What you’ll learn in this article

  • What is the difference between a digital dollar and a central bank digital currency (CBDC)?
  • How Covid and calls for universal basic income have boosted awareness of digital dollars
  • Who would benefit from central bank digital currencies — and what are the pitfalls?
  • Are we headed for a cashless society?

The idea of a “digital dollar” is gaining steam in a world reeling from the coronavirus pandemic. But at the same time, there is confusion over what the differences are between a digital dollar and a central bank digital currency (CBDC) as well as what impact they would have on the world.

In the United States, lawmakers have proposed bills using a so-called digital dollar to aid Americans in need of cash as social distancing orders shuttered businesses and threw more than 26 million people out of work.

However, the Coronavirus Aid, Relief, and Economic Security Act that was passed did not end up containing any provisions for a digital dollar, and instead relies on conventional checks and direct deposits to deliver a one-time cash payment to those in need.

But that hasn’t stopped other attempts to make the digital dollar into reality. The recent Automatic Boost to Communities Act (ABC Act) seeks to use a digital dollar to help deliver a universal basic income (UBI) of $2,000 per month during the pandemic, and $1,000 per month a year after the crisis subsides. 

Forkast.News interviewed a number of experts to explain the difference between the digital dollar and a CBDC, the role that universal basic income has played in making these a reality, and the potential impact on traditional banks, other businesses and society at large.

Digital dollar, as envisioned by U.S. lawmakers

While drafts of legislation in the U.S. mention the digital dollar, it is not the same as a central bank digital currency. The digital dollar proposed by lawmakers involves an electronic cash payment system, similar to a debit card, whereas a CBDC would be a completely new financial system — one where physical cash could eventually be replaced by digital cash.

A U.S. CBDC would be a tokenized dollar that would be issued by the Federal Reserve and exist as a liability of the U.S. government, just like cash. But how different would a CBDC be from electronic cash that already exists?

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David Treat (left) and Angie Lau (right) on the sidelines of the OECD Global Blockchain Policy Forum 2019. Photo: Forkast.News

Electronic money is defined by the Bank of International Settlements as a store of value for payments along with a record of the funds or value available to the consumer on their device, and has existed in various forms for decades under the management of banks and similar financial services. 

But while electronic money merely acts as a placeholder for physical cash, a CBDC would take over as the direct representation of that currency’s value. 

A CBDC could circumvent the need for a debit or credit card, if one had enough of it in their device’s digital wallet. Should CBDCs become commonplace, retailers and consumers would have to explore the implications of a cashless society. New York City, for example, has already banned stores from refusing to accept cash.

According to former chairman of the Commodity Futures Trading Commission J. Christopher Giancarlo, a CBDC would have the same legal status as the cash in one’s wallet, but would reside in your personal device. 

“For government agencies charged to distribute government crisis benefits to vulnerable populations, especially those without access to banking services, direct transmission of digital dollars to smartphones would be a time-saver,” Giancarlo recently wrote.

Giancarlo is a director of the Digital Dollar Project, which aims to steer legislators toward the idea of a tokenized USD and intends to publish a white paper soon on the benefits of a U.S. CBDC.

David Treat, a managing director at the consultancy Accenture, which is also part of the Digital Dollar Project, has told Forkast.News that the power of a central bank digital currency is the same as a physical dollar bill. 

See related article: How a tokenized digital dollar could modernize the American financial system

“A tokenized version of the U.S. dollar in the form of a central bank digital currency would enjoy that same confidence and clarity because it has that full backing and faith and credit of the U.S. government or whichever central bank issued it,” Treat said.

But while Giancarlo and Treat are bullish on the idea of a U.S. CBDC, they caution against rash changes and urge policymakers to plan and develop its infrastructure carefully.

“Something as complex and worthy of the U.S. dollar’s global importance should not be cobbled together in a crisis,” Giancarlo wrote. “Getting it right will take time. Nevertheless, now is the right time to get started.” 

Universal basic income and Covid aid: the first application for a digital dollar? 

UBI was recently popularized by former U.S. presidential candidate Andrew Yang, who proposed payments of $1,000 to every person in the country to offset wage losses from the increasing automation in workplaces. As the coronavirus’ effects ramped up in the U.S., the previously fringe idea has become more mainstream.

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The coronavirus pandemic has spurred interest in a digital dollar system. Photo: Pikist.com

“Real people, not corporations need to be at the center of any legislative relief effort to combat the harms caused by this global pandemic.” Rashida Tlaib, the Michigan congresswoman who introduced the ABC Act, said in a statement. “Too many of our workers, low-income people and families across the country were instantly impacted and we need to have an aggressive and inclusive financial assistance program.”

