has signalled increasing support for a digital dollar [File:  Graeme Jennings/Pool via Reuters]

Davidson’s primary critique is about “sound money” — the worry that digital dollars could potentially erode stability and prosperity. But he also cautions not to stray far from the “permissionless” aspects of cash that allow for privacy in peer-to-peer transactions.

He told Al Jazeera that the digital dollar should be created “not as a tool for control and instead as a store of value and means of exchange”.

Patrick McHenry, the ranking Republican in the House Committee on Financial Services, urged thorough study of both the “advantages and risks”, expressing agreement with the Fed’s commitment to “get it right [rather] than to be first”.

Other Republicans are focused on the inflationary potential of “printing” too much money, or on the pitfalls of the public sector trying to replicate what commercial banks already do. Also, from a cybersecurity perspective, keeping the intermediary banks in place could insulate the Fed.

‘Convenient complement to cash’

Consensus might emerge with Wall Street and financial technology companies around the 21st Century Dollar Act, a bipartisan bill requiring the secretary of the US Treasury to issue status updates on the dollar’s dominance and on the progress of CBDC development.

Some 80 percent of central banks are actively probing the CBDC concept, including the European Central Bank and Bank of England, which recently released papers on the subject.

Last October, the Bahamas unrolled the “sand dollar”, the first national launch by a central bank of such technology. In April, the Eastern Caribbean Central Bank unveiled its DCash. And the Bank of Jamaica plans to introduce digital currency next year.

The Jamaican programme uses Ireland-based eCurrency Mint Inc as the technology provider. That company’s chief markets officer, Miles Au Yeung, suggests the US could do the same.

He told Al Jazeera that only the Treasury and Federal Reserve should have the authority to produce, issue and distribute this new form of legal tender.

“Any CBDC must be able to operate within the existing payment rails of the financial system, including bank accounts, apps, and payment cards, while extending to smartphones, QR codes, and other innovative ways to store digital objects,” said Yeung.

“The digital currency must achieve instant and final settlement,” he added, saying it should be able to scale “massively with minimal energy consumption”.

In the Bahamas, local company NZIA Ltd implemented the new digital currency, which general counsel John Kim described to Al Jazeera as “the most mature, advanced system of its kind”, noting the CBDC they built is a “convenient complement to cash”.

While Jamaica’s CBDC does not rely on blockchain, the Bahamas model is a “best of both worlds” hybrid that combines blockchain and centralised systems, says Kim, who adds that he is taking a “wait and watch” approach to the US digital dollar.

“In reimagining any mission-critical national infrastructure,” he said, “the readiness is just as important as the willingness.”

Source: Al Jazeera