How a tokenized digital dollar could modernize the American financial system

Covid-19’s social and economic rampage recently led several U.S. policymakers to push for the idea of a so-called “digital dollar” to send to citizens in need of relief. But while the Coronavirus Aid, Relief, and Economic Security Act that eventually passed did not mention the term, the idea has gained a foothold in different ways.

David Treat, a director at the Digital Dollar Project and senior managing director at Accenture, told Forkast.News that U.S. lawmakers were discussing using a digital dollar to route money through existing payment infrastructure which could reach and identify recipients. However, the Digital Dollar Project — which is backed by former chair of the Commodities and Futures Trading Commission J. Christopher Giancarlo — is not the same concept as what was proposed in previous drafts of the bill.

The Digital Dollar Project, a partnership between Accenture and a foundation formed to encourage research and public discourse on the digital dollar, intends to rally legislators around the idea of not just an electronic dollar, but one that is tokenized. This is different from the idea of a “digital dollar wallet” or an account managed by the Federal Reserve for each American citizen to receive the emergency funds, as was proposed in the stimulus plan.

Highlights

• “[Regarding the digital dollar and] cross-border money movement, there’s a huge rationale for being able to send money as easily as you and I could text a picture to each other. To be able to use a tokenized version of fiat currency and to move value around is enormously important.”

• “The power of a central bank digital currency is that just as a dollar bill that I pull out of my pocket or wallet and hand to you, a dollar is a dollar no matter where it is. 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.”

• “Given the current crisis and the speed with which we have to respond as a country, our only choice is to use the available channels. But certainly, we won’t be able to implement a true central bank digital currency and avail ourselves of that innovation in this moment.”

• “We see [central bank digital currencies] as something that, at this point, there’s broad recognition that this is too important an innovation to ignore. And most every central bank is somewhere on the learning curve to explore how they want to play.”

Listen to the Podcast

“[The U.S. government’s] use of the term digital dollars is really to convey [being] able to distribute electronic payments directly to consumers,” said Treat, who also serves as the global blockchain lead for Accenture. “Our use of the term is differently focused on a central bank digital currency (CBDC), meaning a third form of money, a tokenized form of legal tender issued by the Federal Reserve that enjoys the full faith and credit of the United States.”

A number of countries’ central banks are racing to create their own CBDCs, including China. In January, the People’s Bank of China, the country’s central bank, reported that “the development of fiat digital currencies is progressing smoothly,” leading analysts to believe that the currency could arrive sometime this year. Singapore and Canada have also announced CBDC experiments with cross-border payment experiments, and Facebook has spurred the U.S. to consider using its Libra stablecoin, which would mainly be backed by U.S. dollars in a basket of currencies.

See related article: Why is China’s Central Bank Launching a Digital Currency? Chicago Booth Economist Explains

While a pilot of the Digital Dollar Project may not be ready for the crisis caused by the coronavirus, Treat said that they’re closely observing the challenges to the financial system posed by the pandemic to learn how a CBDC could help in future crises.

“[CBDCs are] not going to help in the immediate weeks and few months where governments around the world have to urgently distribute benefits. But the current crisis is highlighting the future need and where we should be focusing in driving this innovation and modernizing our systems, so that we can better respond to crises and global dynamics in the future — that is certainly one of the medium and long term use cases [of CBDCs],” said Treat.

Last year, Fed chair Jerome Powell, in a reply to lawmakers who asked him about the viability of a digital dollar, said that the Fed was not developing a CBDC at the time but that they were evaluating the costs and benefits of issuing a general purpose CBDC.

New: Powell told Congress today that the Federal Reserve is exploring whether it makes sense to issue its own digital currency that could be used by households and businesses pic.twitter.com/lH3pnSLkiV

— Zachary Warmbrodt (@Zachary) November 20, 2019

According to Treat, the Digital Dollar Project is moving quickly to create a set of design and policy recommendations, including what a pilot program could look like, to deliver to the Fed in the next couple of months.

“We’re not going to slow down, we’re going to learn a ton from the current crisis around design inputs and requirements for what’s needed,” said Treat.

See related article: Explaining Blockchain to Unwilling Enterprises: Accenture’s David Treat

Full Transcript

Angie Lau: Welcome to Word on the Block, the series that takes a deeper dive into the stories and the emerging technology that shapes our world at the intersection of business, politics and economics. It’s what we cover on Forkast News, I’m Editor-in-Chief Angie Lau. Well, Covid-19 has countries around the world scrambling to deal with the economic fallout on top of the global pandemic.

