The Digital Dollar Project — a private sector initiative by the Digital Dollar Foundation and Accenture — recently became a late entrant to the central bank digital currency (CBDC) testing grounds, announcing at least five pilots within the next year.
But the United States Federal Reserve has yet to commit to the launch of a digital dollar, widening the gap between the U.S. and other central banks — including China — in CBDC developments.
Beijing, having already launched numerous pilot projects in various forms for its CBDC, now officially known as the e-CNY, has a seven-year lead against the U.S. in the global CBDC race.
“I would push aside the race analogy, but I would say there’s a contest,” former Commodities Futures Trading Commission chair and founder of the Digital Dollar Foundation, J. Christopher Giancarlo, told Forkast.News in a video interview. “The winner of the contest is the nation that successfully incorporates into a digital currency their societal values.”
Fed chair Jerome Powell also brushes aside the race analogy, voicing the importance of getting a digital dollar “right” rather than “first.” But U.S. dollar dominance is dwindling.
A recent International Monetary Fund (IMF) report found that global reserves of the U.S. dollar sunk to a 25-year low of 59%, numbers not seen since 1995. But Giancarlo says that a digital dollar carrying the values of a democratic society could strengthen the dollar’s position as world reserve currency.
“We may see a world in which you’ve got a digital dollar, hopefully — and if we get it right carrying those [democratic] values — competing against currencies of non-democracies that carry different values with them, values of state, surveillance of government, control of financial markets [and] of social credit systems,” Giancarlo said. “The dollar could reemerge once again as — well, it is today, the reserve currency — but even more so because of those democratic values built-in compared to the alternatives.”
Accenture’s senior managing director David Treat discussed some aspects of how the Digital Dollar Project will explore some of these democratic values including benefits distribution. This being a controversial topic in the current U.S. financial structure, highlighted by a perceived lag in issuance of stimulus checks during the Covid-19 pandemic.
“Part of what we’re going to explore [are] the various options against a backdrop of not having a national ID system, which is also part of our core societal values,” Treat said. “That ability to actually pair a stablecoin that can embed that business logic into it and to be able to guide what is spent and what is not spent on, paired with a central bank digital currency, we see as a powerful combination and one that’s certainly worth exploring.”
As for the current state of the Digital Dollar Project and its five pilots in the coming year, Treat revealed the project is currently selecting appropriate players in the industry to lead the initiatives.
“We’re in the midst of picking the captains for each one of the pilots,” Treat said. “Very intentionally, when you think about the financial inclusion, the unbanked and underbanked, there may be some maybe some really, really important small local players that we announce.”
Watch Giancarlo and Treat’s full interview with Forkast.News to learn more about the Digital Dollar Project and its pilots, the importance of democratic values represented by a digital dollar, stablecoins acting as placeholders for CBDCs, and more.
- Stablecoins keeping the seat warm for a digital dollar: “Really, where there’s been a lot of private work underway on almost a placeholder basis through the use of stablecoins, as you look at what’s being done in core capital markets, infrastructure in experiments around cross-border payments and other constructs, looking at the wholesale and commercial bank infrastructure. So there’s an intentional wide range. We want to make sure that we’re exploring all of the potential use cases and really zero in on where there’s real value. This is not to replace all forms of money.”
- The dollar reflects democratic values: “Money is as much a social construct as it is a government construct. Money carries with it social values. The dollar during its period of ascendancy that we’ve known the last several generations as the world’s premier reserve currency has carried with the democratic values, the rule of law of financial markets, free of government assertion, government control of individual economic privacy, balanced rightly against law enforcement needs, but generally assuring individual economic privacy. That’s the dollar.”
- CBDCs do not disintermediate banks: “Think about fiat money. Now, fiat money does not disintermediate the banks. In fact, it empowers the banks. It’s the banks who are the distributor of fiat money. We see digital money as basically an upgrade of fiat money, but distributed through the same two-tiered banking system and as a non-interest bearing obligation, the federal government, for the same reason that most thoughtful people don’t keep their life savings in their mattress, they keep it in a bank or other investments to earn a return.”
- Accenture bringing global knowledge to the US: “At this point, we’ve worked with the majority of the G20 central banks. There is a global body of knowledge, a global body of experience that’s well underway. And whether it’s other things that are in the public domain right now, whether it’s Sweden’s Riksbank’s work as the world’s oldest and often most innovative central bank through history to Banque de France, ECB, across the board, the majority of central banks. We very much subscribe to the BIS report of fall that said 80% of the world’s central banks are working on central bank digital currency. They’ve been doing that for years and we’ve been helping them.”
