On Wednesday morning, the Senate Banking Committee’s Economic Policy Subcommittee, under Senators Warren and Kennedy, will hold a hearing on the challenges and opportunities of a digital dollar. The hearing will no doubt take note of the recent speech by Federal Reserve Governor Lael Brainard outlining potential benefits of a US Central Bank (CBDC) digital currency, including in terms of access, inclusion and efficiency, and next steps in the Fed’s analysis. It will also note the speech by Sir Jon Cunliffe, Deputy Governor of the Bank of England, the week before, in which he promised a careful and thorough assessment of the need for some form of “Britcoin” to “meet the needs of modern life to fulfill “.
We agree with the thoughtful and balanced approach of these public sector leaders. For this reason, we have also called for a careful study of a US CBDC, which we – perhaps not creatively – have called the “Digital Dollar”. And while we, as former regulators, believe in the caution of considering what could go wrong with a CBDC, we believe that now is the time to equally consider what could go right.
There are several possible formats for a digital dollar. We recommend the form of a tokenized US dollar issued by the Federal Reserve, distributed through the two tier banking system, and operating alongside physical currency and commercial bank money (the money you hold in electronic form at your bank). It would reflect many of the properties of physical cash, but in digital form.
Instead of withdrawing 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 an innovation is easier access to money, reduced 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 CBDC, including their implications for fractional banking and financial stability, current payment models, global currency competition, and individual privacy. These concerns are worth seriously investigating.
But let’s consider for a moment what could go well.
First, there are financial stability concerns that the digital dollar could deplete commercial banks. But what if the opposite happens? What if more money flows into the financial services sector, especially when people who did not previously have a bank account or bank account move digital dollars to financial accounts because of the newfound ease?
Many young digital cable people and underserved populations are reluctant to step foot into a bank branch to transfer cash to a new account. Mobile devices and “bank-lite” digital purses can offer attractive entry options for banking services that offer interest on deposits and state insurance. And knowing that you have the ability to easily convert money from commercial banks back into digital dollars would not only ensure convenience, but also reduce the chance of panicking.
Second, there are concerns that a digital dollar could negatively impact current payment business models. But what if payment transaction costs are reduced, which benefits consumers and small businesses who currently pay higher fees for processing electronic payments? What if such transactions allow instant settlement, reducing the cash flow stress that places costly overdrafts and other fees on small businesses and consumers? What if the economic benefits of increased activity that CBDCs encourage expands economic opportunity, choice, and productivity?
Third, some argue that the US dollar’s status as the world’s most important reserve currency is firmly entrenched and does not require further innovation. But what if digitization further appreciates the dollar and other trustworthy reserve currencies with new functionalities and user-friendliness while at the same time preserving valued competitive advantages: stability, the support of a robust and strong economy, good governance, openness and rule? The Law? And as monetary innovations become increasingly demanded by global consumers, isn’t it better to favor the instruments of strong and robust democracies?
After all, many are rightly concerned about data protection and mass surveillance with CBDC. Trends in monitoring existing forms of money are already heading in dangerous directions as massive, centralized account-based systems managed by governments and commercial institutions grow in size as physical cash use declines worldwide. But what if CBDCs issued by democratic governments allow citizens to insist that traditional free society norms and privacy rights be built into a digital form of public money? And what if constitutional, legal, and due process restrictions on government access to financial data help better protect individual privacy with a CBDC and future-proof the competitive advantages of leading reserve currencies?
Prudence, caution, and thoughtfulness are appropriate when considering transformative new technologies. But also thinking about what happens when things go well. There is only one way to find out. Only real pilots can test the pressure and assess the disadvantage. The future of money demands no less.
Mr. Giancarlo is Senior 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 Chief Innovation Officer of the US CFTC, Associate Professor at Georgetown University Law Center, and a co-founder of the Digital Dollar Project.