Digital Dollars: Electronic Cash vs Digital Currency

  • New technological capabilities have created a dynamic, via tokenization, that allows for a digital version of central bank currency, without sacrificing stability, security or privacy.  This is about more than a federal government payments infrastructure.

  • In addition to coins and paper money, a dollar-based Central Bank Digital Currency (CBDC) could operate as a third form of money backed by the full faith and credit of the United States of America, but brings it into the truly portable digital world, opening up new possible use cases and applications.

  • Considering the importance of the U.S. dollar to the global economy, our work on a U.S. dollar-based CBDC via the Digital Dollar Project is a logical and important step as we drive towards a digital transformation of the global financial system. 

  • The Digital Dollar Project will be driven by an open, innovative, collaborative mindset, which will explore the full range of possibilities on how to best bring this to fruition

Mar. 27, 2020 – Overview.  In late March, in response to bipartisan proposals to distribute emergency funding to those impacted by COVID-19, the House Financial Services Committee and Senator Sherrod Brown proposed a new U.S. Federal Reserve infrastructure to distribute electronic payments directly to consumers that was termed “digital dollars.”   This approach is distinct from the work now underway by the Digital Dollar Project, which is studying design options to introduce a tokenized Central Bank Digital Currency for the U.S., in our terminology, a “digital dollar”. This will be a new, additional form of central bank currency issued by the U.S. Federal Reserve.

Digital Dollar as part of Electronic Cash Infrastructures. The soon-to-be enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act allows for direct economic impact payments to qualified individuals, and is to be administered by the Internal Revenue Service.  During consideration of this legislation, the House Democratic Caucus proposed that these impact payments be made under an electronic cash payment infrastructure administered by the U.S. Federal Reserve (Fed).  The House Democrats’ proposal, first outlined by the House Financial Services Committee, calls for the establishment of digital wallets, which would receive direct payments from the Fed, creating efficiencies in electronic transfer of cash from the Federal Government to consumers.

Recently, Senator Sherrod Brown introduced the “Banking for All” Act, a bill that would require Federal Reserve member banks to create and maintain pass-through “digital dollar wallets” for persons who have accounts in those banks.  This infrastructure would also be made available to state nonmember banks and credit unions.  Similar to the House Democrats’ proposal, the “digital dollar wallets” would allow for payments to be received by individuals from the Federal Government as proposed in the CARES Act, which is what Senator Brown’s bill authorizes, but the infrastructure can be a foundation for other forms of electronic cash transfers from the U.S. government direct to individuals.

In short, for the House Democrats and Senator Brown, “digital dollars” are essentially electronic cash that can be used for the primary purpose of instituting a payments infrastructure involving the Federal Reserve, Fed-member and non-Fed-member banks and credit unions.  These proposals speak to digital dollars in terms of functionalities and capabilities that are emerging in the digital age.

Digital Dollar as Central Bank Digital Currency.  The Digital Dollar Project (DDP) is exploring ways in which tokenization and related technology can create a novel format of central bank money to offer new functionalities and utilities for conducting payments while accommodating key monetary policy objectives. While our current account based, electronic transfers of cash have been evolving for several decades, they are still based on sending messages back and forth and reconciliation of that information. U.S. central bank money as legal currency has seen few, if any, innovations since the printing of bank notes during the nineteenth century. Its circulation has remained strictly local and its functionalities limited.

Along with other areas of promising payments and currency innovation, the Digital Dollar Project seeks to encourage exploration of new infrastructure for U.S. currency: a digital dollar that has the same legal status as the dollars in your wallet – a form of central bank digital currency issued by the Federal Reserve System that would enjoy the full faith and credit of the U.S. government and represent a third format of central bank money in addition to bank notes and reserves.  The proposals offered by House Democrats and Senator Brown do not propose classifying the digital dollar in that way, but the DDP plans to work with them and other government officials and stakeholders to discuss the role a digital dollar, as legal tender currency, can play in the environments they have proposed.

A true central bank digital dollar could fundamentally change the nature of our financial systems, enabling frictionless movement of money, direct exchange of digital goods and services, and enable greater financial inclusion and fairness.