- What to expect from upcoming pilots: “Exploring one of the false choices that are out there is, ‘oh, CBDC is good for retail use, but it’s not good for wholesale or it’s good for wholesale, it’s not good for retail.’ I’ve heard that a lot of times. One of the things we will want to do is make sure we take on both ends of that spectrum early in the process so we can deliver some good data to inform that debate. So there’s a little tease in that.”
Angie Lau: Is the United States finally playing catch up? A private sector initiative is paving the way — the digital dollar pilot programs are here. What can Americans and the world expect? How does this compare to the seven-year lead China has on its own digital currency, the e-yuan? And how can the digital dollar exist alongside cryptocurrencies?
Welcome to Word on the Block, the series that takes a deeper dive into blockchain and the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Forkast Editor-in-Chief Angie Lau.
The Digital Dollar Project launched by the Digital Dollar Foundation and Accenture in January last year is a private-led effort to bring a U.S. central bank-backed digital currency to reality. But with China’s digital yuan progressing quickly and with the U.S. dollar’s global reserves shrinking, some fear that dollar dominance is under threat.
Today, five pilot projects for a U.S. CBDC are set to launch over the next year. Meanwhile, Asian nations have joined forces to explore cross-border CBDC implications already. So the question is, how does the U.S. compare in this race? As its own central banker, Federal Reserve chair Jerome Powell said, they should “get it right, not first.” And all of this amidst the latest U.S. agency investigations into cryptocurrencies.
Well, joining me today right now is the founder of Digital Dollar Foundation, the former chairman of the Commodities Futures and Trading Commission — CFTC — J. Christopher Giancarlo and Accenture’s senior managing director, David Treat.
Chris and David, welcome back to the show. It’s great to have you both on again.
Christopher Giancarlo: It’s great to be with you, Angie.
David Treat: Thanks, so much.
Lau: All right. Refresh us. The Digital Dollar Project — when we last talked, it was last year, it had just been announced. And now, you’re in the pilot phase. The world is very different one year later, especially with increasing mainstream adoption. That’s the institutional and traditional space as well. Where are we on the Digital Dollar Project?
Giancarlo: Well, we’re really making great strides. I want to put things in context. Society has been experimenting with money for over a decade now. Governments themselves are relatively late to this innovation. I don’t see it as much as a contest between the United States and other countries as much as it is the private sector. And money has long been as much a social construct as it’s ever been a government construct. The private sector has been experimenting with money, and central banks around the world are looking at that innovation and saying, can this solve some problems that we have? Can it give us greater precision of monetary policy? Can it allow us to speed up our institutional wholesale payments? Can it address issues of financial under-inclusion? What can it do for small businesses? What can it do for large businesses? How can it future proof our national currencies against a tide of the internet that is now in its third or fourth generation — after changing the way information moves, after changing the way devices talk to each other?
Now the Internet is once again setting sights on things of value and bringing enormous change. And society has been experimenting with that change and now central governments are doing that. Now, every central government has a different set of factors to deal with because they deal with a national economy and they deal with the way their currency operates in the international economy. And certainly, the dollar plays a unique role both domestically and internationally and has enormous responsibilities to the role it plays.
So Chairman Powell is absolutely right. It’s critical that the United States gets this right. We, at the Digital Dollar Foundation and Project, have been looking at this for some time now. With the help and generous support of Accenture, we now are going to put our ideas into practice. We’re going to now test out some of the things that have been talked about for a long time about the dollar. And so, David, why don’t you talk about some of those projects?
Treat: They intentionally span the range — as Chris said — of financial inclusion focus projects for the banked and underbanked. While we immediately recognize that it’s not a panacea for those challenges that are enormously complex, we do want to make sure that we’re looking at the various ways where it could help, that we have some constructs and theories that we want to test out to see if there’s a mechanism by which we can have an easier onboarding for those that either choose to or are constrained from being able to participate in financial services and then all the way to the other end of the spectrum of what it can do.
Really, where there’s been a lot of private work underway on almost a placeholder basis through the use of stablecoins, as you look at what’s being done in core capital markets, infrastructure in experiments around cross-border payments and other constructs, looking at the wholesale and commercial bank infrastructure. So there’s an intentional wide range. We want to make sure that we’re exploring all of the potential use cases and really zero in on where there’s real value. This is not to replace all forms of money. It’s to add new tools and capabilities to be able to help us modernize and better match the needs of the digital world that we’ve been building up all around it for which money really hasn’t changed in a very long time.
