Federal Reserve Conference Casts Doubt over Digital Dollar Project

Panelists at the Federal Reserve’s first conference on the international role of the dollar, are not impressed with the prospect of a US Central Bank Digital Currency (CBDC).

According to a report published on Tuesday, July 5, regarding the conference in June, a panel examining digital assets pointed out that a US-issued CBDC is unsatisfactory because it fails to live up to Fed’s expectations. Furthermore, the panellist identified that the lack of a regulatory framework holds down institutional investment in cryptocurrencies.

The Fed’s summary highlighted: “Panelists generally agreed that technology by itself would not lead to drastic changes in the global currency ecosystem, as other factors such as the rule of law, stability, network effects, and the depth of markets are crucial for the advantages held by dominant currencies.”

According to the review, many tasks are still required to create a more comprehensive policy framework for digital assets to support the development of private-sector stablecoin alternatives to a government-issued digital dollar to adopt a more proactive mindset in countering risks threatening the dollar’s dominance.

The review also refuted claims that foreign currencies, particularly China’s digital yuan or digital assets, pose threats to the US dollar in the international scene. The report described the scope of cross-border CBDCs as still quite limited. According to the report, people are not flocking to the Chinese digital yuan or the Nigerian e naira simply because they’ve gone digital. However, the review pointed out research suggesting that a major market for cryptocurrency comes from efforts to evade capital controls, especially in China’s stringent regime.

The report highlighted the importance of the US CBDC to improve the speed of payments, financial inclusion, and the dollar’s international status. Such a goal can be achieved if there is a private-public collaboration to help develop networks that speed up payments. Financial inclusion can be established if the CBDC technology makes banking more accessible and therefore decreases the number of unbanked households. In this way, the CBDC would help the unbanked while improving the dollar’s international status.

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US Lawmakers Introduce ‘ECASH Bill’ Aimed at Creating Digital Dollar

A group of U.S. lawmakers announced Monday that they introduced a law bill that calls for developing an electronic version of the U.S. dollar that has the same privacy expectations and legal status as fiat currency.

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Supported by serval lawmakers, including Stephen Lynch (D-Mass.), Jesús Chuy Garcia (D-Ill.), Ayanna Pressley (D-Mass.) and Rashida Tlaib (D-Mich.), the bill titled ‘Electronic Currency and Secure Hardware (ECASH) Act,’ would direct the Treasury Department to develop and issue a digital dollar.

The e-cash would be used directly by the general public via widely available hardware devices without the necessary involvement of third-party payment processing or custodial intermediaries. As defined in the draft bill, the electronic dollar would be a bearer instrument that enables people to hold onto their phone or a card. It would be a token-based system, not account-based. If someone were to lose their card or phone in an account-based system, they would lose the funds.

The e-cash would also support peer-to-peer (P2P) transactions and support fully anonymous transactions. Users wouldn’t be subject to any more severe know-your-customer rules. They would access the e-cash dollars via a bank account, P2P transaction or a store, and do whatever they liked with it.

Rohan Grey, assistant professor of law at Willamette University, who provided advice on the drafting of the bill, said unlike other digital dollar proposals, the e-cash would not be issued by the U.S. Federal Reserve and therefore would not be a CBDC. He further stated that the e-cash would not involve any form of distributed ledger, blockchain, or other intermediated account.

“We’re proposing to have a genuine cash-like bearer instrument, a token-based system that doesn’t have either a centralized ledger or distributed ledger because it had no ledger whatsoever. It uses secured hardware software and it’s issued by the Treasury. The e-cash would be purely P2P, capable of offline transactions, and able to be held and used completely anonymously like physical cash is today,” Grey elaborated.

Grey added that the system could help serve people who are unable to hold bank accounts because of minimum balance requirements or those who don’t trust banks because banks may freeze accounts or charge fees.

The Digital-Dollar Dilemma

The global currency market is facing digital disruption. Consumers across the globe are adopting crypto coins, ushering in a more decentralized era in global finance. Governments are taking notice and are moving to develop central bank digital currencies (CBDCs).

The U.S. is facing a classic “innovator’s dilemma” in which it is expected to respond to an insurgent innovator that threatens its dominant position in leading the adoption of an increasingly digital financial system.

Early this month, The Biden administration began to address this issue by signing a recent executive order that directed U.S. government agencies to prioritize the development of policies to regulate digital assets and examine the feasibility and requirements of launching a digital dollar.

