Yesterday, a former U.S. regulator, known as “Crypto Dad” owing to his evangelism of digital currency, announced the formation of a non-profit think-tank that will back the adoption of a Central Bank Digital Currency in the U.S., dubbed the “digital dollar”.
J. Christopher (“Chris”) Giancarlo retired from his post as the Chair of the Commodity Futures Trading Commission (CFTC) last year. Giancarlo has formed the Digital Dollar Foundation in partnership with investor Charles Giancarlo and Daniel Gorfine, former Director of LabCFTC and Chief Innovation Officer of the U.S. Commodity Futures Trading Commission (CFTC).
Chris Giancarlo has been vocal about the need for the U.S. to move to a digitized the dollar, having co-written an op-ed with Gorfine in the Wall Street Journal in October 2019.
In the opinion-piece, the pair highlighted that countries across the world as well as social media platforms (i.e. Facebook Libra) are more advanced in their endeavors to launch digital money than the U.S. is, and as a result, the country risks being left behind. Moreover, these competing initiatives could erode the U.S. dollar’s strong position as the world’s reserve currency which would in turn reduce the country’s impact on the international stage and the prosperity that it has enjoyed over the last century.
Stated in those terms, the pair are implying that this situation is not far short of a national emergency.
“The digital 21st century is underserved by an analog reserve currency. A digital dollar would help future-proof the greenback and allow individuals and global enterprises to make payments in dollars irrespective of space and time”
The term “digitized dollar” is something of a misnomer. Afer all, with the exception of physical bank notes, dollars are digitized insofar as they exist as account balances in computer records across financial institutions today.
Central Bank Digital Currency (CBDC) is an evolution of this world where central bank money is represented in a single shared ledger, secured with encryption in a technique known as “tokenization”. Digitized money is more versatile than its traditional form as it can be programmed.
Taking An Open And Collaborative Approach
The Foundation realizes that an initiative of this scale is going to involve establishing a broad base of support which is why it plans to take an open and collaborative approach to designing and building CBDC, seeking input from a community of stakeholders, then providing designs for participants to react to.
“The project will explore design options and approaches for creating a digital dollar through a deliberative process, including stakeholder meetings, roundtable discussions, and open forums“
The Foundation is quick to dismiss the idea that CBDC will replace the traditional forms of money used in the U.S., stating that “a dollar CBDC would represent a third format of currency and, similar to paper currency, be backed by (and therefore be treated as a liability of) the Federal Reserve. The aim of a CBDC is to be portable, in a digital format, and able to be sent as easily as a text.”
CBDC Is Not JP Morgan Coin
For Martha Bennett – VP, Principal Analyst at analyst firm Forrester, it’s important to draw a distinction between CBDC’s goals and those of money digitization projects at commercial banks such as JPM Coin. According to Bennett, ”a CBDC by definition has different control mechanisms associated with [JPM coin and similar e-money initiatives originated by commercial banks]; and under all the current proposals I’ve seen, it would also preserve the existing two-tier infrastructure, without which economies would grind to a halt.”
The Foundation has engaged Accenture as lead architect and technology innovation partner, citing its work with other central banks such as the Bank of Canada, the Monetary Authority of Singapore, European Central Bank, and most recently with the intent of Sweden’s Riksbank — the world’s first central bank — to sign an agreement to develop an e-krona CBDC in a test environment.
While Accenture is an aggressively commercial organization (I should know as a former employee), it appears that the consulting and implementation giant will be donating its time and resources to the Foundation.
Accenture’s motives are not purely altruistic as its involvement with the Foundation provides the firm with a ring-side seat for what could be the biggest upheaval in the way that financial services work in the U.S. for a century. The company’s role in the Foundation gives it a strong foundation from which they can sell work into a large and growing market. For example; the firm will be uniquely placed to integrate CBDC into other blockchain based initiatives that have a payments component. It can also take its learnings from the Foundation and apply them to roll out CBDC to 194 other countries across the world.
With most ongoing blockchain initiatives in the market involving a payment aspect, the consulting firm could have its work cut out for the next decade in helping these initiatives connect their platforms into the digitized dollar. It’s a long game, but the firm has the resources to wait it out.
For Bennett, the Foundation and the public/private collaboration aspect is encouraging.
“This is a welcome, and in many ways much-needed, development. A Foundation, one of whose founders is a former regulator partnering with Accenture is a powerful combination. The Foundation’s founder members bring the industry expertise, connections and gravitas as well as credibility that’s needed; Accenture brings not only its deep expertise in blockchain technology/DLT, but also its experience in working with regulators and banks in other countries of digital currency and other central bank activities.”
While Bennett doesn’t necessarily agree with the “Facebook/Libra” narrative that the U.S. will get left behind China, she nevertheless sees the U.S. finding its voice as important.
