There is a frenzied, if inaccessible, debate taking place among think tanks, policy experts and media outlets signaling that the U.S. Federal Reserve should launch a centrally issued digital twin of the U.S. dollar.
Among the many arguments for why this is necessary is that the U.S. is losing ground to China, whose government has a national blockchain strategy, including a real-world prototype central bank digital currency (CBDC). While these arguments are valid, they miss the larger point, which is that by today’s hyper-competitive digital currency and blockchain standards, the U.S. may not be a laggard at all, but rather is already winning the race for the future of money and payments.
In trying to “out-China China” on these important issues, we miss that the future of money and payments should be about enhancing domestic financial optionality. Upgrading payment and banking systems,, enhancing interoperability and open banking standards, requires a major upgrade in the technology stack that supports value transfer and more open financial services innovation.
That was exemplified by the original version of the COVID-19 relief bill, the Cares Act, which called for the creation of a digital dollar to expedite domestic stimulus payments while trusted, privately-issued digital currencies were already in circulation along with a growing and interoperable blockchain-based payment system.
Legacy financial rails, such as ACH, EFT and other interbank transfer networks, have not had an update in 50 years. Blockchain-based payment systems represent the completion of a lot of unfinished work in the financial services value chain, which has left more than 1.7 billion people around the world as unbanked, rather than a source of disruption or circumvention. China’s fintech and mobile money titans collectively process over $67 trillion a year. That alone does not constitute a threat to the U.S. dollar as a global reserve currency. The vibrant crypto asset industry that calls the U.S. home has been advocating for a more open global payment system for years.
A true internet of value would advance important first principles, such as privacy, trust, democratization of assets and prosperity, rather than clinging to dated and largely ineffective financial rules, such as the Bank Secrecy Act.
The bottom rung of economic mobility is access to low-cost payments. In a world where individuals rely on nationally issued identity, billions of people are on the financial sidelines – a source of global risk and destabilization. We need new forms of digital financial services plus internet-native digital identification and authentication, which preserve privacy, but provide assurances that financial crime compliance standards are being adhered to and modernized.
The U.S. should lead the way on both charges, promoting open internet-based financial services while enabling new forms of inclusivity. We should aim to be a pioneer in building the internet of value for digital assets, identity and other breakthrough innovations.
The investors, entrepreneurs and diverse teams building this new wave of platforms are increasingly calling the U.S. home, powering U.S. economic competitiveness and the post-COVID-19 recovery. COVID-19 revealed areas of pre-pandemic vulnerability, including our inability to execute financial transactions at population-scale domestically and through poverty-fighting remittance corridors. We should be able to exchange value, monetize and own digital assets, as well as build internet-native financial services firms, with regulatory clarity.
In the maiden decade of blockchain, digital currencies and crypto assets, a $2 trillion industry was born largely on public digital commons, rather than on risk-prone and costly technology implied by a government-administered CBDC, which would shift technology risk to the public sector and, thereby, to taxpayers.
The more the U.S. embraces these financial innovations and industries of the future, the more the prospects of scaling internet-level prosperity and access becomes possible. The meteoric rise of the nine-year-old Coinbase, a crypto-native financial exchange, which is now the United States’ most valuable exchange bar none, is emblematic of the opportunity. Proving regulatory clarity and a national industrial policy that embraces exponential technologies such as blockchain can make all facets of our economy more resilient, future-proof and competitive.
Protecting vulnerable critical infrastructure, which is imperiled by the twin threats of climate change and single point of failure designs, such as the Colonial Gas Pipeline, which was hobbled by a ransomware attack, is a reason for blockchain-based thinking. The same holds true for the void of open banking and financial access across the country. And providing safe e-voting or authentication options that can enhance trust on the internet without divulging personal information can at once improve national competitiveness and international standing for the U.S.
The fastest way to disrupt the very financial system that has made the U.S. the economic and political envy of the world would be to succumb to the pressures of launching a centralized digital currency. While the U.S. banking and financial system can improve how it deals with rampant cyberthreats and an impossible digital transformation agenda that favors the largest banks in the country, CBDCs would disrupt the two-tiered banking system, while providing uncertain outcomes for consumers and markets.
The two-tiered banking system is the structure that enables household-name banks to interface directly with a country’s central bank, enhancing consumer protection and regulations, while at the same time enabling central banks to convey monetary policy. The democratic promise of cryptocurrencies and digital currencies is the ability of powering internet-level prosperity and merchant acceptance – the technological equivalent of digital legal tender, while importing sound monetary policy.
A free market-based movement is afoot driving fundamental, open and compliant innovations in the movement of money and value on the internet. This digital currency and blockchain economy is building the next generation of digital financial services firms in the U.S. and around the world, creating thousands of jobs and an outsized share of market value. That the majority of asset-referenced stablecoins in circulation today are pegged to the U.S. dollar speaks to how the fundamental trust in the U.S. dollar as the global reserve currency of choice is being preserved by digital currencies, not circumvented by them.
There are material risks in the issuance of a digital U.S. Federal Reserve dollar. Most value-added money in circulation today rides on private or consortium-backed rails, a U.S. CBDC would transition substantial technological and operational risk from the private sector, which is powering safe and well-regulated digital currencies and assets on public blockchains, to the public balance sheet – and therefore shouldered by taxpayers. Also privacy and censorship resistance is more likely to be protected by a vigorously competitive rules-based market than with general purpose, government-issued digital currencies.
We need a public-private balance that makes the U.S. dollar the reference asset for all manner of value-added activity. Whether enshrined on paper bills or emblazoned on coins, plastic cards or, in the case of dollar-digital currencies, in code, the key is to offer the full faith and credit of the U.S economy across a range of payment instruments and rails. Ultimately, that will be good for consumers, the economy and global security.
Dollar digital currencies that are backed 1:1 with assets preserved in the two-tier U.S. banking system (like USDC), import all the safety, soundness and values of the U.S. dollar, turbocharging it with the power of the internet. Your financial needs don't take bank holidays, and neither should your money.
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