Digital dollar seems inevitable, but details remain fuzzy

The push for a public option to digitize government payments has gotten stronger, and the discussion has moved on from whether it should happen to how it should happen.

The heavy lift required for the coronavirus response has pushed central bank digital currencies into the global spotlight. It has also changed the CBDC conversation from adjusting to cryptocurrency and countering Facebook’s Libra project to improving relief to shore up struggling economies. The European Union, for example, has gone from vowing to stop Libra to pushing a digital euro to manage cash access tied to the virus.

The U.S. made a tepid move to study digital currency in 2019, but in the short time since several U.S. politicians have pushed for a government-backed P2P app, or a “digital dollar,” while Visa has sought to patent technology that would make the card network a potential partner for central bank digital currencies.

“Progress from little to no discussion or engagement in the U.S. a year ago around a U.S. CBDC — to our current state of advance and informed dialogue — is material and important,” said Dave Treat, senior managing director and global blockchain lead at Accenture and director of the Digital Dollar Project.

There’s been similar movement in expediting payments processing. While there were years of debate over whether the Fed should be involved in real-time payments, the announcement of FedNow appears to have boosted overall participation in The Clearing House’s real-time payment rail.

Given the urgency of the pandemic, future rescue initiatives and the mixed performance of funds distribution thus far, it's likely there will be some form of currency digitization, with partisan differences in execution.

“A Fed CBDC is definitely coming,” said Eric Grover, a principal at Intrepid Ventures. There’s early soft support on both the left and right, he said.

As the idea progresses, the battle will be over the structure of delivering the Fed’s digital dollars — either direct or indirect, according to Grover. Democrats will be more likely to support FedAccounts, or digital dollars directly delivered from the Fed, which would enable concepts such as a public P2P app. Republicans would likely prefer private banks disburse federal digital dollars to consumers.

There will be chances to battle for both positions, given the likelihood of new stimulus — CNBC reports the White House and Republicans expect negotiations in late July — and the upcoming presidential election.

The coronavirus pandemic and subsequent economic crisis have revealed shortcomings in delivering government support, whether it’s small business lending or relief funds to consumers.

The government opened the Paycheck Protection Program lending to fintechs and updated the program to clarify forgiveness terms, though lenders still report challenges navigating the program.

“Some Americans are still waiting for immediate relief, many needing the relief the most have not received it,” Rep. Steven Lynch, D-Mass., said Thursday during a House Financial Services Committee hearing on digital tools.

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Panelists at the Democratic-leaning hearing advocated for both digital dollars and postal banking, with Mehrsa Baradaran, professor of law at the University of California, Irvine, calling for a partnership between the Fed and the U.S. Postal Service to reach people who do not have bank accounts or broadband access. Postal banking existed in the U.S. in the past, and provides financial services in the U.K., Austria and other nations, often as a way to ensure financial access while managing the cost of cash.

The Fed already offers digital dollar accounts to limited users such as banks and large financial institutions, Morgan Ricks, professor of Law, Vanderbilt University, said at the hearing, calling for consumer debit accounts and the use of the post office network to serve as branches to boost financial inclusion. Ricks also said FedAccounts would protect the U.S. status as the world’s reserve currency, though others, such as JPMorgan Chase, have cast doubt on that, contending digital dollars could hinder U.S. influence in trade finance.

“Cash is a public method available to all, as the economy moves online the use of cash will diminish, a digital dollar must have the same attributes as cash,” Rep. Tom Emmer, D-Minn., said during the hearing, adding that China’s digital yuan is closed to the general public. “Same rules that apply to physical cash should also apply to the digital dollar.”

There are details to be worked out, since “digital dollar” is not a universal definition, Treat said. The digital dollar proposal in an early version of the CARES Act referred to using the existing account-based U.S. financial infrastructure, though the Digital Dollar Project defines it as a tokenized form of a CBDC, which would be a new form of money.

“At this stage of the CBDC innovation cycle, the advanced economic, legal, business, and technical experts are working through the learning curve of what the technology can do,” Treat said. “The process to engage and explain this innovation to the wider public is just starting now.”

Robert Hockett, a law professor at Cornell, has proposed a system in which a Social Security or Taxpayer Identification Number opens an account directly with the Treasury. “All that would be necessary to convert ‘TreasuryDirect Accounts’ into digital bank accounts would be to authorize account holders to receive and hold dollars in and pay dollars out of them,” said Hockett, who is skeptical about the idea of combining postal banking and a digital dollar.

Financial inclusion and dollar digitization are two relatable but separate things, Hockett said. For example, using post offices to improve financial inclusion does not help with digitization, Hockett said. “You could digitize postal accounts, but then we’d be left wondering why we need the post office at all.”