China's DCEP enters testing, take a look at the United States' "Digital Dollar Project" plan.

The excitement surrounding the secretive testing of the People's Bank of China's central bank digital currency DC/EP by state-owned banks in the blockchain industry prompts a closer look at the "Digital Dollar Project" initiated by the United States in response to China's rise in the field.

Information Source: Digital Dollar Foundation
Translator: Lu Jiangfei

The former chairman of the Commodity Futures Trading Commission (CFTC), Christopher Giancarlo, established a non-profit organization, the "Digital Dollar Foundation," specifically to promote the idea of a "digitized dollar" in order to "counter" China's digital renminbi project.

Christopher Giancarlo, former chairman of the Commodity Futures Trading Commission (CFTC)

In an interview with the media, he stated, "As China's digital renminbi project progresses smoothly, if the United States falls behind China, it may lose its global economic leadership position. The goal of the Digital Dollar Foundation is to uphold the national interests of the United States."

The Digital Dollar Foundation is a non-profit organization dedicated to researching the conversion of the dollar into a blockchain-based digital currency and exploring the potential benefits of a digitized dollar. Other founders of this foundation include Daniel Gorfine, a former CFTC official responsible for financial technology research at regulatory agencies, and Charles Giancarlo, former executive at Cisco and brother of Christopher Giancarlo. The foundation and the "Digital Dollar" project have received support from the consulting giant Accenture, with the founders providing initial funding for the foundation, and Accenture focusing on providing research and logistical support.

Below are the specific details of the "Digital Dollar Foundation" project, as sourced from the project introduction.

Since Western Union first used telegraph networks for remittances in 1871, the basic processing flow of this "ancient" business has remained largely unchanged, despite the rapid advancements in digital technology. You need to send a message to a network containing payment information, and a bank with equivalent accounts and other functions for both the remitter and the recipient is required to provide funds for the transaction. The entire process can be very slow, expensive, and full of uncertainties, especially when it comes to cross-border remittances and dealing with issues like exchange rate fluctuations.

The pace of change in remittance processes is slow, but the demand for currencies with more functionalities to support faster, more certain, and easier access is increasing, drawing the attention of central banks worldwide. More than two-thirds of central banks have begun exploring new payment applications, with some banks becoming potential innovators in new technologies, such as tokenization, which provides more possibilities to represent and transfer value. Here are a few examples:

• The Riksbank, Sweden's central bank, has begun testing the digital currency e-krona in a pilot environment, making it the first central bank to do so;
• China is exploring a digital currency issued by the central bank, known as the Central Bank Digital Currency (CBDC), which is expected to be launched in the near future;
• The European Central Bank (ECB) has been actively exploring various functions of digital currencies.

However, central banks are not the only institutions exploring how to meet the demand for new currency functionalities. Tech giants and other financial institutions are also seeking innovation, such as:

• Facebook-backed Libra has shown that private, non-sovereign stablecoins can serve as a medium for cross-border payments and play a significant role in remittances;
• Enterprises including Goldman Sachs, JP Morgan, MUFG, and Walmart are also experimenting with developing their own digital currencies to provide users with payment technologies and functions not currently available with their national currencies.

These private companies have greatly contributed to driving innovation, but now is the time to explore the implementation of digital dollars to demonstrate the future of the US dollar. The recently established Digital Dollar Foundation has called for innovation in the US dollar and will collaborate with global leaders in central bank digital currencies like Accenture to establish the Digital Dollar Project to research the potential pathways for tokenizing the US dollar, as well as the impacts on the US and global economic and financial systems.

The project will focus on three main aspects:

1. Encouraging research and public discussions on the potential benefits of digital currencies;
2. Convening thought leaders and actors in the private sector;
3. Proposing viable solutions that support potential models in the public sector.

For the practical steps required for the US central bank digital currency project, the Digital Dollar Project will develop a framework and further explore the design schemes and methods of designing digital currencies through a deliberative process, including stakeholder meetings, roundtable discussions, and public forums. While considering the core interests of the government, the project will focus on a series of key guiding principles, building upon the existing efforts supported by the Federal Reserve. The Digital Dollar Project will ultimately find a clear solution for a central bank digital currency that can enhance the effectiveness of monetary policy and financial stability, provide the necessary scalability, security, and privacy for retail, wholesale, and international payments, and support integration with existing financial infrastructure.

Since the introduction of paper currency by the US central bank in the 19th century, there has been no innovation in the US dollar. The US dollar issuance has been strictly domestic, with many limitations in its functionality. The Digital Dollar Project aims to drive the next major innovation for the US dollar: a digital dollar issued by the Federal Reserve System, enjoying the full faith and credit of the US government, representing a third form of central bank currency beyond banknotes and reserves.

The digital dollar will serve the foundation of digital financial markets, offering a new medium of exchange that is convenient, easily transferable like sending a text message, settling without being limited by time and space. The digital dollar will boost confidence in digital payment transactions and expand the scope, diversity, and flexibility of US dollar payments.

The digital dollar issued by the Federal Reserve will expand the scope, usage, diversity, and flexibility of US dollar payments, supporting retail, wholesale, and international payment use cases:

• Central bank-issued currencies are no longer suitable for online retail payments. While physical cash remains important for small payments, the digital dollar will provide new options for digital transactions, offer real-time P2P payment services, and provide more diverse payment methods—especially during financial crises, giving the currency greater autonomy. The digital dollar can be distributed to end-users through commercial banks and trusted payment intermediaries, providing mechanisms to ensure and promote financial inclusivity.
• Wholesale payments will be based on the national payment system, generally settled through interbank clearing using the central bank's settlement securities and other large-value payments. Central bank currencies typically play a vital role in large-value payment transactions, meaning that the digital dollar can provide more diversified access for large payments and support the emergence of digital financial market infrastructure.
• Currently, digital cross-border payments cannot use the US dollar, but digital dollars can establish more direct currency relationships, reduce risks, address flaws in the existing correspondent banking model, enhance international payment competitiveness, and promote financial market integration. Moreover, using digital dollars for cross-border and offshore transactions allows the US dollar to be directly used for digital payments, such as remittances and large payments, and provides the possibility to support offshore securities settlements.

