The digital dollar project is not a central bank digital currency project led by the Federal Reserve, and it is also different from private digital currencies such as Libra. It aims to promote the exploration of central bank digital currencies and propose frameworks and recommendations for the creation of U.S. central bank digital currencies.
Original title: “Research on the Digital Dollar Project”
Written by: Hao Kai, working at HashKey Capital Research
Audit: Zou Chuanwei, Chief Economist of Wanxiang Blockchain, PlatON
In May 2020, the Digital Dollar Project released the first edition of the white paper, which attracted great attention in the blockchain industry. This article mainly studies the digital dollar project and is divided into three chapters. The first chapter analyzes the nature of the digital dollar project, the second chapter introduces the main content of the digital dollar project, and the third chapter summarizes.
The nature of the digital dollar project
The digital dollar project was jointly initiated by the non-profit organization Digital Dollar Foundation and Accenture. The main sponsors include Chris Giancarlo, former chairman of the Commodity Futures Trading Commission (CFTC), former chief innovation officer Daniel Gorfine, Accenture executives David Treat and Pure Storage etc. Accenture has extensive experience in the field of central bank digital currency, and has cooperated with the Bank of Canada, the Monetary Authority of Singapore, the European Central Bank and the Riksbank.
It should be noted that the digital dollar project is not a central bank digital currency project led by the Federal Reserve, but a private project. Therefore, the digital dollar project is essentially different from other central bank digital currency projects. Currently, the world’s major central bank digital currency projects include the DC/EP of the People’s Bank of China, the Ubin project of the Monetary Authority of Singapore, the Stella project of the Bank of Japan and the European Central Bank, and the Jasper project of the Bank of Canada.
At the same time, the digital dollar project is also very different from private digital currency projects such as Libra, USDC and GUSD. The digital dollar project did not propose a new currency issuing agency in the white paper, but suggested that the digital dollar be issued by the Federal Reserve. Therefore, the digital dollar project is closer to a research project that proposes a framework and recommendations for the creation of a U.S. central bank digital currency.
The main content of the digital dollar project
The Digital Dollar Project studies the feasible technical solutions of the U.S. Central Bank’s digital currency, and introduces the potential demand, use cases, special advantages and value of the digital dollar in the white paper. It also points out that the digital dollar can consolidate the position of the U.S. dollar as the world reserve currency .
Technical solutions
issued
The digital dollar is issued by the Federal Reserve, guaranteed by the Federal Reserve’s credit, and backed by 100% reserves. The digital dollar can be regarded as a third form of central bank currency besides cash and reserves, and can be swapped with cash and reserves in equal amounts.
The digital dollar follows the central bank-commercial bank’s two-tier operating model, which is essentially the same as the issuance and circulation model of cash. In the two-tier operation model, commercial banks exchange reserves into digital dollars through the Federal Reserve, the Federal Reserve issues digital dollars to commercial banks, and commercial banks directly provide the public with services such as deposit and withdrawal of digital dollars. The two-tier operation model can follow the current currency issuance and circulation system, and faces relatively small legal and regulatory risks, which will help the popularization of digital dollars.
Interoperability
The digital dollar project emphasizes the interoperability of digital dollars, that is, digital dollars can coexist with existing and future financial infrastructures at home and abroad. The Digital Dollar Project will cooperate with institutions such as the Bank for International Settlements and the International Monetary Fund, and encourage the public to work together to improve the future financial infrastructure.
Tokenization
Tokenization is the conversion of assets, commodities, rights or currencies into a form of representation that can prove and transfer ownership. For the US dollar, the tokenized digital dollar has higher efficiency, programmability and accessibility.
The Digital Dollar Project compares Token-based systems and account-based systems. In a Token-based system, transactions do not rely on a centralized ledger, and the receiver can verify the legality of the transaction, as shown in Figure 1. Distributed Ledger Technology (DLT) can ensure the uniqueness of Token and prevent double spending.
Figure 1: Token-based system, image source: white paper
In an account-based system, the operator of the system authenticates the sender and confirms the account balance on the centralized ledger. Most account-based systems rely on trusted third-party operators to maintain a centralized ledger, as shown in Figure 2.
Figure 2: Account-based system, image source: white paper
privacy protection
Privacy protection is an important issue considered by the Digital Dollar Project. In theory, it is possible to design a completely anonymous and untraceable system, but such a system will breed illegal behavior and be difficult to hold accountable. Therefore, the digital dollar project requires a technical solution that balances privacy protection and supervision.
