On Wednesday morning, the Senate Banking Committee’s economic policy subcommittee, chaired by Senators Warren and Kennedy, will hold a hearing on the challenges and opportunities of a digital dollar. The hearing will undoubtedly retain the recent speech of Federal Reserve Governor Lael Brainard highlighted potential benefits of a U.S. Central Bank Digital Currency (CBDC), including with respect to access, inclusion and efficiency, and the next steps in the Fed’s analysis. Note also the word the week before by Sir Jon Cunliffe, Deputy Governor of the Bank of England, promising a careful and thorough assessment of the need for some form of “Britcoin” to “meet the needs of modern life”.
We agree with the thoughtful and balanced approach of these public sector leaders. This is why we have also called for a careful exploration of an American CBDC that we called it – perhaps not creatively – a “digital dollar”. And while as former regulators we believe in the prudence of considering what could go wrong with a CBDC, we believe the time has come to consider what could be right as well.
There are several possible formats for a digital dollar. We suggest the form of a token US dollar issued by the Federal Reserve, distributed through the two-tier banking system, and functioning alongside physical currency and commercial bank money (those funds that you hold electronically in your bank). It would reflect many properties of cash, but in digital form.
Instead of taking paper money from an ATM and putting it in your wallet, you can withdraw a digital dollar into a digital wallet on your smartphone. The promise of such innovation is easier access to money, lower costs, faster transactions, and improved monetary functionality and programmability.
Some are rightly concerned about the risks of a digital dollar, Britcoin, and other types of CBDCs, including their impact on fractional banking and financial stability, current payment models, global currency competition, and individual confidentiality. These concerns deserve serious consideration.
Yet, for a moment, let’s think about what might be going on.
First, when it comes to financial stability, there are concerns that the digital dollar may decrease money being held in commercial banks. But, what if the opposite happened? what if After money is transferred into the financial services industry, especially if previously unbanked or underbanked people transfer digital dollars to financial accounts due to the new ease of doing so?
Many young people connected to digital and underserved populations are reluctant to set foot in a bank branch to transfer physical money to a new account. Mobile devices and “bank-lite” digital wallets may well provide attractive access ramps to banking services offering interest on deposits and public insurance. And knowing that one has the ability to easily convert money from commercial banks back to digital dollars would not only provide convenience, but perhaps make it less likely to do so in the event of a panic.
Second, there are concerns that a digital dollar could negatively impact current business models for payments. But what if it lowers payment transaction costs, benefiting consumers and small businesses that currently pay higher fees to process electronic payments? What if such transactions provided instant settlement, reducing the cash flow stress that plagues small businesses and consumers with expensive overdrafts and other fees? What if the economic benefit of increased activity that CBDCs encourage extends economic opportunity, choice and productivity?
Third, some argue that the status of the US dollar as the world’s primary reserve currency is well established and does not require any further innovation. But what if digitization further strengthens the dollar and, indeed, other trusted reserve currencies, with new features and ease of use, while preserving some esteemed competitive advantages: stability, support a robust and strong economy, good governance, openness and the rule of law? And as monetary innovation becomes more and more in demand by global consumers, isn’t it better that the preferred instruments are those issued by strong and robust democracies?
Finally, many are rightly concerned about privacy and mass surveillance with the CBDC. Trends in monitoring existing forms of money are already moving in perilous directions as massive and centralized systems based on accounts managed by governments and business entities gain momentum, while use of physical species is declining globally. But what if CBDCs issued by democratic governments offered citizens the opportunity to insist that traditional free society norms and privacy rights be embedded in a digital form of public money? What if constitutional, legal, and due process limitations on government access to financial data help better secure the privacy of individuals with a CBDC and sustain the competitive advantages held by major reserve currencies?
Caution, prudence and thoughtfulness are most appropriate when considering new transformative technologies. Likewise, however, think about what happens if things go well. There is only one way to find out. Only real world pilots can test the upward pressure and assess the downside. The future of money demands no less.
Mr. Giancarlo is Senior Legal Counsel at Willkie Farr & Gallagher, Former Chairman of the US Commodity Futures Trading Commission (CFTC) and Co-Founder of the Digital Dollar Project. Mr. Gorfine is the former innovation director of the US CFTC, adjunct professor at Georgetown University Law Center and co-founder of the Digital Dollar Project.