The Digital Dollar Project aims to incorporate a wide range of stakeholders' perspectives and needs, providing implementable solutions, including phased, careful testing to meet existing performance standards of the US financial infrastructure. Before being widely implemented in all use cases, the digital dollar may initially be limited to some scattered pilot projects, following these ten key principles:

1. Ensure the real benefits and inclusive benefits of the digital dollar before widespread adoption, as it will become a liability of the Federal Reserve and a component of the monetary base.
2. Maintain the effectiveness of monetary policy and financial stability, ensuring the forward-looking nature of the US dollar.
3. Ensure the privacy and security required for payment transactions.
4. Comply with existing Know Your Customer/Anti-Money Laundering (KYC/AML) requirements, distribute through regulated payment intermediaries and banks, maintain a two-tier banking system.
5. Establish special provisions for those unable to use digital payments.
6. Enhance economic policy insights through digital payment transparency.
7. Provide comprehensive seamless integration with existing core banking and payment functions, custody solutions, and e-wallets.
8. Develop top-notch technology to support the required functionalities of digital currencies.
9. Promote collaboration between public and private stakeholders to leverage and promote the vitality and innovation of the private sector.
10. Provide flexible project element development and testing.

The importance of the US dollar in international transactions is evident, with over three-fifths of global central bank foreign exchange reserves held in US dollars (see Figure 1). For US dollar users, any innovation, no matter where it originates, has a direct impact on the US dollar and its role as an international settlement medium globally. However, some view over-reliance on the US dollar as problematic, and with the gradual shrinkage of US dollar international liquidity, motivations, geopolitical pressures, and generational preferences are prompting many to consider alternatives to the US dollar as an international payment medium. For example, the introduction of the Digital Currency Electronic Payment (DCEP) by China is seen as a significant move to promote the internationalization of the renminbi, which could pose a threat to the US dollar's hegemonic status.

Figure 1: Global Central Bank Foreign Exchange Reserve Scale

Figure 2: International US Dollar Liquidity

Figure 3: US Portfolio Securities Holdings in Various Countries

International US dollar liquidity is shrinking. In emerging markets, especially in Asia, cross-border US dollar payments and local US dollar credit liquidity are decreasing, with growing motivation to seek alternative settlement mediums (as shown in Figure 2). The size of the Asian credit market has declined from a peak of 6.9% of GDP in 2013 to 5.1% in 2018, and the US dollar's share in the Asian cross-border credit market has decreased from 11.9% in 2014 to 8.5% in the first quarter of 2019.

Meanwhile, the US dollar's share in the bill business is estimated to be about 4.7 times the global trade share of the US. In Japan, the share of US dollar-priced imports is estimated to be over two-thirds, and the share of imports from the US accounts for about one-tenth of total imports. As the US dollar is extensively used in international transactions, many also hold significant amounts of US securities assets, particularly in Asia (as shown in Figure 3). Therefore, a decrease in the use of the US dollar globally could lead many countries to reduce their holdings of US securities, potentially putting downward pressure on US security prices and the US dollar itself.

Many central banks in various countries remain cautious about issuing central bank digital currencies. Central banks are concerned that central bank digital currencies may impact the national financial system and economy, potentially leading to bank runs. Additionally, digital currencies have other issues such as privacy and security concerns. While US dollar banknotes are widely used, there are still some worrisome situations, prompting a desire for a wider use of digital forms of central bank currency. Introducing digital dollars into the US banking system can alleviate concerns about fraud and money laundering, but additional protective measures are still needed for the offshore use of digital dollars.

It is believed that the reason why other central banks adopt digital currencies is largely to reduce dependence on the US dollar in international transactions. Therefore, as other digital currencies become increasingly attractive in international transactions, the US may need to orderly readjust its dollar strategy to continue meeting the conditions for serving as a stable international currency. Therefore, the adoption of digital dollars in the US is crucial.

The special global status of the US dollar also means that any form of US dollar issuance or changes to the US dollar must be carefully evaluated and tested. We must clearly express and understand the intent and implications of digital dollars to guide the market on how to address the potential impacts of adopting digital dollars. Moreover, as the US dollar is an international currency, consultations and cooperation with policymakers from other countries are necessary.

It is important to note that digital dollars should not be expected to change the behavior, regulations, and effectiveness of monetary policy and financial stability as a third form of the US dollar.

The Digital Dollar Foundation and Accenture have assembled a multidisciplinary core team that will consider the preliminary design and recommendations for the first phase of digital dollars, collaborating with economists, technologists, lawyers, scholars, consumer advocacy groups, human rights experts, and ethicists. Over the next few months, the team will consider potential designs and recommendations, as well as a multi-step plan aimed at experimenting, testing, learning, and enhancing the necessary functionalities of digital currencies.

The progress and direction of the program will be determined by a governing body, and upon completion of the first phase work, the Digital Dollar Foundation will propose the establishment of the governing body. At the end of the first phase, the team will present the research results to major stakeholder groups and decision-makers and begin considering the next phase of work, expanding pilot projects and determining broader solutions.

This article is authorized for reprint by ChainNews, original source: ChainNews (ID: chainnewscom)

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