The Digital Dollar Project
A multi-stakeholder initiative to develop options for a Digital Dollar
Since Western Union’s first use of telegraph networks to send money in 1871, the basic process of sending money – even with the development of digital technologies — hasn’t changed much. A message is sent via a network containing the payment information and a bank is required, on both sides with reciprocal accounts or other abilities, to fund the transaction. The process can be slow, expensive, and uncertain, particularly if international legs of the transaction are required while foreign exchange (FX) rates fluctuate.
While the process of sending money has been slow to change, the demand for currencies with added functionality to support faster, more certain, accessible, and complex payments has accelerated and central banks are paying attention. More than two-thirds of central banks have been investigating new payment applications, with many of these banks emerging as new potential innovators applying novel technologies, including tokenization, to offer new possibilities to represent and transfer value. For example, the Riksbank, the Central Bank of Sweden, is now the first among leading central banks to have decided to test the deployment of a digital currency (e-krona) in a pilot environment. It’s been reported that China plans to introduce a central bank issued digital currency (CBDC) in the near term and the European Central Bank (ECB) has been actively exploring digital currency features.
But central banks are not the only ones exploring ways to capitalize on the demand for new currency functionalities. For example, the Facebook-supported Libra proposal highlights that private, non-state stable coins may play an important role as a borderless payment medium. Similarly, other initiatives, including digital coins from Goldman Sachs, JP Morgan, MUFG, and Walmart, seek to offer new payment technology and functionality that existing national currencies currently do not provide.
These private sector developments are helping advance innovation, but the time has come to future-proof the greenback by exploring implementation options for a U.S. digital dollar. The principal members of the new Digital Dollar Foundation (The Foundation) have sounded the call for this needed dollar innovation. Together with Accenture, a global leader in CBDC advancement, the Foundation is now catalyzing action by forming the “Digital Dollar Project” (the Project) to study potential avenues to advance U.S. digital dollar tokenization and related implications on the U.S. and global economic and financial systems.
The Project will encourage research and public discussion on the potential advantages of a digital dollar, convene private sector thought leaders and actors, and propose possible models to support the public sector. The Project will develop a framework for potential, practical steps that can be taken to establish a dollar CBDC. It will further explore design options and approaches for creating a digital dollar through a deliberative process, including stakeholder meetings, roundtable discussions and open forums, and be based on careful consideration of core governmental interests, support for existing U.S. Federal Reserve (Fed) related projects, and a focus on a set of key guiding principles. The Project will ultimately seek to identify options for a CBDC solution that enhance monetary policy effectiveness and financial stability, provide needed scalability, security, and privacy in retail, wholesale, and international payments, while ensuring integration with existing financial infrastructures.
The value case for a digital dollar
U.S. central bank money 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. Central banks generally issue bank notes for use by the general public and reserves to the banking system.
The Digital Dollar Project seeks to encourage the next major innovation in the U.S. currency: a digital dollar 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.
A digital dollar would serve digital financial market infrastructure. To meaningfully expand upon existing capabilities, the new medium should be portable, be sent as easily as a text, and thereby allow settlement irrespective of space and time. It would enhance confidence for conducting digital payment transactions and broaden scope, diversification and resilience in dollar payments.
A digital dollar issued by the Fed would enhance scope, access, diversification and resilience in dollar payments and support retail, wholesale and international payment use-cases:
Retail payments on-line cannot be conducted in central bank money. Bank notes remain important in particular to make small payments, although on average physical cash is in decline as a percentage of broader monetary aggregates. A digital dollar would offer a new choice for digital transactions, offer instantaneous peer-to-peer payments, and provide diversification of payment rails in particular to grant greater autonomy, especially in times of heightened financial distress. A digital dollar could be distributed to the end-user through commercial banks and trusted payment intermediaries and offer additional mechanisms to ensure and facilitate financial inclusion.
Wholesale payments rest on national payment systems and are normally conducted through inter-bank clearance using central bank money to settle securities and other large value payments. The important role of central bank money to conduct large value payment transactions implies that access to central bank money has important distributive effects. A digital dollar would offer more diversified access to large value payments and support the emergence of digital financial market infrastructures.
International payments cannot be conducted digitally in U.S. dollars. A digital dollar would allow establishing more direct monetary relations, reduce risks, address persistent deficiencies of the existing correspondent banking model, enhance competition in international payments and advance financial market integration. The use of a digital dollar in cross-border and offshore transactions would allow making digital payments in central bank money for remittances and large value payments, including the possibility to conduct offshore securities settlement.
The Digital Dollar Project seeks to incorporate a wide range of stakeholder views and needs. The Project will aim to offer solutions that can be implemented, including through phases and careful testing, and meet existing performance criteria of U.S. financial infrastructure. Introduction may be partial and could be limited to discrete pilots before broadly rolling out across all use cases. Such an introduction would adhere to the following key principles:
Ensure real-world and inclusive benefits of – and subsequently make broadly available — a digital dollar that will constitute a liability of the Fed and form an integral part of the monetary base.