Now in the U.S., there’s a 2 trillion dollar stimulus plan and proposed legislation to transfer direct payments to Americans via a digital dollar. It sounds very much like what China has been working on for a while, a central bank-backed digital currency. Well, let’s get the details from one of the directors of the Digital Dollar Project himself. David Treat is also senior managing director and global blockchain lead at Accenture. Now, this Digital Dollar Project is a collaboration with J. Christopher Giancarlo, former chair of the CFTC and the group is working to advance a U.S.-led CBDC. David, welcome.

David Treat: Thank you. Great to speak with you again.

Lau: I think the last time we talked was in Paris at last year’s OECD Global Blockchain Policy Summit. And the world looks a lot different today! I hope you’re well.

Treat: I am, thanks for asking.

Lau: Let’s get right to it. The economic fallout is massive. The human toll continues to climb, and now there is word of stimulus to get into the hands of Americans. And one of the vehicles being discussed is a digital dollar. What is a digital dollar?

Treat: Yes, it’s one of the things I’m really eager to get very clear about. So we launched the Digital Dollar Project. We announced it in January. And just as you said in the setup, it is our focus around applying the capabilities and the idea of a central bank digital currency in the U.S. context. And so we started to use that term digital dollar as our nomenclature for that. That’s distinct from the proposed legislation that’s been going through the House Financial Services Committee most recently, where they’re focused really on the speed and the necessity of getting money into people’s hands amid the current crisis. And to do so, we’re going to need to rely upon the existing forms of payments infrastructure and movement of money.

Their use of the term digital dollars is really to convey that, to be able to distribute electronic payments directly to consumers. Our use of the term is differently focused on, as you laid out the beginning, a central bank digital currency, meaning a third form of money, a tokenized form of legal tender issued by the Federal Reserve that enjoys the full faith and credit of the United States. This notion, as you suggested, is being advanced around the world with a variety of different central banks. We announced a program that we’re supporting in Sweden with Riksbank in the fall to help on their journey. We’ve been working with multiple central banks around the world for years now, quietly, and over the past year, certainly more and more publicly as the entire community has recognized that the ability to have tokenization of dollars, central bank digital currency has some real value as a new third form of money. 

Lau: You’re talking about a third form of money, which is very specific and very unique. And the nomenclature is very, very important. You’re talking about an architecture, an infrastructure that is much more complex that what the American legislators and policymakers are currently proposing?

Treat: That’s right, and it will take time to implement. So [with] the structures and the modernization of our financial system, taking advantage of this is going to take time. And so it’s not going to help in the immediate weeks and few months where the governments around the world have to urgently distribute benefits. But the current crisis is highlighting the future need and where we should be focusing in driving this innovation and modernizing our systems so that we can better respond to crises and global dynamics in the future — that is certainly one of the medium and long term use cases [of a CBDC]. So it’s not going to help right now immediately. But we should be learning from and using this as a motivation to move faster towards these new models.

Lau: And so what you’re really talking about is the evolution of opinion of what technology can do to transfer dollars. In this case, this is an emergency stimulus plan, and the “digital dollar” that is being proposed, what might it look like? You and your team have been spending a lot of time on Capitol Hill educating a lot of legislators about this concept, about the theory. What are some of the ideas that are percolating right now on Capitol Hill if we are to see an actual implementation of a digital dollar in America?

Treat: I think it’s most important to start with the why and the value cases for why you would consider a central bank digital currency and why this third form of money is important to continue to innovate around and to drive. Some of the obvious and the classic ones that have been discussed a lot are front and center, the U.S. is the world’s largest source of remittance payments, and the cost of those remittance payments is just exorbitant. On average, the data from the World Bank is that there are 7% fees that can be upwards into the teens and even in some cases, high 20s. These fees for sending money back to family, to loved ones, to be able to send payments to where they’re most needed. And from a population that is in most need of help, to charge this kind of fee structure for it, is just a huge opportunity to change the fairness factor and to help.

The whole notion of why it’s so expensive is the infrastructure that supports it. It’s message based, it’s all about reconciliation of data. It’s about the current infrastructure that really hasn’t evolved internationally and cross-border the way it certainly has domestically. Many countries have put a lot of money into faster payments initiatives and we’ve seen tremendous gains around domestic money movement. But the notion of cross-border has been a different story. Interestingly, two ends of the spectrum—remittance payments and that focus around the migrant worker or a populations in particular is one at the other end of the spectrum—the way big banks move money cross-border is similarly expensive and slow, and frankly, it’s something not predictable in that if you have to make multiple hops from multiple central banks to get to your ultimate destination, you can’t possibly calculate the right FX on those trades as they go from currency to currency to their ultimate destination.