“A U.S. voice has been notably absent from the international debate around central bank issued digital currencies (CBDCs). I hope this initiative will change this dynamic”
Digital Money As Programmable Money
David Treat, Senior Managing Director and Global Blockchain Lead at Accenture lead sees that it’s time for money to catch up to today’s digital world.
“We at Accenture have been trying to build our digital world to be bigger, faster, better, however money has not evolved at the same pace. We can send e-mails instantaneously across the world, and money needs to do the same. The current form of currency hasn’t changed in the physical form in millennia, and its electronic form hasn’t changed for a decade”
Treat sees the potential for programable digital money as being a transformative development and offers an analogy of the difference between money and food stamps to illustrate why. Where both can be used to purchase food, money has no intrinsic intelligence, yet the latter has a set of rules, restrictions and reporting built into it. That’s the promise of digital money – as it becomes programmable and smart.
Treat explains that the Foundation will initially zero-in on identifying some of the foundational components of what CBDC should include, along with some core principles such as strong security and high availability. From then, the Foundation can build more detailed designs around them, consulting with stakeholders as it does so. Some of this work has already started, with some early work published on the Foundation’s website.
Confirming Bennet’s earlier mentioned comments, a key core principle that the Foundation has set forth is to work within the confines of the existing two-tier financial system rather than seek a radical re-architecting of the way that money flows around financial institutions today.
CBDC Will Not Solve Everything
CBDC has been trialed in various parts of the world already, such as Canada. However, results have been mixed with an emerging narrative that the technology cannot meet some of the more complex aspects of banking such as settlement netting, credit and margining. Without these techniques, banking would simply not be possible, yet they are broadly incompatible with blockchain technology.
Treat reframes the issue as one of unreasonable expectations, stating that the assumption that CBDC can enable instant bilateral payments and settlement is unrealistic because that’s fundamentally incompatible with how banking works. He envisions a world where CBDC comes into play downstream of this financial alchemy. In this way, the old world and the new one will integrate together.
That said, payment and settlement between financial institutions using a digitized dollar will be quicker and cheaper; today financial institutions have to set aside billions of dollars to guard against a situation where their counter-party fails to settle. Having that money sitting on the sidelines is incredibly expensive – every billion dollars held in this way costs an institution approximately $11m a year. Whereas with programable digitized money, much of that risk goes away, meaning that the banks need only hold a fraction of the funds in reserve than before.
This isn’t just a theoretical point, it’s now a reality. In the U.S. a financial infrastructure provider, Paxos, is gearing up to provide a peer-to-peer blockchain based settlement platform having recently received the go-ahead from the Securities and Exchange commission.
Like the CBDC, it uses a digitized form of money for settlement purposes, but unlike what the Foundation is doing, that digitized money represents liabilities that the banks have with each other, as opposed to being backed and guaranteed by the Federal Reserve. CBDC is a natural next step for the Paxos project and is likely to be one of the early adopters if the digitized dollar does reach fruition.
A Puzzle For The Economic Wonks
Treat goes on to suggest that a financial system using CBDC could be far more dynamic than today. If CBDC enables settlement to occur in minutes rather than days, he envisages a model where banks can pay more to settle quicker (which is inherently more expensive because you get less of the benefits of netting). “Dynamic risk priced settlement windows is where it is heading”, says Treat.
It’s these wonkish and obscure financial services terms that offer a glimpse of how complex introducing CBDC really is. Even small changes in the fabric of financial services can have a ripple effect across the industry, leading to many unintended consequences.
For Treat, that’s the power of the structure of the Foundation as it will promote co-operation with the outside world by bringing in experts such as economists into the Foundation’s tent, providing a venue for these esoteric, but vital aspects to be debated.
Fundamentally rewiring a financial system that has not materially changed for centuries is no mean feat, especially when there are so many differing interests to take into consideration – the public, regulators, and financial institutions.
The Foundation appears to be embracing the African Proverb – “If you want to go fast, go alone. If you want to go far, go together.”
But that comes at a risk that the initiative becomes bogged down by too many competing voices. China on the other hand, with its command and control has an advantage in advancing CBDC in that they do not have to necessarily build consensus.
Another challenge for the Foundation will be dealing with the lack of CBDC of decision-makers in Washington. While in principle, the digital dollar — the Foundation claims — “would be fully covered by existing regulations guiding issuance and circulation of Federal Reserve monies”, rule makers will need to be brought along in the journey. Digitizing money on a distributed ledger is a mind-bending concept that requires time to fully understand. To give the matter the attention it deserves will be challenging for busy politicians, and there is a danger that many will rely on the negative stereotypes of cryptocurrency being used for illicit purposes.