J. Christopher Giancarlo & David Kretz discuss the key findings of the Digital Dollar Project's working paper, emphasising the importance of ‘future-proofing’ the US dollar for a world increasingly shaped by competing digital networks of value.
Business, government, and consumer interest in digital currencies has never been higher. In particular, stablecoins and related fiat-linked instruments have gained attention. The Digital Dollar Project’s new working paper, ‘Modernizing the U.S. Dollar for the Future of Digital Networks’, addresses the opportunities and risks of digital network modernisation of the US Dollar, intended to spur broader consideration, investment, and adoption.
The paper was written by Accenture, David Kretz Consulting, and Oliver Wyman, in close coordination with the Digital Dollar Project’s (Project) Board of Directors and Advisory Board. The Project was founded five years ago with the intention of catalysing research, exploration, and real-world experimentation to drive digital network modernisation of the US dollar.
Enthusiasm for stable digital currencies is based on a number of foundational needs. Many payment system challenges (and related user needs) can be directly addressed through digitally networked currencies. Examples include:
Trapped liquidity: domestic, and particularly cross-border, payment systems often have disparate operating hours which can trap liquidity, creating pools of local money sitting uninvested. Digital currency networks work 24/7 and do not have operating hour gaps (unlike wires) or value limits (unlike US real-time payments).
Elevated settlement and credit risk: when the mutual transfer of funds and/or assets does not happen simultaneously, credit risk is created. One party in a trade receives assets before the other. Digital currencies and related smart contracts enable simultaneous settlement, eliminating such credit risk.
Operational inefficiencies: existing systems rely on messages passed between payors, banks, beneficiaries, and intermediaries. By operating on a shared, synchronised database, Digital Ledger Technology eliminates the need for such messaging, thus reducing operational inefficiencies and related errors.
Unlike Europe, where significant effort is led by the European Central Bank, the US approach is centred in the private sector. Even more so after the recent Executive Orders prohibiting a US Central Bank Digital Currency. We see private sector leadership as a strength.
The US private sector is a model of innovation and success. This is true for stable digital currencies, and our paper highlights a number of successful product introductions and emerging efforts.
However, there are challenges in this decentralised and competitive approach. Broadly, competition can impede the development of interoperable digital networks. The central idea of these efforts is to create digital money, but the term money includes expectations of ubiquity and acceptance. Competition can hinder those expectations. Examples include:
Technology differences. Not all digital wallet addresses are available for all instruments.
Ownership variations. Stablecoins are bearer instruments and tokenized deposits are tokenized versions of bank accounts. The latter have constraints on their transferability.
Value variances. Instruments intended to have stable value against the dollar may have slight variances. A ‘dollar’ may not in fact have the exact same value of a dollar across different digital currency instruments offered by commercial, non-sovereign enterprises.
Our work is intended to address those impediments through collaboration. Such collaboration would not impede innovation or competition. In fact, we believe that collaboration on core frameworks, standards and regulation will broaden the network, increasing adoption and acceptance, all of which will increase ROI for participants.
Simply calling something a ‘digital dollar’ doesn’t mean that it will be accepted as USD 1.00 by payees. For Digital Dollar instruments to function effectively and be accepted as money, they must exhibit the core characteristics of money (store of value, unit of account, and medium of exchange) and be broadly accepted in financial transactions. Fulfilling these roles in a digital context requires that focus be given to four key attributes:
Stable value: digital dollars must maintain stable value to ensure that purchasing power is preserved.
Ease of settlement: digital dollars should settle at or near par value, guaranteeing consistent and predictable exchange rates with comparable forms of money.
Broad interoperability: digital dollars must remain fungible and seamlessly interoperable with existing forms of money and payment systems, facilitating smooth and efficient transactions across various platforms and networks.
Acceptance: digital dollars require broad acceptance at points of sale (POS), as payroll, in foreign exchange (FX) settlement, as vendor payments, and in other financial transactions.