The idea of a digital dollar — a CBDC or otherwise — as a distribution system of Covid-related financial aid has piqued lawmakers’ attention for a variety of reasons. 

CBDCs could make payment systems more efficient, reducing transfer and settlement times. 

Policymakers could also use CBDCs as a more nimble vehicle for delivering interest rate adjustments as well as disbursing financial stimulus quickly during a crisis.

During a pandemic, CBDCs would have an added benefit of helping limit the spread of disease. Studies have shown that the coronavirus can survive for 24 hours on cardboard and up to three days on plastic and stainless steel — meaning that handling cash, checks or an ATM could put people at risk of infection. A digital dollar could disburse cash aid without adding to infection risks.

See related article: How healthcare uses blockchain to wage a smarter war against the coronavirus pandemic

Similar to versions of the digital dollar brought up in previous bills, the digital dollar envisioned in Tlaib’s bill would work by having the Federal Reserve set up an account directly with those eligible, creating a Digital Dollar Account Wallet branded as a “FedAccount” for all U.S. citizens and residents. The ABC Act bill recommends that the digital wallet be set up by 2021, but proposes using prepaid debit cards until then.

Experts have hailed the digital dollar initiatives, as there are many benefits to updating an aging financial system with distributed ledger technology.

“It is great to see senior policymakers recognizing the value of a technology that allows a direct peer to peer delivery mechanism of value,” said Viktor Andreas, co-founder and executive director of blockchain technology solutions provider Lykke Business. “Especially for delivering aid, it is crucial to do it fast and unbureaucratic. Using digital currencies allows [people] to avoid the risks of fraud and corruption as it is entirely traceable.”

According to a poll released by the Data for Progress and the Justice Collaborative Institute, a majority of people believe a one-time payment through a universal basic income scheme during the Covid crisis isn’t enough; 66% lf those polled — including over half who identified as Republicans — were in favor of $2,000 monthly payments for a year after the state of emergency is declared over.

If the ABC Act becomes law, the government would need to disburse a lot of money, which a digital currency could facilitate. The bill directs the government to mint and issue two $1 trillion platinum coins and to further mint and distribute additional coins “on an as-needed basis to cover any direct and indirect expenses” related to the program.

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Source: Data for Progress

Another factor to consider is how the payments would be distributed to those in need during the Covid-19 crisis. Past research by the Brookings Institution has shown that one of the key impediments to sending out payments is the lack of a centralized, up-to-date address or electronic funds transfer information on individuals.

Blockchain technology could increase the speed and efficiency of cash transfers like UBI, since the technology relies on the unique digital identities to manage transfers and balances without relying on a centralized system. Additionally, smart contracts could be programmed to process transactions based on programmed rules, cutting out the middlemen like banks and bookkeepers in conventional financial systems.

“You could write a smart contract that automatically transfers cash from one core treasury account to all individual account holders at specified time intervals (weekly, monthly, etc); or, you could write a smart contract that distributes cash to account holders that can only be used for specific types of purchases (conditional cash transfers),” said Ben El-Baz, head of ecosystems at Hong Kong-based fintech organization HashKey Digital Asset Group. 

An alternative to a blockchain-based system would be that a central bank could update its payments infrastructure to create the same benefits. A study by the Bank of International Settlements found that 70 percent of central banks participating in the 2019 survey are currently, or will soon be engaged in CBDC work.

CBDCs: potential pitfalls and advantages

Analysts point out that a cashless future, which CBDCs could provide, might usher in a greater amount of government monitoring over financial transactions and curtail the anonymity of fiat money.

CBDCs could also allow greater government control over how currency is used outside of national borders, changing the relationship between jurisdictions’ laws and global financial systems. 

“There’s an ongoing war on cash, with companies like Visa controlling most of the digital infrastructure where payments flow, lobbying governments against cash with a discourse of ‘financial inclusion’ and automation,” said Julio Linares, of Circles UBI

Going cashless is already the wave of the future. According to a recent study by the Federal Reserve Bank of San Francisco, 2019 was the first time that debit cards were more frequently used for payments, at 28%, while cash fell to second place at 26% and credit card payments have steadily increased over the past three years to 23% of all consumer transactions.

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Source: Federal Reserve Bank of San Francisco

A CBDC could foster even greater usage of digital currencies as opposed to physical cash.

