The Digital Dollar Project
J. Christopher Giancarlo — Former Chairman of the US Commodity Futures Trading Commission (CFTC)
“Money is the measure of capital. It’s capital — a train, a factory, an idea — that creates wealth. Capital springs from invention and enterprise, and as those things flourish, so may wealth grow.” James Grant, Bagehot, The Life and Times of the Greatest Victorian
At this year’s CfC St. Moritz in Switzerland, I announced the launch of the Digital Dollar Project to lead public discussion of the merits of a tokenized form of the United States central bank digital currency (CBDC) or, what we alliteratively call the “Digital Dollar”:
The Project looks to encourage research and public dialogue on the potential advantages of a digital dollar, convene private sector thought leaders and actors, and propose possible models to support the public sector.
The Digital Dollar Project is a partnership between Accenture plc, the global consultancy firm, and the Digital Dollar Foundation. The Foundation is a not-for-profit organization I formed with my brother Charles Giancarlo, a veteran Silicon Valley entrepreneur, investor and executive and Daniel Gorfine, former CFTC Chief Innovation Officer. The Accenture team is led by David Treat, managing director and global head of Accenture’s Capital Markets Blockchain practice.
Determined to bring many perspectives and professional disciplines to bear, the Digital Dollar Project recently announced the convening of an extraordinarily experienced and diverse Advisory Board. It includes individual economists, business leaders, technologists, innovators, lawyers, academics, consumer advocacy and human rights experts and ethicists from across the political spectrum. The Board has held two virtual meetings with further meetings to follow. In addition, the Project has given a series of briefings to Congressional staffs, US Administration officials and policy bodies both in the United States and abroad. Further work continues on a soon-to-be-published White Paper setting out the Project’s view of the benefits of a tokenized US CBDC for the US economy as well as the broader global financial community.
It is a somewhat unique historic characteristic of the United States that when it embarks upon a critical technological initiative, such as landing a man on the moon or building the Internet, it often does so through a series of partnerships between the private and public sectors. We believe that creating a well-architected, durable and universal digital dollar is of similar importance. Successfully creation will be an enormous undertaking. It needs to be done carefully, in an iterative fashion and by supporting the critical monetary and public policy imperatives of the public sector with the knowhow, ingenuity and project management skills of the private sector. The Digital Dollar Project aims to be a private sector partner to the US public sector in this essential endeavor.
Defining A Digital Dollar
In the two-tiered banking system within the United States, the Federal Reserve (Fed) issues bank notes for the general public and reserves for the banking system. Our proposed digital dollar would maintain the same two-tiered distribution architecture: commercial banks would trade reserves for digital dollars to issue and distribute for end user transactions.
The digital Dollar would be a liability of the Fed carrying the full faith and credit of the United States. This is different than proposals from various banks, like JP Morgan, for bank tokens that are liabilities of their singular institutions. Nevertheless, the Project does not view a digital dollar as competitive with or antithetical to the development of private stable coin efforts, many of which seek to tokenize commercial bank money. Similar to today, private sector innovation will continue to build on top of public infrastructure underpinning the US dollar.
Our proposed digital Dollar would be tokenized. “Tokenization” is the act of turning an asset, good, right, or currency into a digital representation with properties sufficient to attest and transfer ownership. As an analogy to our current world, cash is a physical token. To verify the transaction, you only need to verify the authenticity of the bill (token). Because each bill is unique, it is impossible to spend the same bill more than once. This differs from account-based electronic money, which uses a reconciliation-intensive, message-based approach to adjust entries in a ledger.
In a token-based system, the token contains all information necessary for the recipient to verify the legitimacy of the transaction. In an account-based system, the operator of the system authenticates the sender to ensure authorization to update account balances on a potentially centralized account ledger. Physical cash, bank notes, are examples of token-based central bank money, and central bank reserve accounts and bank deposit accounts are examples of central bank account-based money.
In a token-model, Distributed Ledger Technology (DLT) based systems ensure uniqueness and prevent duplicate spends through a consensus model that provides secure transaction ordering. The consensus model can fall along a spectrum of centralization and decentralization depending on the desired features of the system. The consensus model provides a mechanism to design and control specific transaction features.
The introduction of a tokenized digital dollar would be a source of innovations for the broader financial system in a fundamental way. A tokenized digital dollar would be a new financial medium and, combined with distributed ledger technology, would provide a new payment rail upon which central bank money can be sent and received. It would serve as an innovative financial market infrastructure that would be portable, sent as easily as a text, and allow settlement irrespective of space and time and bank access. It would enhance confidence for conducting digital payment transactions, broaden scope, diversification and resilience in dollar payments, and support retail, wholesale and international payment use cases.
