Accenture and the Digital Dollar Foundation have published a whitepaper laying out proposals for the development of a central bank digital currency (CBDC) in the US.
The partnership, known as the Digital Dollar Project, is seeking to “future-proof the dollar” against developments in the way consumers and businesses transact across the world.
Specifically, the Project wishes to protect the USD’s status as the world’s reserve currency, which may be under threat with other national governments exploring launching CBDCs.
The paper also highlights the decline in the use of cash accelerated by the Covid-19 crisis, while also emphasising the potential financial inclusionary benefits of a digital dollar, as is stressed in all discussion around digital currencies.
However, the contribution of a digital dollar to international payments is also emphasised. The whitepaper points to the possibilities of enhancing competition in international payments and integrating financial markets, which would appear to be a statement of intent regarding the importance of the dollar retaining the status it has enjoyed for decades as the world’s de facto currency.
It cites the $30 billion in remittances that were sent from the US to Mexico in 2019 as an example of the potentials in cross-border payments without the need for an intermediary, while also reducing costs and other frictions.
The whitepaper concludes that the US must decide the role it wishes to play as this “wave of digital token innovation gains momentum” and questions over the dollar’s ability to remain a default analog instrument and unit of account.
The US must therefore take a prominent role in development of CBDCs the launch of a digital dollar is a logical step in achieving this.
This is a widespread view among experts in digital currency innovation, who believe that that the US has the most to lose in a race to develop and rollout a CBDC that achieves international use.
Carlos Cocuzzo, economist at ING, has noted that while countries like Canada and Japan could take a ‘wait and see’ approach with their CBDC plans, the US cannot afford to.
“If, for example, the People’s Bank of China were to allow foreign customers or clients to access the digital yuan, that would have an impact on the demand for dollars in the foreign exchange market,” he said in March.
Opportunity for modernisation
The Project puts forward a ‘champion model’ that it proposes a digital dollar should follow. This would operate as a third form of money alongside existing fiat currency and commercial bank money and be distributed through the existing architecture of commercial banks and regulated money transmitters.
The whitepaper also favours a token-based system as it more closely replicates the use of cash, rather than an account-based model which relies on the authentication to updates balances on a ledger.
Addressing privacy, the Project describes the balance that needs to be found between complete anonymity and full traceability. The former would be incompatible with law enforcement, while the latter could inhibit adoption.
The whitepaper cites the Fourth Amendment which protects citizens from unreasonable searches or seizures of property, which one assumes would extend to the possession of digital currency.
Developers of a digital dollar would then need to consider where to “draw the line”, according to the Project, between sensible privacy rights and necessary KYC/AML compliance.
It suggests that one approach would be to treat the CBDC similarly to how cash is in the present system, though acknowledges that the comparison cannot be fully born out: cash is anonymous by its nature rather than by design.
Nonetheless, submitting an IRS form is required when receiving a cash payment of $10,000 or more, which points towards some parameters put in place to control who is allowed to possess digital dollars and in what quantity.
The ‘champion model’ would also explore the use of blockchain technology, possibly with a number of both private and public organisations validating transactions.
A digital dollar would then spark a flurry of modernisation in the existing ecosystems throughout the banking and payments industries.
This could be compared to the advent of the internet and smartphones, which ushered in a wave of innovation and ingenuity in the way people and businesses are able to transact. A digital dollar, the paper claims, would provide a “modern currency architecture” to be leveraged and built upon.
One of these areas is cybersecurity, a key requirement of a digital dollar. While there are many solutions that can mitigate risk in this area, the current financial infrastructure is built on legacy systems that could be prone to exploitation.
The Fed would, of course, demand the highest standards of cybersecurity from any organisations wishing to use a digital dollar, which would require new infrastructure with updated technology.