A digital dollar would support the greenback's role as the global reserve currency, could support underbanked individuals and may be more trusted than another type of cryptocurrency, U.S. Rep. Jim Himes (D-Conn.) argued in a white paper published Wednesday.
The 15-page document, which argues the U.S. should create a central bank digital currency (CBDC), outlines what a digital dollar is (a liability of the Fed), how they compare to cryptocurrencies like bitcoin or tether, some of the needs for a CBDC and the differences between wholesale and retail CBDCs. It also contrasted the potential safety of a digital dollar compared to cryptocurrencies.
The white paper comes as the broader crypto market settles into an extended downturn and conversations about a potential U.S. CBDC continue within the Fed.
"A U.S. CBDC would have advantages over privately issued stablecoins and crypto‐assets, most notably the ability to be backed by the full faith and credit of the U.S. government, like traditional cash, and would provide holders with a degree of safety that may not be offered by privately issued stablecoins because of the risk associated with sponsors’ reserves," the document says.
Other countries are already considering issuing a CBDC, the paper notes.
The white paper also notes that a CBDC could pose risks to privacy or security, as well as broader monetary policy implications. Himes proposed the Fed "experiment with a wide range" of privacy and encryption tools to protect consumer data.
These experiments should include public participation, the paper says.
Whether a U.S. CBDC should be intermediated is another open question, as well as what its architecture should be.
Himes suggests a CBDC should use a semidistributed base, rather than a true blockchain or purely centralized back end. Intermediaries could access this network if they had a specific reason to.
"A U.S. CBDC should be regarded as an alternative rather than a substitute for commercial money and payment systems. Therefore, the architecture and characteristics should not 'squeeze out' activity more efficiently or appropriately provided by commercial entities," the white paper says.
The white paper also argues in favor of a account-based wallet system, rather than a token-based one that has been advocated by groups like the Digital Dollar Project. An account-based system would require the Fed or the appropriate entities to conduct know-your-customer processes on the users of wallets, while a token-based system would prioritize token and transaction verification.
The Federal Reserve has conducted research into both the policy and technical aspects of a digital dollar for the past few years, but various officials have expressed reserves about it arbitrarily issuing one.
Federal Reserve Chair Jerome Powell, as well as a report published by the U.S. central bank, said they want Congress and the Biden administration to authorize the Fed to issue a CBDC before the central bank actually feels comfortable doing so.
In a statement Wednesday, Himes said other countries have made "real progress" in developing their own CBDCs.
"The longer the United States government waits to embrace this innovation, the further we fall behind both foreign governments and the private sector," he said. "It is time for Congress to consider and move forward with legislation that would authorize a U.S. CBDC. I hope that this white paper will contribute meaningfully to that dialogue.”
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.