The digital dollar will not be a blockchain-based currency issued by the US central bank, but instead a peer-to-peer method of transferring monetary value developed by the US Treasury Department.
A group of lawmakers in the US recently proposed new legislation which would allow the country’s Treasury Department to create an electronic version of the US dollar. Representatives Stephen Lynch (Massachusetts), Jesús Chuy Garcia (Illinois), Ayanna Pressley (Massachusetts) and Rashida Tlaib (Michigan), all Democrats, were behind the ‘Electronic Currency And Secure Hardware Act’ (ECASH Act), which will direct the US Treasury Secretary (Equivalent to the Union Minister of Finance in India) to create this digital dollar, effectively bypassing the US Federal Reserve.
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“As digital payment and currency technologies continue to rapidly expand and with Russia, China, and over 90 countries worldwide already researching and launching some form of Central Bank Digital Currency, it is absolutely critical for the U.S. to remain a world leader in the development and regulation of digital currency and other digital assets,” said Lynch.
Is the digital dollar going to be a CBDC?
With the creation of the digital dollar falling on the Treasury Department in the proposed legislation, the Federal Reserve Board will be bypassed in the issuance of this digital currency. As the central bank will not be involved in the issuance, the digital dollar would not be considered a Central Bank Digital Currency (CBDC). Additionally, while many CBDCs do use the blockchain ledger and internet to function, the digital dollar will not be built on a blockchain or require the internet to operate.
“In my view, it is a mistake to equate and reduce the idea of a ‘digital dollar’ to that of a ‘central bank digital currency.’ The former encompasses a wide spectrum of designs, architectures, and arrangements, while the latter refers only to a narrow segment of that spectrum in which central banks are the exclusive issuers and administrators,” said Rohan Grey, an assistant professor at Willamette University who was consulted on the Bill during a Congressional hearing last year.
“But in my view, the universe of digital fiat currency possibilities that we should be exploring at this stage extends beyond that which the vocabulary of CBDCs allows us to consider,” he added.
The creation of the digital dollar will not stop the Fed from going ahead with releasing a CBDC later in the future. The digital dollar instead seeks to replicate the privacy-respecting features of physical cash.
It will function on no digital transactions ledger, making transactions anonymous but also resulting in transactions being token-based and not account-based. That is to say that if you lose your card or phone where you store your digital dollars, they are gone for good. The digital dollar is akin to having a wallet full of cash, except the wallet is your card or phone.
Thus, it is further separated from CBDCs, which are being mostly built on the principles of stablecoins or other decentralised ledger tools.
“We’re proposing to have a genuine cash-like bearer instrument, a token-based system that doesn't have either a centralized ledger or distributed ledger because it had no ledger whatsoever. It uses secured hardware software and it's issued by the Treasury," Grey told Coindesk.
Grey hopes that the digital dollar programme will benefit millions who are unable to hold bank accounts due to stringent minimum balance requirements or those who are wary of banks due to their propensity to charge hidden fees or freeze funds.
When will the digital dollar be developed?
The legislation has stated that a two-phase e-cash pilot programme would be started within 90 days of enactment and total deployment of e-cash to the American public would happen within 48 months.
But that can only happen if the legislation is actually passed into law. While the Bill has seen support from progressives, consumer advocates, civil libertarians and even some crypto ‘true believers,’ Grey expects most Republicans to oppose the Bill, reported Cointelegraph.
The Bill was introduced to the United States House of Representatives, the lower house of the US Congress, where the Democrats control a narrow majority. After being passed through the House, it would then need to also be passed in the Senate, where the Democrats again only hold a bare majority.