On March 10, President Biden issued an executive order that called for the responsible development of digital assets. It focuses on the development of cryptocurrencies, stablecoin, and CBDC. The executive order embraces digital asset innovation and signalled the end of regulatory uncertainty surrounding such digital assets. The order also encourages a whole government approach and inter-agency coordination in the research and development of a CBDC.

In January, The Federal Reserve released a discussion paper that examined the pros and cons of creating a CBDC for the U.S. The paper invites public comments and says that the Fed will not favour any particular policy outcome. The regulator disclosed that the paper is an initial step in determining whether and how a CBDC could enhance the domestic payments system while keeping it effective and safe. As previously mentioned, the Fed is accepting comments in response to the Paper until May 20, 2022.

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Federal Reserve and MIT Begin Developing a New Digital Dollar

The United States Federal Reserve and researchers at the Massachusetts Institute of Technology (MIT) are collaborating on a central bank digital currency (CBDC) initiative called Project Hamilton.

Project Hamilton has now tested a digital dollar that the Fed claims can process 1,700,000 transactions per second.

According to the project’s whitepaper,

“Our primary goal was to design a core transaction processor that meets the robust speed, throughput, and fault tolerance requirements of a large retail payment system. Our secondary goal was to create a flexible platform for collaboration, data gathering, comparison with multiple architectures, and other future research. With this intent, we are releasing all software from our research publicly under the MIT open source license.”

Phase 1 of the project sought to implement two different digital dollar architectures which address the performance, resiliency, and flexibility problems associated with CBDCs.

“The first idea is to decouple transaction validation from execution, which enables us to use a data structure that stores very little data in the core transaction processor. It also makes it easier to scale parts of the system independently. The second idea is a transaction format and protocol that is secure and provides flexibility for potential functionality like self-custody and future programmability. The third idea is a system design and commit protocol that efficiently executes these transactions, which we implemented with two architectures.

Both architectures met and exceeded our speed and throughput requirements.”

According to the project whitepaper, phase 1 of the project highlighted key insights into digital dollar design.

Select ideas from cryptography, distributed systems, and blockchain technology can provide unique functionality and robust performance…

CBDC design choices are more granular than commonly assumed…

[And] by implementing a robust system, we identify new questions for CBDC designers and policymakers to address, regarding tradeoffs in performance, auditability, functionality, and privacy.”

Project Hamilton now plans to move to Phase 2, which will explore alternative technical designs from a wide range of research topics.

“Research topics may include cryptographic designs for privacy and auditability, programmability and smart contracts, offline payments, secure issuance and redemption, new use cases and access models, techniques for maintaining open access while protecting against denial of service attacks, and new tools for enacting policy.”

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Former CFTC chair Chris Giancarlo joins Digital Asset’s board

Chris Giancarlo, who served as chair for the U.S. Commodity Futures Trading Commission until 2019, will be joining the board of directors for blockchain startup Digital Asset.

In a Tuesday announcement, Digital Asset said Giancarlo would be providing counsel on asset tokenization, distributed ledger technology, and the possible impact of regulatory developments on the crypto space. The former CFTC chair is currently working as senior counsel at the Willkie Farr & Gallagher law firm, and co-founded the Digital Dollar Project, a non-profit organization aimed at generating data to inform U.S. lawmakers on developing a central bank digital currency, or CBDC.

“We are on the precipice of a digital economic transformation that will necessitate safe and secure ways for businesses to interconnect and share assets,” said Giancarlo.

During his time as CFTC chair, Giancarlo also served as a member of the U.S. Financial Stability Oversight Committee, the President’s Working Group on Financial Markets, and the executive board of the International Organization of Securities Commissions. Many in crypto and blockchain referred to him as “Crypto Dad” for supporting digital assets during his five years at the CFTC, including overseeing the launch of regulated Bitcoin (BTC) futures and advocating for a “do no harm” approach to blockchain regulation.

Giancarlo was replaced as chair by Heath Tarbert in July 2019, for whom current CFTC commissioner Rostin Behnam took over in 2021 as acting chair before being confirmed by the Senate in December. Though no longer serving in an official capacity for any U.S. government agency, the Crypto Dad was on the board of directors at BlockFi for four months in 2021, and recently joined blockchain investment firm CoinFund as a strategic advisor.

Related: Chris Giancarlo: U.S. risks becoming ‘backwater’ without central bank digital currency

Digital Asset has raised more than $300 million through funding rounds since its founding in 2014, most recently raising $120 million in a Series D financing round in April 2021. The firm has acquired firms in the crypto and blockchain space including Hyperledger, Bits of Proof, Blockstack and Elevence.