Lau: So it’s a digital version. It’s not meant to replace but complement. But you did mention cryptocurrency as you mentioned stablecoins. You mentioned the parallel universe of crypto that has been built since 2008. And in a current-day environment, we’ve all seen this incredible adoption, including corporate treasuries and institutional — Tesla, just obviously top of mind.
But also amidst today’s announcement, we’re talking May 14th here today for our audience. But today’s announcement that the Justice Department and the IRS are now looking into Binance and really honing in on the concern that billions of dollars have been flowed through Binance by crypto criminals or the underworld. How does that erode or diminish the integrity of this conversation that we’re having right now about the importance of digital assets, but also crypto and also a digital version of money?
Giancarlo: So, Angie, I began by talking about the internet in its third and fourth generation. We’re going to look back in history as saying the internet is one of those fundamental steps forward in the technological advancement of humankind. And in its wake, there’s a lot of change. There is also a lot of opportunities for bad actors to take advantage of that as they’ve done every other step along the technological evolution of humankind from the beginning of time, whether it was the steam age or whether internal combustion cars were used to run alcohol during prohibition.
All technologies lend themselves to bad use and also good use. Those of us who see this as an opportunity or are committed to seeing its further development in the right usage. Money is a public good. A nation’s currency is as much of a piece of infrastructure as is a railroad as is an airport. Upon that infrastructure money businesses are built, services are offered, people’s lives are ordered. The dollar plays a tremendous role here in the United States, plays a tremendous role around the globe. And what we’re seeking to do with the Digital Dollar Project is explore those good uses, but also understand the challenges in order to see how the dollar itself can be modernized from effectively an analog instrument into a digital instrument.
We take no position on the private development of currencies other than to say maybe the public use can learn something from those private efforts as they develop. There are lessons to be learned that can be adopted by the private sector. But we really see what we’ll do at the Digital Dollar Project is filling a need right now in the United States. The central bank is exploring this, but it’s exploring it from a technology architecture point of view. And that leaves unexplored commercial uses, society and societal impacts, practical uses. We could use our resources, our relationships, and we’re operating on a not -or-profit basis to explore it in a way that’s practical and yet make all the data that comes out of that publicly available for academics, for the administration, for the Federal Reserve, and for leaders on Capitol Hill who will ultimately make the big decisions as to whether the United States actually adopts a digital dollar or not.
Lau: And that also depends on the US electorate, it depends on people’s sentiment, and that public sentiment is so integral…
Giancarlo: As it should in a democracy. As it should in a democracy. I said that all countries have a different role of their government, of their currency. We’re not an autocracy. We are a democracy. Decisions like this should rightly be made through the democratic process and not by government fiat, in my view, as a member of a free society.
Lau: And so when public sentiment could potentially be swayed by these headlines, we’re seeing the price of Bitcoin drop as a result of the Justice Department and the IRS investigations into Binance, for example, today that public sentiment is being impacted. Is there a concern that this is going to flood into sentiment about digital dollar or digital currency? Because whether we like to admit it or not, a lot of people are still in, really, chapter one or the prologue of understanding what this new world is.
Giancarlo: I ran a major government agency with global responsibilities. Headlines come and go. Daily events happen all the time. One has to take a long-term view. As I said, the internet is having a multi-generation impact on society, and it’s going to have an impact. The future of money, in my view, is very much digital and networked. I don’t think one headline should distract us from the overall goal of modernizing money, whether that be non-sovereign or sovereign.
Treat: One thing that I would add is, as with any new wave of innovation, the language and the definitions and the precision of that language is critically important. One of the things that we’re eager to do is really help to clarify that there’s an ever-growing taxonomy of innovation in this digital asset, digital currency space. The more precise in the language that we are, the more we clearly delineate the differences in the different value cases. For each type of digital asset and digital currency, the better.
Certainly, as we’re focused in this project — on central bank digital currency — being able to convey what that means. This is, as Chris said, a public good. The characteristics of systemically important infrastructure, the expectations of auditable, transparent, SLA-based, all of the things. The trains have to run on time, and all of the constructs that you would expect of core infrastructure, are being designed into that. The more that we can clearly describe the use cases, the requirements, and the value associated with it, these different subcategories in this digital currency, digital asset space, will more and more stand on their own and their own merits. And we’ll have a much more clear discussion and maybe talk past each other a little bit less as we talk about each one individually.