Retail payments on-line cannot be conducted in central bank money. That makes eCommerce challenging for populations that traditionally have been underserved in retail banking. A digital dollar would offer a new choice for digital transactions, instantaneous peer-to-peer payments, potentially lower costs, and diversification of payment rails, which would grant economic actors greater autonomy, especially in times of heightened financial distress. A digital dollar could be distributed to the end-user through commercial banks and trusted payment intermediaries and offer additional mechanisms to facilitate financial inclusion by incentivizing broader and more accessible services (i.e. digital wallets). As with any cash exchange, a retail digital Dollar transaction would be complete as soon as possession changes. That is very different that all other cashless payments, whether by credit card, wire, personal check, or digital app such as Zelle or Venmo, in which settlement is not complete until their banks have recorded, reconciled, and settled their respective debits and credits.
Wholesale payments rest on national payment systems and are normally conducted through interbank clearing using central bank money to settle securities and other large value payments. The role that central bank money plays in conducting large value payment transactions has important distributive effects. Current wholesale large value transactions are account-based and predominantly executed by banking and payment providers that have accounts with the Federal Reserve. Only organizations with Fed accounts can transact in central bank money. A tokenized digital dollar would provide alternative access to central bank money and support the emergence of broader, more diverse financial market infrastructures.
International payments currently cannot be conducted digitally in U.S. central bank money. A digital dollar would allow more direct monetary relations to be established, reduce risks, address persistent deficiencies of the existing correspondent banking model, enhance competition in international payments and advance financial market integration. The use of a digital dollar in cross-border and offshore transactions would allow making digital payments in central bank money for remittances and large value payments, including the possibility to conduct offshore securities settlement.
Congressional Proposal
As this paper is being written, the United States along with the rest of the world has been struck with the COVID-19 pandemic and partially immobilized. As Washington has formulated its policy response of social distancing with its consequential braking of the economy, it has set upon issuance of direct payments to individuals to offset lost wage income. To better effectuate direct assistance, proposals have been made for so-called “digital dollar” electronic cash payment infrastructures to distribute electronic payments directly to consumers. These proposals to date consider “digital dollars” in terms of benefits distribution functionality, not as a form of true CBDC.
The Digital Dollar Project proposes something far more fundamental: a new, additional format for U.S. currency: a digital Dollar that has the same legal status as the Dollars in one’s purse, only on a personal device. For government agencies charged to distribute government crisis benefits to vulnerable populations, especially those without access to banking services, direct transmittal of digital Dollars to mobile devices may a time saver. Moreover, in a pandemic where viruses are transmitted by paper money and metal cash transactions, paying for food and essentials with digital Dollars is more than convenient, it also may be a lifesaver.
Yet, the digital Dollar is a larger undertaking than just a federal government payments infrastructure. It means a tokenized, digital form of US legal tender with all the future advantages and challenges that will accompany it. Its creation will likely be a source of fundamental innovations for the broader financial system.
The digital Dollar Project will continue its exploration of a true US CBDC in thoughtful writings and a series of iterative pilot programs. Creating a well-functioning and universal digital Dollar should be done in the same way that the Internet was created, by combining the knowhow, financing and project management skills of the private sector with the monetary and public policy concerns of the public sector. And it should be done deliberately, cautiously and, yet, with determination. Something as complex and worthy of the US Dollar’s global importance should not be broadly implemented in a crisis. It will take time to get it right. Nevertheless, the COVID-19 crisis is a good catalyst to get started.
The Digital Dollar Project is up and running. There is much to do.
About the Author
The Honorable J. Christopher (“Chris”) Giancarlo is Senior Counsel to the international law firm of Willkie Farr & Gallagher and the former Chairman and Chief Executive of the United States Commodity Futures Trading Commission (CFTC). Furthermore he is the founder of the Digital Dollar Project.
Giancarlo was first nominated to the CFTC by President Barack Obama and unanimously confirmed in June 2014. He was subsequently nominated as CFTC Chairman by President Donald Trump and again unanimously confirmed in August 2017. He departed the CFTC in July 2019 after completing his five-year term. As CFTC Chairman, Mr. Giancarlo served as a member of the Financial Stability Oversight Committee (FSOC), the President’s Working Group on Financial Markets, and the Executive Board of the International Organization of Securities Commissions (IOSCO) and participated in meetings of the Financial Stability Board (FSB).