And so it’s almost in some instances very hard to send the right amount. So expensive, inefficient, costly, very operationally intensive to operate the account structures you need around the globe. And so when we just look at cross-border money movement, one of the things that’s highlighted in the current crisis is the availability of U.S. dollars globally as the reserve currency. You see a lot in the news around the pressures on U.S. dollar availability and liquidity. So putting this whole space together around cross-border money movement, there’s a huge rationale for being able to send money as easily as you and I could text a picture to each other, to be able to use a tokenized version of fiat currency and to move value around is enormously important.

We’ve seen real innovation over the past years, recognizing this value pool and these gaps in the formation of original cryptocurrencies and stable coins, most recently really responding to this gap and this need, but suffering from the fact that they are not by definition fiat currency. And so the power of a central bank digital currency is that just as a dollar bill that I pull out of my pocket or wallet and hand to you, a dollar is a dollar no matter where it is. And in physical form, that’s never a question. 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.

Lau: From what I understand then in terms of making very clear differentiation between what is being proposed in legislation right now, and what is actually available in terms of technology, the stimulus bill and the legislation considering the proposed digital dollar seems to be very basic. It’s almost like training wheels.

On the one hand, it really trains up Americans to feel more comfortable in getting digital payments, in using electronic cash or digital cash. On the other hand, there’s this enormous opportunity of technology that is already in place, already being used. Why isn’t that being implemented now and or is the political speed of which that’s able to be done is nearly impossible during this crisis?

Treat: Well, given the current crisis and the speed with which we have to respond as a country, our only choice is to use the available channels. I expect there’ll be a lot of creativity applied and there will be interesting ideas as to as to how to do it effectively and efficiently. But certainly, just to reiterate from the beginning, we won’t be able to implement a true central bank digital currency and avail ourselves of that innovation in this moment. When you break the problem down, it’s one of a benefits distribution problem that countries have solved in a variety of different ways over time. This is obviously of a magnitude that is unprecedented. But we will need to use our existing available channels just based on the time frame.

Lau: So how would it work? How would it work for Americans who are just waking up to the idea of a digital dollar, but absolutely recognizing the need for stimulus. 1,200 dollars is being promised to every American to help smooth out the economic impact for people’s lives and families and communities. So how would it actually work in the real world?

Treat: I’m not going to speak specifically to how the problems currently being solved. There are a lot of very smart groups focused on this, and there’s a lot more to come quickly in the coming days and weeks to make it work. At the end of the fundamental notion of making sure that the right amount of money gets to the right people and that there’s no fraud and is done safely and securely— these are big challenges. The government and the private sector are actively engaged in how to best solve them.

What we’re taking away from this, in looking at this challenge and looking at the questions that are getting asked — the tide has gone out, and now we’ve got a full understanding of where the challenges and the opportunities and the gaps and the structures that need to be modernized are, and are applying that to our thinking around what does a third form of money introduce. What is a central bank digital currency and the notion of a digital identity, wallet, infrastructure, what could that provide in the future? So we’re going to make sure to be part of the dialogue of how the solutions evolve to better inform the new future modernization of financial services and make sure that maybe it’s that for the next crisis that we are able to respond in every way that we all need.

Lau: There’s a Chinese saying that within chaos comes opportunity. And so could a digital dollar, whatever it looks like amidst the Covid-19 crisis, be a precursor to a central bank digital currency for the United States? 

Treat: What’s being discussed is really just routing money through a payment infrastructure and how to identify and reach the recipients on the other end. So in that regard, we will be dependent upon and use the current system. As I said, as we look at those challenges, it’ll help inform the new future system. But it’s definitively not a central bank digital currency that’s being discussed. And so we are talking about something fundamentally different.

Lau: Fundamentally different, but again, it’s the training wheels and getting people comfortable to the idea. We’ve got China working on CBDC themselves, it’s called DCEP. And potentially we could be seeing this launched possibly sooner than later as a result of this coronavirus crisis. But what about the United States? I know that you and your group are talking about a CBDC for the Federal Reserve, for the U.S. system. Where is the US in this race? Is there a race?