Giancarlo: I was going to say one more thing, Angie. I’m old enough to remember when the first wave of the internet came to pass — the internet of information. I remember the knock on it by those who were skeptics was that it was only good for transmitting pornography. Well, that hasn’t changed. The internet is still good for pornography but it’s also good for booking a vacation, getting a taxi, finding information. The world has become networked, technology is value-neutral, and the goal has got to be to harness it for the good while restraining the bad.
Lau: That is a balance that continuously remains tenuous as we move forward, as it does to your point, in any kind of innovation, as it accelerates.
I want to pick up on your point as well — the importance of democracy [in] defining a digital version of a currency. In what way do you think that that actually starts to create characteristics of how a dollar should behave? Does democracy have a unique way of defining some of those characteristics in a way that perhaps other nations that are not democratic could or would?
Giancarlo: Absolutely. I said before that money is as much a social construct as it is a government construct. Money carries with it social values. The dollar during its period of ascendancy that we’ve known the last several generations as the world’s premier reserve currency has carried with the democratic values, the rule of law, of financial markets free of government assertion, government control, of individual economic privacy, balanced rightly against law enforcement needs, but generally assuring individual economic privacy. That’s the dollar.
Other currencies may carry other values with them as we go into a digital future. These values are going to be even more important. We may see a world in which you’ve got a digital dollar, hopefully — and if we get it right carrying those values — competing against currencies of non-democracies that carry different values with them, values of state surveillance, of government control of financial markets, of social credit systems. Actually, a relatively small percentage of the world’s people live in democracies, but many people aspire to those democratic values wherever they live. I believe that done right with the right values built into, designed into a digital dollar, as designed as designed virtues, the dollar could reemerge once again as — well, it is today, the reserve currency — but even more so because of those democratic values built-in compared to the alternatives and the alternatives could also be non-sovereign currencies that don’t carry rights to privacy. Non-sovereign currencies are mined by their sponsors for the commercial data that it generates. The dollar, that privacy would be protected against government mining by our Fourth Amendment and it would be protected against commercial mining by whatever one’s relationship with their bank or financial institution or wallet provider. So the values at the end of the day are the most important issue as we develop currencies — whether they be sovereign or non-sovereign, whether they be democratic or non-democratic.
Lau: Let’s talk about China. It’s the seven-year lead that you’re working against that we called it a race. That gap is only extending. Where do you view the digital dollar initiative? It’s still a private sector-led initiative. You do not have central bank Federal Reserve-backing. You may be working alongside a lot of legislators, but this is not a public-led initiative. Is that a vulnerability with this project?
Giancarlo: I would push aside the race analogy, but I would say there’s a contest. The winner of the contest is the nation that successfully incorporates into a digital currency their societal values. In many ways, the contest for the United States is against itself to make sure that the digital future of money is one that has incorporated those values that made the dollar the world’s primary reserve currency, the rule of law, of individual economic privacy, of free and independent financial markets. If we’re successful incorporating those in the digital future of the dollar, that would be a very successful outcome of that contest.
Lau: David, when you’re taking a look at the pilots that you’re working on, and you contrast that with the pilot trials that have been happening for years now in China, what are you thoughtful about? What are you thinking about?
Treat: Let me add a layer to that. At Accenture, we’ve been looking at blockchain in our applied research context, Accenture Labs, since 2012. And in 2015, we recognized it was time to build a business around it because it was relevant for our corporate enterprise government perspective. I was tapped to do that.
As I did kind of the first desk audit of, “Hey, who’s working on this?” A guy in my team immediately emerged and said, “Oh, I’m working with the central bank and we’re focused on central bank digital currency.” And from that first moment and first client, as we formed our team, we’ve been working with central banks around the world since 2015. This is not a binary “one country started” — this has been global. At this point, we’ve worked with the majority of the G20 central banks. There is a global body of knowledge, a global body of experience that’s well underway. And whether it’s other things that are in the public domain right now, whether it’s Sweden’s Riksbank’s work as the world’s oldest and often most innovative central bank through history to Banque de France, ECB, across the board, the majority of central banks. We very much subscribe to the BIS report of fall that said 80% of the world’s central banks are working on central bank digital currency. They’ve been doing that for years and we’ve been helping them.