Preserve effectiveness of monetary policy and financial stability, and future-proof the greenback.
Ensure requisite privacy and security in payments is preserved.
Adhere to existing Know Your Customer/Anti-Money Laundering (KYC/AML) requirements amid distribution through regulated payment intermediaries and banks, preserving the two-tiered banking system.
Facilitate special provisions to on-board parts of the population that are being digitally excluded.
Enhance economic policy insights through the transparency of digital payments.
Offer comprehensive and seamless integration with the financial infrastructure including through connectivity to existing core banking and payment functions, custody solutions, and electronic wallets.
Develop best-in-class technology to support needed digital currency functionalities.
Collaborate across public and private stakeholders, both leveraging and facilitating private sector dynamism and innovation.
Offer flexible development and testing of project elements.
International Digital Dollar
The importance of the U.S. dollar in international transactions is clear—it continues to represent more than three fifths of central banks’ foreign exchange reserves (Figure 1). In no other area will innovation be more beneficial for dollar users, and nowhere will changes to the dollar as a settlement medium be felt more than in the international domain. At the same time, incentives, geopolitical pressures, and even generational preferences to replace the dollar as an international payment medium are significant amid a perceived undue dollar dependence and contraction of international dollar liquidity. China’s push towards a renminbi CBDC is seen largely amid its efforts to advance renminbi internationalization as an effort to do so at the expense of the dollar’s primacy.
International dollar liquidity is shrinking. The contraction of dollar liquidity, as approximated by cross-border and local dollar credit, in emerging markets and in particular, in emerging Asia raises incentives to seek alternative settlement media (Figure 2). Credit in emerging Asia has contracted from a peak of 6.9 percent of gross domestic product (GDP) in 2013 to 5.1 percent in 2018. This decline also coincided with the share of dollar cross-border credit in emerging Asia falling from 11.9 percent in 2014 to 8.5 percent in the first quarter of 2019. At the same time, the share of the dollar in invoicing is estimated to be around 4.7 times the U.S. share in world trade; in Japan, the share of imports denominated in dollars is estimated to be more than two thirds compared with imports from the U.S. being about one tenth of total imports. The use of the dollar in international transactions also has been accompanied by significant holdings of U.S. portfolio securities, which is particularly true in Asia (Figure 3). Thus, a decline in the international use of the dollar would likely result in a reduction of international U.S. securities holdings which could exert downward pressure on U.S. securities prices and the dollar.
Many central banks have remained cautious about the adoption of CBDC. In part this rests on uncertainty of the effect of CBDC on a central bank’s national financial system and the national economy, and whether CBDC may cause some crowding out of commercial bank monies. There are additional concerns around privacy and security. Wider access to a digital form of central bank money may also be seen with some trepidation although it is already common with bank notes. While concerns about fraud and money laundering can be mitigated by channeling a digital dollar through the U.S. banking system, offshore use of a digital dollar may require additional safeguards.
The possible adoption of digital money by central banks outside the U.S. is considered to be in large part motivated by reducing reliance on the dollar in international transactions. The adoption of a digital dollar in the U.S. is seen as critical to a possible orderly recalibration of the dollar’s attractiveness relative to other digital currencies to support stable international monetary conditions.
The special global status of the dollar implies that any alteration in its issuance provisions need to be assessed and tested with utmost care. Intent and implications must be clearly articulated and understood to guide market expectations about the possible effects of digital dollar adoption. The international role of the dollar may imply that consultation and collaboration with international actors should be considered.
The adoption of a digital dollar as a third dollar format is not expected a priori to alter conduct, provisions for and the effectiveness of monetary policy and financial stability.
The Digital Dollar Foundation and Accenture have formed a core multi-disciplinary team to consider initial designs and proposals for a digital dollar as the first phase of a multi-phase journey. The team will engage with economists, technologists, lawyers, academics, consumer advocacy groups, human rights experts, and ethicists. Over the next several months the team will consider potential designs and proposals along with a multi-step plan to pilot, test, learn, and enhance needed digital dollar capability. The pace and direction of the program will be determined by a governing body that will be proposed along with the completion of the first phase of work. At the end of the first phase, the team intends to present its findings to key stakeholder groups and policymakers and begin consideration of possible future phases to expand the pilot and formalize a broader approach.
Timeline and stakeholder engagement opportunities
Requirements and design sessions are underway and select key stakeholders will be invited to join a series of workshops over the coming months. The team plans to share more information about the proposed designs and plans in the late first half of 2020 at which time public comments and contributions will be invited.
For more information about the Digital Dollar Project, please see DigitalDollarProject.org.