Innovation in critical infrastructure must be managed prudently and address key risks. At a high level, the risks introduced by stable digital currencies fall into two categories:
Risks to the stability of the financial system. One such risk is migration from bank deposits to stablecoin collateral, which may impact lending capacity. Another risk is increased liquidity demands resulting from an increased volume of instant payments.
Risks related to the use and misuse of the financial system’s services and user data. These risks include challenges related to keeping services legally compliant, protecting privacy, and protecting against cybersecurity-related attacks.
At a high level, our recommendations are:
Financial institutions and non-bank financial institutions should drive broader (enterprise-level) business cases and foster stronger industry commitment to innovative products and services. As an example, large institutions should respond to the efforts of highly-focused new entrants. There are leaders today, but we wish to see greater investment across the ecosystem.
Financial market utilities and consortiums should champion interoperability, which facilitates acceptance. You won’t hold a ‘cash equivalent’ if it isn’t accepted by a payee. As such, FMUs and consortiums need to develop new potential settlement models to ensure that new dollars are accepted as readily as existing dollars. An example would be how to treat stablecoins or large, uninsured tokenized deposits with slight variances from USD 1.00.
Legislators should work together with trade associations and policy institutes (such as the Project) to address regulatory ambiguity and advance legislation that creates equal opportunities for responsible innovation. These current ambiguities impede investment, acceptance, and innovation. We applaud recent Congressional efforts including the STABLE and GENIUS Acts.
To support those recommendations and related efforts, the Project’s paper and broader work is intended to establish a clearinghouse of learning and development. Our Advisory Board is comprised of leaders and experts across a broad range of background and functional areas. We intend to drive this work forward through targeted initiatives and publications.
Thirty years ago, the first wave of the internet rolled across the globe: an Internet of Information. Then, the US and other leading democratic societies made sure that the Internet that we know today reflected the values of open and free societies, rather than closed and repressive ones. In that remarkable effort, the public sector and the private sector worked together to set global internet standards and create key governing institutions: the Internet Society, ICANN, and others. The results not only for the United States but also for the free world have been transformational both economically and socially.
Today, thirty years later, we are amidst a new wave of the Internet that is similarly unstoppable and inevitable: an Internet of Value. The question is whether the United States will show similar leadership and conviction. As of this writing, the US official sector has been an inconsistent participant in global conclaves determining basic standards for digital currency. Instead, we see focused attention from economic competitors and economic adversaries. Fortunately, the American private sector is strong and active. US stablecoin operators and banks are doing important work in furthering global US dollar influence. The world now eagerly waits to see how the US official sector supports it.
It is time to recognise this opportunity for Americans and other free peoples to work together again to ensure that the US dollar networks of the 21st Century are not only on the cutting edge of speed, reliability, accessibility, and inclusion, but also reflect enduring virtues of financial freedom and economic liberty. Let’s work together as our enlightened predecessors did and ensure that the future of Digital Dollars protects the viability of the US dollar and its reserve currency status but also enhances universal values of free enterprise and free economic expression against both government and commercial digital surveillance, censorship, and control.
About J. Christopher Giancarlo
The Honorable J. Christopher Giancarlo is Senior Counsel to the international law firm, Willkie Farr & Gallagher and previously served as the 13th Chairman of the United States Commodity Futures Trading Commission. Mr. Giancarlo is Chairman and co-founder of the Digital Dollar Project.
About David Kretz
David Kretz has over 35 years of banking experience, primarily in Treasury Services and Global Payments. Having served at Bank of America and JPMorgan, his roles have included Global Head of Payments and Global Head of Treasury Services Strategy. He is now an independent consultant, focusing on payments and digital currencies.
About the Digital Dollar Project
The Digital Dollar Project is a non-partisan, non-profit organisation devoted to catalysing research, exploration, and real-world experimentation of digital modernisation of the US dollar. The work of the Project is focused on addressing how to ‘future-proof’ the US dollar for a coming world of competing digital networks of value; maintain its reserve currency status, and preserve the universal values for which the US dollar has historically stood.
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