Part of what I’m excited to do is bring that global knowledge and that global experience from helping around the world to the U.S. context. And so, as Chris said, the race analogy is not the right one to focus on. Just as Chris laid out, it’s the premise of how it’s designed and how it works. And at the end of the day, the most useful, most functional currency backed by the best economy that it can be backed by then underpins its usage and value. And so I’m actually incredibly bullish on the ability for not just the U.S., but clearly, the focus of this is the US. I’m encouraged by the global progress being made around the world by central banks in this effort, because also at the end of the day, we do have a very globally interconnected global financial system. And so interoperability and the whole notion of how it not just helps domestically, but internationally is critically important.
Lau: You’re almost applying the characteristics that a lot of us hold into your efforts outside of the United States with your projects, with other sovereigns in their CBDC efforts, and then taking it back and illuminating it for the US market and hopefully the Federal Reserve if they ultimately listen.
I want to outline some nine pilot scenarios that you shared with me for our audience because I think this also reflects to what you both said, the characteristics and the values, and the intent of how money should be applied. So there’s a rural pilot, so effective P2P payments, offline transactions, banking deserts, where people may not have necessarily that easy access to bricks and mortars being the latest branch. Potentially, this could help offset that challenge. Urban, obviously, the city remittances, banking relationships. This I thought was interesting. Benefit distribution, operational efficiencies, programmable tokens, providing enhanced retail, customized ability, and fraud reduction.
I just want to rest on that a little bit. There are about six more, which include national level, small and medium businesses, multinational business, international payments, domestic payment transfers, and domestic atomic settlement.
But I want to pick up on benefit distribution. Obviously, when we talked about the stimulus dollars being handed out during the Covid-19 crisis, the stimulus checks and the tax checks that were handed out, the unemployment benefits that were handed out to people in need, there was a lot of criticism about the operational inefficiencies, the technological archaicness of the system. That meant that people were waiting weeks, if not more than a month, for dollars they needed yesterday. A digital dollar under this pilot of benefit distribution, how would that work? And what are you testing for against this scenario that we already experienced?
Giancarlo: Dave, you want to grab that one first?
Giancarlo: That’s a great one.
Treat: It immediately gets into some really interesting things that we’re going to explore, which is the proximity in there or the integrated relationship of identity within financial systems. And so when you’re talking about benefits distribution, you have the policy choice or the decision that you want to distribute funds or goods or services. And then you have to be able to know who you’re sending them to and to be able to have that all hang together. And certainly, we all read, there are all of the stories of the identity challenges around it.
To answer the question, the thing that we want to explore is at a fundamental level, that mechanism of being able to distribute a tokenized version of the CBDC directly to wallets is then — just as we’re seeing other types of digital currency transactions today — very fast, efficient, quick and non-repudiable, that you can count on it, you can audit it, you can, it’s a fast and effective means of distribution. But that also then has to be paired with, “are you sending it to the right parties, and are you not sending it to the same party twice and the like?”
Part of what we’re going to explore, the various options against a backdrop of not having a national ID system, which is also part of our core societal values — we could have the debates and discussions around that — how do you match those two things in a way that we all would think valuable, and meet the social and policy and legal needs and requirements of our current context? There’s actually quite a bit to explore there. It’s not as simple as let’s just set up a set of wallets and send tokens to them. We’re going to need to explore the various mechanisms by which you actually could take advantage of the digital identity constructs to be able to be certain they are sending the right amount to the right people. And you’re only doing it once. So, it’ll be an interesting one to explore.
The other dimension that’s important to say is that’s only part of that use case. The other part of that use case around benefits distribution are where we have social programs, whether it’s what FEMA does and in moments of natural disaster, to be able to get aid to people that have been, suffered from hurricane, earthquake, other natural disaster or programs like food stamps. That ability to consider that, our going-in position is that notion of embedding business logic that says we want a benefit to be distributed and we want the population to spend it based on what the policy decisions are — food, health, safety, shelter, and not anything else. That ability to actually pair a stablecoin that can embed that business logic into it and to be able to guide what is spent and what is not spent on, paired with a central bank digital currency, we see as a powerful combination and one that’s certainly worth exploring. So benefits distribution has a number of different dimensions to it. There are a number of pilots already underway around the world in this context. It won’t just simply be “can we get money to a wallet?” It’s thinking about all of those social sociological identity usage principles, laws, values and regulations that wrap around it.
Giancarlo: Because David is so involved in some of these efforts around the world, he speaks about the challenges, which he knows well. But the opportunity is if we can surmount those challenges, it’s instantaneous delivery of value in the form of a government benefit. What we did learn in the crisis is the existing system has enormous amounts of latency, has enormous amounts of friction, and it’s by definition exclusionary because it requires people to have a certain degree of identity in many banking relationships, a certain amount of initial capital.