For privacy protection, the existing central bank digital currency projects have adopted similar design ideas. DC/EP’s digital wallet adopts a hierarchical management mechanism, and perfect user information can realize wallet upgrades. The hierarchical management mechanism is the key to DC/EP’s privacy protection and risk supervision. The fourth phase of the Stella project is also studying the balance between confidentiality and auditability of transaction information, and the privacy enhancement technology adopted must be both auditable.
Use Cases
Digital dollars can be combined with transaction infrastructure such as distributed ledger technology to become a new financial medium and payment tool. At the same time, the feature of programmability can enrich the usage scenarios of the digital dollar. Note that the digital dollar is not intended to replace the existing currency system, but to coexist with the existing currency system, providing the public with a new choice in retail, wholesale and international payments.
retail
In addition to cash payments and credit card payments, the public can use digital dollars for instant peer-to-peer transactions. The digital dollar supports instant sending or receiving of payments without an intermediary, greatly reducing usage costs. For Americans without bank accounts, they can receive financial services through software tools such as digital wallets to promote inclusive finance.
In the context of the new crown epidemic, the existing U.S. dollar system has flaws and deficiencies in the effective allocation of funds and cannot provide a more direct means of payment. Many Americans have to wait a month or more before they can receive assistance. The digital dollar will provide an effective tool for the government to pay individual relief payments. At the same time, the digital dollar can also avoid the problem that cash may carry viruses.
wholesale
Wholesale relies on national payment systems, such as real-time gross settlement system (RTGS) for large payments. Currently, wholesale transactions occur in an account-based system, and only institutions with accounts can conduct wholesale transactions. Digital dollars can provide a Token-based system, providing institutions with more diversified methods. In addition, from a settlement perspective, digital dollars provide atomic transactions, transactions and settlements, which can reduce fraud and reduce counterparty risks.
International payment
The digital dollar can establish a more direct currency relationship, solve the time delay caused by the agency bank model in current international payments, and improve the efficiency of international payments. The US dollar is the most important currency in the world today. The US dollar accounts for a high proportion of foreign exchange transactions, bank financing, and central bank foreign exchange reserves. The widespread use of the U.S. dollar means that a large number of U.S. dollar-denominated securities and other liabilities are held by institutions in other countries. The digital dollar can bring additional benefits to international trade and further consolidate the U.S. dollar’s status as the world’s reserve currency. At the same time, the programmability of the digital dollar can provide customized services and help control the distribution of dollars overseas.
to sum up
The nature of the digital dollar project is quite special. It is neither a central bank digital currency project led by the Federal Reserve, nor is it very different from private digital currency projects such as Libra. The digital dollar project aims to promote the exploration of central bank digital currencies, and propose frameworks and recommendations for the creation of U.S. central bank digital currencies to support government departments’ research on central bank digital currencies.
The initiators of the digital dollar project believe that the central bank’s digital currency has higher use efficiency, programmability and accessibility, which is an important innovation. The United States should play a leading role in central bank digital currencies. The introduction of the digital dollar is a crucial step, which can consolidate the status of the dollar as the world’s reserve currency. Digital dollars should be carefully designed, especially in areas such as KYC, anti-money laundering, and anti-terrorist financing. In this process, there should be cooperation between government departments and private institutions.
From the perspective of technical solutions, the digital dollar project will coexist with the existing dollar system and operate together; the issuance of the digital dollar follows the central bank-commercial bank two-tier operation model; the digital dollar can be related to distributed ledger technology Combined, it becomes a new financial medium and payment tool, and transaction information is recorded on a distributed ledger. It should be pointed out that the first white paper of the Digital Dollar Project did not contain much in-depth and specific technical content.
From the perspective of project follow-up plans, the digital dollar project is also very different from Libra. The Libra project is aimed at issuing tokens, with clearer goals and directions, and all work is carried out around this goal. The digital dollar project did not propose a token issuer. It is a research-oriented project. The follow-up plan is still research-oriented, and some use scenarios and case tests will be conducted.
Although the Federal Reserve has not launched the U.S. central bank digital currency, there are many stable currency projects on the U.S. dollar in the cryptocurrency market. The operating experience of these cryptocurrency projects, as well as the results of research projects represented by the digital dollar project, may become the accumulation of the Federal Reserve’s future implementation of central bank digital currencies.
