Intrigue of the century: when will we get the digital dollar?

Today, there is again a lot of talk about CBDC, but everyone seems to be waiting and watching for what the US is going to do: Will it create a digital dollar on the blockchain, implement some other solution, or stick to a conservative policy?

The States themselves would probably very much like to leave things as they are. But that simply doesn’t look possible. China is already testing the digital yuan with might and main, promises to make it ubiquitous in 2022, and then to get it included amid the ranks of world reserve currencies. In turn, the European Union is working in depth on the concept of the digital euro. And obviously, if necessary, it will launch it very quickly.

Those are all challenges to the American dollar, and the US is well aware that their currency will have to go digital at some point. However, to understand is one thing, and to accept is quite another. Especially when you consider that converting the most widespread currency in the world into digital form will require of you to deal with a lot of questions, most of which, by the way, don’t even have definitive answers.

Back in 2019, the question of creating the digital dollar was more of a theoretical one. Even politicians avoided discussing it. Except in early December 2019, when Steven Mnuchin, the head of the US Treasury Department, said in an interview with Bloomberg that the Fed would not need to launch a digital currency in the 5 years to follow.

However, 2020, with all its upheavals, unexpectedly moved the US CBDC issue onto a practical plane. Here’s just one example. After direct payments went to American households during the COVID-19 pandemic, it turned out that 8 million of them (which is more than a third of the total) simply do not have a bank account where money could be transferred. Because of this, they received stimulus in outdated paper checks and the process got drawn out. Whereas if CBDC was used, the problem would not even arise.

In response to the situation, two initiatives were submitted to Congress that involve the use of digital currencies for direct payments: a provision for the creation of digital wallets by Chairman of the House Committee on Financial Services Maxine Waters, and Senator Sherrod Brown’s “Banking for All” bill, which provides for the creation of a free digital dollar wallet FedAccount.

Previously, in February 2020, a member of the US Federal Reserve Board of Governors Lael Brainard said that the department was considering launching a digital payment system that would be more efficient and less costly than the existing one. A little later this was confirmed by the chairman of the Fed, Jerome Powell. Speaking before Congress, he indicated that the Fed was working in this direction and there were several projects in development at the time.

But it all seems more like some ritual dancing around the problem – after all, to even start the process of developing the digital USD at the national level would require the passing of an appropriate law. And wouldn’t you know it, such a law flared up the passions around it in the following months.

At the end of March 2020, it became known that the US Democratic Party was working on a legislation that would facilitate issuing the digital dollar as a response to the pandemic and its economic consequences. The draft economic stimulus bill included a proposal to create the digital dollar based on blockchain technology.

According to the draft legislation, the digital dollar was defined as “a balance expressed as a dollar value consisting of digital ledger entries that are recorded as liabilities in the accounts of any Federal reserve bank; or an electronic unit of value, redeemable by an eligible financial institution (as determined by the Federal Reserve Board of Governors)”. The digital dollar provision was, however, removed from the final draft.

Still, there are some interesting points to remember. For example, it suggested storing digital dollars in a “digital dollar wallet”, which was defined as follows: “A digital wallet or account maintained by the Federal reserve bank on behalf of any individual. Represents assets in an electronic device or service used to store digital dollars that can be linked to a digital or physical ID”.

The provisions of the draft bill would make all Federal Reserve System member-banks facilitate the implementation of digital dollar wallets and take all necessary measures to integrate them into the economy.

It was after all references to the digital dollar disappeared from the bill that members of the US House of Representatives Committee on Financial Services, led by Maxine Waters, strongly supported the idea of introducing the digital dollar to stimulate the economy. Waters highlighted the importance of 269 removed pages concerning the digital dollar: “As officials, it is our responsibility to provide workers, consumers, investors and our nation’s economy with the necessary resources to overcome this unprecedented crisis, so I call on the leadership of the House of Representatives and Senate to include these crucial pieces of legislation in the upcoming stimulus package.”

In an interesting turn of events, Ohio Senator Sherrod Brown, a senior member of the Banking Committee, then put forward his own bill, identical to the provisions removed from the Support Working Families Act. The law proposed by Brown would allow every US citizen to create a digital dollar wallet – a free bank account that can be used to receive money and make payments. It would be possible to open such an account at any local bank or post office.

The next stage of the fight for the US CBDC unfolded at the end of May 2020: The Digital Dollar project published its white paper. The 30-page document in detail described the US Federal Reserve digital currency, the basic principles of the digital dollar and the prospects for its implementation.

The Digital Dollar project is the brainchild of former heads of the Commodity Futures Trading Commission (CFTC) and the digital services company Accenture. The document presents many potential applications for the e-USD – for example, money transfers between the United States and Mexico. But the main thing is that the project did not promote the idea of ​​some kind of revolution in the US monetary system, its authors in every possible way declared their desire to act within the existing standards. Several times the document mentions maintaining the system in which currency comes from the Fed to financial institutions, and only then becomes available to a wider public. In other words, the e-USD should, by design, be distributed through the existing two-tier architecture of commercial banks and regulated intermediaries.

The white paper also states that the digital dollar must be used according to the existing KYC and AML guidelines. At the same time, CBDC must preserve the privacy of its users. The conflict between these requirements is supposed to be resolved on the basis of the IV Amendment to the US Constitution, as well as separate legislation. In essence, the digital dollar would be analogous to cash currency.

And finally, a year ago – on June 11, 2020 – hearings of the Congress Task Force on Financial Technology on the issue of the e-USD took place. All of the participants agreed that the digital currency could improve access to the Federal Reserve System deposits. However, the question of what exactly should the digital dollar be remained unresolved.

Congressman Davidson, a member of the Task Force on Financial Technology and a prominent cryptocurrency advocate, told reporters that he found the meeting “encouraging” as it showed an understanding that the digital dollar does not pose a threat to the US dollar, as it is still the same dollar.

In turn, Davidson was troubled by something else: the digital dollar could lose a number of features of the existing dollar, namely, confidentiality and self-sufficiency. After all, the advantage of cash is precisely the inability to track financial transactions. According to Davidson, blockchain-based digital currency is capable of maintaining the privacy of transactions, but the developers have yet to work on that. Tracking all the data on payments and financial status of users might be quite normal in China, but is completely unacceptable in the USA or Europe. It has been a year since. The election of President Joe Biden and major changes in the American establishment have significantly slowed down the discussion of issuing the e-USD. However, little by little, everyone is coming back to it – the Fed, Congress, and the White House. The idea of creating a “dollar on the blockchain” no longer shocks anyone, so I think that by the end of this year we will see serious progress in this area. After all, the competition between China and the United States is still looming large.