With a digital system, those issues of friction, of latency, and if we get the identity right, identity fall by the wayside, which case in a crisis, we can have immediate, precise benefit distribution. Any time you go from an analog system to a digital system, the precision level is enormous. And that’s what we’re searching for with digital currency, a degree of precision, and benefits distribution. A degree of precision in monetary policy that no society has ever enjoyed before this technology came around.
Lau: Two things; central bank — this will be directly tied to central bank coffers, which essentially disintermediates banks and most banks’ functionality in the monetary system. Is this something that the Federal Reserve is ready for? Is the Digital Dollar Project conscious of and or thinking about how that may be the case or may not be the case, depending on how this is structured?
Giancarlo: Very, very conscious of it is the answer to that. And secondarily, think about fiat money. Now, fiat money does not disintermediate the banks. In fact, it empowers the banks. It’s the banks who are the distributor of fiat money. We see digital money as basically an upgrade of fiat money, but distributed through the same two-tiered banking system and as a non-interest bearing obligation, the federal government, for the same reason that most thoughtful people don’t keep their life savings in their mattress, they keep it in a bank or other investments to earn a return.
We think most thoughtful people will treat digital money in the same way. We really don’t see this as disintermediating the banks. We think that banks play a critically important role in the US economy and the global economy. People with US$100,000 that want to buy a few hundred thousand dollar house are still going to need to go to a bank to borrow the additional — people that want to start a business. We need banks to play that role. Therefore they need deposits. And so we see this very much as not disintermediating the two-tier banking system but being very much a feature of it.
Lau: David, I want to pick up on just the characteristics argument. Chris very eloquently said that amidst the backdrop of non-democratic nations, for example, the social credit aspect of being able to use the dollar, depending on what the state or what a centralized government or authority decides that I can do with this. How is that different, however, from how a central bank-backed digital currency functions? Even in the fiat world, where you raise interest rates because you want people to spend, you lower it, if you want people to save, et cetera, et cetera. How are you implying that thinking that levering up and levering down of monetary policy in the characteristic of the digital dollar?
Treat: Yes, one of our other core tenants is that we think this is monetary policy-neutral. Actually, it’s a third form of money. It may provide some precision and some additional tools to monitor the money supply. But actually, based on the work globally and based on the initial design constructs, conversations, our fundamental premise is that it is actually monetary policy-neutral. I think the technology has wildly, wildly powerful configurability and can introduce concepts. But that will all be at the will and direction of the Federal Reserve and Congress around what we value. But at the foundational case, nd one of our core tenants is actually being monetary policy-neutral.
Giancarlo: I would say that a big difference between a democratically elected government deciding to adjust monetary policy across the board because they believe that in the interest of people at large, more spending might be better. The big difference between that and a non-democratically elected government deciding that an individual criticized the government and so therefore their spending is going to be cut off. So I don’t think general monetary policy in any way is anti-democratic or violates individual freedom in the way that a social credit scoring, where taking an unpopular stand on any issue, one could lose their access to money or the ability to use money to buy goods, services or in some cases, even necessities.
Lau: Another headline that has taken over the machine, as it were, the concern about the environmental impact of Bitcoin, of other cryptocurrencies, what have you discussed in terms of when you’re designing a digital dollar and the potential environmental impact of that? Is that something on the table of discussion?
Treat: No, it’s really not. And again, this is something I wish we had more clarity and more education around, because people are talking past each other in wildly, wildly, wildly unhelpful ways. One of the core differences between a central bank digital currency, which by definition needs to be operated by the federal government, by the central bank, or designated regulated authorities, is there’s no mystery as to who operates the node infrastructure. There’s no need to incent anyone to be able to operate it. And on that basis, you don’t need the same kind of consensus mechanisms. You can use more basic raft-based consensus to keep the nodes in order. And so it’s actually when you have known operators of the system and you can still have a very large node network and have all of the benefits that we ascribe to the cryptocurrency space, but you have a tremendously efficient operating structure because it’s known actors not competing to win the next allocation of a coin. So it’s actually wildly efficient.
We’ve been actually doing a bunch of work in the corporate enterprise and government context in the comparisons not to cryptocurrencies, but the comparisons to existing mainframe architecture and its efficiency. And just some really staggering stats coming out where you’re going from tens of millions of lines of code to operate systems to tens of thousands or less as we modernize our financial architecture. This is actually a wildly efficient mechanism to operate it and when you have known operators of the system, massively efficient, no ESG concern. Quite the opposite.