Treat: So two different things you’ve asked there. On the latter, our view is that it’s important that the U.S. move, but it’s important that they get it right rather than do it fast. The wave of innovation has created all sorts of opportunities. And we’ve got very, very powerful technical options that touch on very sensitive issues as deliberately as part of what we’ve done within the digital dollar project is form a stakeholder group that our intent is to draw from all the appropriate areas of expertise and stakeholder groups and perspectives, from consumer advocacy to constitutional law to the banking system and business community to humanitarian and public sector organizations. Just to make sure that there aren’t unintended consequences, that we don’t have the appropriate policy discussions for, that we address the privacy issues that are an implicit part of any financial system, AML, KYC legislation, etc.

So it’s a very powerful technology and capability. It has very important policy discussions to work through. It has important global financial system aspects to it as the dollar is the current reserve currency of the world and the impact that has had tremendous benefits. The consistency in the availability, I think has played an important dynamic around how our global economy has evolved. And so as anything evolves over time with this kind of magnitude and reach and impact, it has to be done very, very thoughtfully. So we’re certainly not emphasizing speed. Beyond the fact that it’s really important to have the design discussions now and to surface those policy discussions right now. But there’s not a rush to implement. We view it as much more important to get right, not fast.

Lau: Politically, do you think the environment is warming up to these ideas? We have starting April 1st, Brian Brooks, Coinbase’s chief legal officer taking over as the chief operating officer of the Office of the Comptroller of the Currency, that is a significant role, even though this is a lesser known U.S. government regulator, but tapped by Treasury Secretary Steven Mnuchin himself.

Treat: If you look at the trajectory of central bank digital currency as a topic over the past years, our very first project with a central bank was almost five years ago now. And so we’ve been working in this community for a while. If you had asked any central banker two years ago, I think very few would even talk about it openly. I think a year ago, there would have been a recognition of the topic and interest in it from a public stance perspective. What we’ve certainly seen in the past nine, 10 months is a massive acceleration in the space.

And so, it was a big topic at Davos this year. It’s a big topic in all of the different venues and convenings of central banks, we see it as something that at this point there’s broad recognition that this is too important an innovation to ignore. And most every central bank is somewhere on the learning curve to explore how they want to play. We certainly for the work that we’ve done and for all of the experience we’ve gained in working with central banks over these years, we’re confident that this is a very valuable innovation and that it’s going to be worth moving towards at speed. But again, we’re going to make sure we do that with all due care to make sure there aren’t unintended consequences and that we’re really thinking through each of the stakeholder groups and the use cases and the rationale for why.

Lau: So, David, I’m going to ask you to do a little forecasting yourself. Where do you see the digital dollar project after the pandemic is over, after the world gets back to a new normal? Where do you foresee the digital dollar project going?

Treat: We’re pushing ahead as fast as we can. We’re going to rely upon our stakeholder group where we’re actively convening and going through content. And our plan is to form a set of design recommendations inclusive of what a pilot program could look like and design considerations and policy considerations all in a very open fashion. We’re going to be offering that up to the community and specifically to the Federal Reserve and Treasury in the next couple of months. We’re not going to slow down, we’re going to learn a ton from the current crisis around design inputs and requirements for what’s needed.

We’re going to continue to take all of our global knowledge and draw upon our stakeholder advisory board, stakeholder group to create the best recommendations we can. So we’ll have something to show in a couple of months. From there, based on the response to the recommendations we will then figure out how we move forward. Our hope is, of course, that we are able to prove that there’s sufficient value to move into some form of pilot implementation with all of the right parties involved. But we won’t presuppose that too much, we want to be true to the process, be open to the challenges and the feedback from not just our stakeholder advisory board, but also the wider community. So look for more information in a couple of months. We will be excited to engage with any and everyone who’s got good things to contribute.

Lau: Well, at the end of the day, the stakeholders have the most at stake. And that’s everyone who engages in the global economy, everyone who participates as workers trying to feed their families, go to their jobs and just try to get by. I think what Covid-19 has taught us is that we’re all resilient, but new systems have to be put in place. And it really seems that political attitudes are changing exponentially.

Thank you so much, David. That was really illuminating to understand the concept and really the depth of work that you and your team are putting together. It’s not exactly what legislators are talking about. The nomenclature is the same, but what it is leading us to is a whole new future that could look very different when it comes to buying your next coffee, as simple as that. So, David, I want to thank you and stay well, stay safe where you are. And thank you, everybody, for joining us on this latest episode of Word on the Block. I’m Forkast.News, Editor-in-Chief Angie Lau. Until the next time.