Digital Dollar Project Calls for 2-Tiered Distribution System in First White Paper for US CBDC

The Digital Dollar Project's first white paper describes how a two-tiered system underpinning a tokenized dollar could modernize the U.S. financial system.

AccessTimeIconMay 29, 2020 at 1:00 p.m. UTC
Updated Sep 14, 2021 at 8:46 a.m. UTC
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The Digital Dollar Project is proposing a framework for the creation of a U.S. central bank digital currency (CBDC).

The group published its first white paper Friday, detailing the need for a tokenized version of the U.S. dollar and some potential avenues for building this system. A digital dollar could help the U.S. maintain the dollar’s status as the world’s reserve currency while serving a broader array of individuals and entities than the current financial system, the paper says.

The group is helmed by former U.S. Commodity Futures Trading Commission (CFTC) Chairman Chris Giancarlo, Gattaca Horizons CEO and former CFTC Chief Innovation Officer Daniel Gorfine, Accenture Senior Managing Director David Treat and Pure Storage CEO Charles Giancarlo, with contributions from a number of Accenture analysts and directors. The Digital Dollar Foundation, which is working with Accenture on the project, was launched earlier this year.

“What we’re hoping to be is a catalyst for a discussion here in the United States about what role the U.S. will play in this ongoing and accelerating global debate over the future of money in a new digital age,” Chris Giancarlo, now senior counsel at Willkie Farr & Gallagher LLP, told CoinDesk.

As such, the paper explores the current U.S. financial system and advocates for a digital dollar that utilizes a “two-tiered distribution architecture,” with commercial banks and other regulated entities acting as intermediaries between the Federal Reserve (the U.S. central bank) and end users. 

These commercial banks would distribute the funds much the way ATMs distribute cash to customers, the paper said. 

The digital dollar envisioned by the paper could even operate alongside private stablecoins, the paper said.

“When we do big things in the United States as we did with the space program, as we did with the internet, it’s almost always a very healthy partnership with the private sector and the public sector, with each learning from each other, with the private sector … bringing innovation to bear and the government looking out for core principles of privacy and individual rights and liberties and getting that balance,” Giancarlo said. 

Two-tiered system

Any U.S. CBDC should maintain the existing two-tier banking system, the paper said. 

“A two-tiered banking system preserves the current distribution architecture and its related economic and legal advantages, while inviting innovation and accessibility,” it explained. 

Under this model, the Fed would issue digital dollars to banks, while users could either store funds in their accounts or hold onto these tokenized dollars in their own digital wallets. 

The bank would be able to lend against the funds held in accounts, the paper said.

“Unless the digital dollar is put into a safe deposit-like storage or custodial solution, once exchanged for balances in a bank account it is fungible with other monies as it is on a banks’ balance sheet,” the paper said.

This type of system will ensure that individuals and entities store funds at commercial banks, the paper said. 

“These deposits underpin the U.S. entire economy by enabling banks to lend funds to borrowers for activities such as buying a home, building a new factory and everything in between,” the paper said. 

Treat told CoinDesk that part of the Digital Dollar Project’s work would be helping stakeholders understand this proposed system – basically understanding where the tokens are moving within the ecosystem. 

The two-tiered system would also need to be able to satisfy both individual privacy concerns and regulations around financial transactions, including anti-money laundering and know-your-customer (AML/KYC) rules, he said.

“To have the end points of where the tokens can move be a regulated wallet infrastructure we think is likely the best answer, and part of what we’ll test,” he said. 

Accounts vs. tokens

The paper also contrasted the concept of a token-based digital dollar with an account-based digital dollar, with a preference for a tokenized system. 

A tokenized dollar would be more broadly applicable, Giancarlo said. In reference to a series of bills introduced earlier this year by U.S. lawmakers that proposed account-based digital dollars, he said a tokenized version would be more broadly applicable. 

While the digital dollar proposals laid out before Congress refer specifically to stimulus payments meant to benefit American taxpayers impacted by the COVID-19 pandemic, the group’s view is the digital dollar should be more broadly applicable.

“We think a true U.S. CBDC addresses that problem but then so much more, including building a new architecture for money for generations to come that will serve not just under-banked populations here in the United States during a crisis ... abroad and [spur] financial inclusion globally,” Giancarlo said.

The tokenized dollar should be faster, more efficient, less costly and able to extend the dollar’s utility, he said.

Here, too, it’s important to firmly define what’s being discussed, Treat said. 

“One thing that we’re trying to do with the paper and in our talks is introduce a set of language to just be crystal clear or make the conversation more clear,” he said. “Part of what the paper is doing is working on definitions and that lexicon for everyone. The basic notion of the interplay [of] an accounts-based system and a token and a token-based system, I think, is incredibly important.”

Pilot programs

The next step for the project is to develop a series of pilot programs and tests for a number of potential use cases outlined in the paper. The use cases are broadly categorized as being either part of domestic payments, international payments or government benefits, and range from direct peer-to-peer payments to issuing government aid in response to disasters. 

Giancarlo said the pilot programs may be evaluated based on a number of factors including the proposed token’s impact on the money supply, technological choices, privacy from both government intrusion and commercial exploitation, impact or use in sanctions and compliance with AML/KYC laws, among other concerns.

“What about the ledger itself? How permissioned or permissionless, or is it a distributed ledger at all?” Giancarlo said. “All of these issues need to be worked out so that we can come to the table with a lot of events.” 

Even after all of the theoretical planning, the proposed tokens would still need to be tested in real-world scenarios, he added. 

Past the planning stage, it’ll require lawmakers and policymakers to actually execute any potential digital dollar solution, Treat said. 

“We’re here to get the conversation going, to provide thinking, experience and expertise, and we will leave it to the policymakers to set the pace,” he said. “So our ability to comment on what’s possible, the value of it, where it’s headed and the importance in the long term is the most important part.”

This process will all take time, Giancarlo said. He projected that the process of building a digital dollar could take five to 10 years, but added, “we’ve got to start now.” 

“We very much say the dollar is way too important to try to be done overnight or something over the weekend,” Giancarlo said.


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