Giancarlo: We might have actually a greater environmental responsibility by moving away from coinage and paper and cotton materials to a digital system.
Lau: That is a very great point. That is another important conversation for another show. We’ll get you back for that one.
And thank you for addressing that. In regards to traditional banks, a lot of people still discuss the SWIFT system that still dominates the monetary relationships around the world. How important for you both is it for today’s global economy to be more efficient, as you’ve said? Does the digital dollar provide a pathway to future of international settlements in a way that currently SWIFT seems, as all of us have experienced the latency? Does digital dollar and other CBDCs kind of pave the way towards more efficiency on a global scale?
Treat: If you don’t mind? Let me start with this one.
Giancarlo: Of course. You know this.
Treat: I’ll turn it over to you, but I’m compelled to be disappointed in my own social media amplification. So, Angie, two days ago, we co-published a paper with SWIFT on central bank digital currency. So we’ve been working with them. Very proud of the work in terms of their forward-thinking stance around their crucial role, central role in today’s global financial infrastructure and cross-border payments. And so we’ve we published it, published a paper together around what that looks like and how it works and have been working and reference experiments within that just to exactly play out that future as to what role do they play in this modernization. So I will have to post it a few more times to make sure we’re getting the traction on it.
Lau: Thank you for sharing it with us here.
Giancarlo: I’ll leave that one with David’s answer. It’s a great answer, so I’m going to leave it there.
Treat: Read the paper.
Lau: But, I ask it because that is, that has been a target for a lot of these conversations. And so it’s interesting to hear that there is an evolution in terms of how the SWIFT system is also thinking about it. Because in contrast, you have China and what’s happening here in Asia that has often felt, in terms of remittances and fees, that this is a system that does not work for it or work for a lot of people in this region. And so how what’s happening here is in contrast to a system that SWIFT is included in that hasn’t worked for a lot of people.
Giancarlo: Let me actually just take it up to a higher altitude level and make this point. Throughout most of human history, until the last five or six hundred years ago, money was tokenized in a token form. It was shells, beads, eventually it was coinage.
In China, for the very first time, it became paper money. But money was a token. You passed it to someone and they verified the token. They didn’t need to necessarily know your identity or what you had in an account. But the token system, because of weight, because of thievery, because of other things, was basically a local system. And as commerce expanded beyond a village and a county and became national and international, tokens actually became very unwieldy. And the account-based system established because people would have their money in their local bank and they would basically get a letter of credit, or that bank would notify a bank in another province that so-and-so is good for their money, extend them credit, and hence we have the account-based system. Most of the money used in global commerce today is account-based.
It was the answer to the early form of globalization. But the internet gives us the ability to once again use tokens and move them anywhere around the globe in seconds and with programmability ultimately to move in time. The ability to move tokens of money in space and in time is an enormous leap forward for humankind. It’s going to have a dramatic impact on the existing account space system. It’s not necessarily going to wash it away, but it like the beginnings of a new civilization on top of an old one, old forms will remain.
But this technology is so powerful. That it’s going to allow for the very first time in human history, the instantaneous movement of money. It’s in place in space and in time, and it’s just an enormous concept, as I say, society has been looking at this now for over a decade and governments are waking up to it. And we, with the Digital Dollar Project, are going to try to help explore some of that in the US in the context of the US dollar.
Lau: And to stay at that that that level, we’ve mentioned stablecoins here. How is a digital dollar effective when there are stablecoins that can be linked to currencies right now in use.
Giancarlo: Go back to history. The dollar wasn’t always the ubiquitous form of currency in North America. In the 19th century, there were many forms of currency use. Some of them were sovereign currency of foreign countries. Some were issued by banks and trust companies and railroads and mining companies. And they all had different value. Some cases, the value was stronger. The closer you were to the bank and the further you went across state or out of state, it traded at a discount to other instruments. You had all these different premiums or discounts of one instrument traded to the other. And the greenback, the dollar was created to provide some stability and ultimately replaced all those. So you had a standard measure of value of the U.S. dollar.
Stablecoins all have their own unique mechanism, their own unique protocol, their own unique tether or tie to the dollar. And so in an environment where you have multiple stablecoins and perhaps a digital currency, you’re going to have different variations in value. It’s a complicated system. It’s one with precedent. We’ve done that in the United States. And as we’ve made very clear, we, at the Digital Dollar Project take no view on development of non-sovereign money. If anything, there’s a lot to be learned from those experiments. But our focus is on the digitization of the dollar because we believe the dollar is, as we said before, a basic part of our economic architecture that needs to be modernized and made future-proof for a digital future.