In the meantime, while the U.S. is dealing with the havoc caused by the coronavirus, Facebook and China may push digital currencies into greater prominence.

Facebook’s Libra digital currency project will now be a basket of stablecoins tied to fiat currencies. As analyzed by Forkast.News, Libra could act as a stepping stone for businesses and lawmakers to develop a CBDC for the U.S.

See related article: As China’s DCEP approaches launch, Facebook’s Libra pivots

Meanwhile, China is about to trial its own digital yuan, also known as digital currency / electronic payment (DCEP), in four cities; Shenzhen, Suzhou, Chengdu and Xiong’an. If successful, its launch would be the first major example of a central bank issuing a digital currency, which China may use as a means for increasing the renminbi’s strength outside of Asia.

Xu Yuan, associate professor at Peking University’s national development research institute told Chinese state broadcaster CCTV that end users would see little difference between the digital currency and normal currencies, but that a CBDC would allow central banks to monitor cash flows in real time.

“Although there is little change from the perspective of user use, from the perspective of central bank supervision, future forms of finance, payment, business and social governance etc, this is the biggest thing ever,” Xu said.

A report by China Daily adds that China’s CBDC could help the renminbi integrate better into globally traded currency markets and would be less susceptible to politics and other disruptions.

“A sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level,” reads the report.

“People trust state-issued cash because it’s anonymous, easy to use and potentially untraceable… a CBDC in collaboration with these companies could potentially deal the final blow to paper cash as we know it — if people become sensitized to this reality, their need for a decentralized, anti-surveillance digital cash will grow,” said Linares. 

But in a recent interview with Forkast.News, billionaire venture capitalist Tim Draper predicted that both the Chinese and U.S. CBDC would fail.

“Both of them will bomb, and the reason is; the whole point of cryptocurrency is that, you look at bitcoin — it’s decentralized, it’s open, it’s global, it’s transparent — it is not subject to political whims or the idea that somebody can just print two trillion of them. And if you digitize the dollar or the renminbi, you are still stuck with most of the problems that you have with current political currency, with fiat currency,” Draper said. “I wouldn’t want to take Chinese digital currency anymore than I’d want to take renminbi.”

See related article: Famed investor Tim Draper predicts both a digital dollar and Chinese DC/EP “will bomb”

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Some experts believe CBDCs would not be as successful as cryptocurrencies. Photo: Cryptocurrency360.com

Nonetheless, the continued appearance of a digital dollar in legislation is planting a seed for a potentially new way of stimulating the economy. Experts believe blockchain could also facilitate the U.S. government’s stimulus measures during the Covid crisis. 

“Maybe because of blockchain, you can have new ways that you can stimulate the retail consumption economy, that’s the promise of all of this,” said El-Baz, of HashKey Group. “The representation of a dollar or the ability to manipulate the balances of fiat currencies via smart contract is actually very, very powerful, because what you can do is you can create markets or contracts for transactions in computer software logic, which then makes it very quick and easy to execute financial transactions, for example; borrowing and lending.”

“But these disruptions don’t come for free, there’s always a tradeoff,” he added. “Who loses out, and what’s the stability risk?” 

While banks could lose out from being disintermediated if their customers have direct access to a FedAccount digital wallet, the use of blockchain in the financial industry could also serve to improve efficiency and their competitiveness to ordinary consumers.

“It would make [banks’] business more efficient and cost-effective,” said Andreas, of Lykke Business. “Currently, the banking industry is suffering from counterparty risks, complexity, and cost of cross border transactions, siloed businesses and balance sheets and many more issues that would benefit from the emergence of CBDCs and the subsequent tokenization of everything.”

Experts say a CBDC would also be a step towards a more efficient and “real-time” financial market system that would allow real-time settlement and reduce counterparty risks. Financial transactions could be stored on a distributed ledger and accessible real-time by authorized users/entities for compliance checks. 

CBDCs could affect banks differently, depending on their services. 

“Smaller, non-for-profit banks like the Sparkassen in Germany would feel the hit of the European CBDC the most,” Linares said. “The big banks that survive the crisis, unless regulated or abolished, will most likely continue business as usual by lending to big players for big projects.”

While the Covid-19 pandemic continues to destabilize the global economy, it may be catalyzing changes to the financial market infrastructure, with distributed ledger technology as a key component. 

“Many businesses [such as] tokenized financial products are impeded by the lack of a trusted digital currency,” Andreas said. “With the introduction of CBDCs, the ecosystem would be complete and enable their full potential.”