Lau: Do you think the real contest is between a centralized fiat, like a digital dollar or decentralized cryptocurrency?
Giancarlo: Academics will tell you there’s three traditional characteristics of money; store of value, unit of account, a means a payment. All of the different cryptos have different value propositions within those three. Something as decentralized as Bitcoin from my observation, on days of risk off, it trades like gold. Of days of risk on, it traids like Tesla. But as a means of payment, it’s variable. Because speaking of Tesla, a week ago, you could have bought a Tesla with Bitcoin. Today, you can’t. So so as a means of payment, it has an uncertain track record, as is a store of value. Well, look at gold. Gold has it. All commodities are up except for gold. In many ways, Bitcoin has become the digital replacement of gold as a reserve store of value among fears of inflation and other economic consequences.
Lau: And so what can we expect to see? The pilots are getting underway. What’s next, what are the conversations you’re having when you see Jerome Powell next?
Giancarlo: We’re not going to give you the grand reveal, but maybe we’ll give you a little teaser. Dave, you want to give a little teaser? And then maybe we’ll come back on your show in a month or so and maybe do a grand reveal.
Lau: I’m looking forward to it. I want to hear it. But what’s there? Tease us a little bit? Tease us a little bit.
Treat: From a process perspective, we’ve announced the pilots, our advisory group is actively engaged and we’ve had a massive amount of reach out since — it’s been 10 days now or so. We’re in the midst of picking the captains for each one of the pilots. Those players that have a particular body of expertise, experience, or other contribution that can carry it forward, help to define us. We’re figuring out who those captains are going to be, but very consistent with the nature of how we’ve run the DDP from the start, incredibly open. We’re going to make sure with each one of the pilots, we’ve got a diverse set of experts and stakeholders, people who are going to kick the tires hard and people who are going to champion innovation. And so the groupings around the pilots are then going to be really interesting. And in many respects, we’re going to take advantage in some instances of work that’s already been completed somewhat in anticipation of a CBDC where there have been efforts to use a stablecoin construct as maybe a potential example as again, in a placeholder context and now be able to then get to quicker results working off of that preexisting body of knowledge.
The other thing that’s really important — and you’ll see in this — is that our technology independence is crucial here. We’re not commenting or focusing on one particular technology. We’re going to have a technical steering committee that really guides and makes sure that we’re using a variety of different technologies and architectures across the pilots because the focus and scope really is on the functional evaluation, the sociological usage, feedback, and inputs, the value cases associated with that. We’ll obviously continue to learn on the technology side, of course. But we’ll come back in in a number of weeks with those first groupings and announce the pilots.
Lau: I’m going to play translator and read between the lines of what David just said. And what I’m hearing is that we’re going to hear from some big Fortune 500 companies and big agencies and big names that are going to help spearhead some of these pilots. Am I right?
Treat: Right and wrong. Very intentionally, when you think about the financial inclusion, the unbanked and underbanked, there may be some maybe some really, really important small local players that we announce.
Giancarlo: Well, I’ll tell you what, I’ll interpret David a little bit. So one of the false choices that are out there is, oh, CBDC is good for retail use, but it’s not good for wholesale or it’s good for wholesale. It’s not good for retail. I’ve heard that a lot of times. One of the things we will want to do is make sure we take on both ends of that spectrum early in the process so we can deliver some good data to inform that debate. So there’s a little tease in that we’re going to look at both the retail side and large wholesale use early in our process, because we want to make clear that the spectrum of examination is worth a look doing across the board and not just at one end or the other.
Lau: Well, both of you are experienced diplomats, clearly on the government agency side and business enterprise side. And it is truly all about the stakeholders. That’s what I’m hearing loud and clear. It is the integrity of this future system as it pertains to everyone on that value chain, including little old me and the Federal Reserve.
So thank you so much for this very expansive conversation. It was a pleasure to have you both on again and share the latest updates. And we do expect to talk again when you’re ready to share bigger news.
Giancarlo: That’ll be fun. We’ll make it happen.
Lau: That was Chris Giancarlo and David Treat of the Digital Dollar Foundation. I’m Angie Lau, Forkast.News Editor-in-Chief. And this was the latest episode of Word on the Block. Thank you all for joining us. Until the next time.