Two visions for the 'digital dollar' seek the same thing: a public option for money

Does the U.S. really need a digital dollar?

That question figured prominently in the background of a “virtual hearing” held Thursday by the House Financial Service Committee’s Task Force on Financial Technology entitled: “Inclusive Banking During a Pandemic: Using FedAccounts and Digital Tools to Improve Delivery of Stimulus Payments.”

There’s a lot to unpack here, and the temptation is to focus on the most urgent and flashiest parts: COVID-19 and digital currency.

Instead, let’s focus on the term “inclusive banking.” In that context, there is another way to ask the question: Does the U.S. need a public option for digital money?

The meaning of FedAccounts

Isn’t the dollar already digital? Someone usually raises such a query at this point in the conversation. If you want to get really philosophical about it, that raises another one: What is the dollar?

Perhaps the purest form is the paper dollar bill. Banknotes are called bearer instruments: simply holding them is enough to verify ownership of them. But it’s more complicated than that. Paper cash is also a direct claim on the central bank — in the case of the U.S., the Federal Reserve. The digits in your bank account, on the other hand, are a claim on your commercial bank.

In fact, central banks already issue digital currency: commercial banks have accounts at central banks and settle transactions between each other digitally.

This is where the “FedAccounts” idea enters the picture.

The term was coined in 2018 by a group of legal scholars led by Morgan Ricks, a professor at Vanderbilt University Law School. As they argued in an academic paper: “Congress should authorize the Federal Reserve to give the general public—individuals, businesses, and institutions—the option to hold accounts at the central bank, which we call FedAccounts.”

Two years later, the idea seems to have sprouted legs in Washington. In March, the exact idea and language appeared in a draft bill from House Democrats as Congress was debating a pandemic relief package. The draft bill also described how the Postal Service would play a role as an intermediary and how the FedAccounts system might integrate with commercial banks.

Ricks, who testified during today’s hearing, called out the U.S. banking system — and in particular the lack of participation in it by a decent portion of the public.

In his prepared testimony, he used the pandemic as the backdrop: “Why has the federal government resorted to distributing millions of paper checks, rather than paying everyone electronically? Part of the problem is that many Americans do not fully participate in the mainstream system of money and payments.”

Ricks cited a 2017 FDIC survey to estimate that around 14.1 million adults and 6.4 million children are “unbanked,” meaning that no individual in the household has a bank account. Another 48.9 million adults and 15.4 million children qualify as “underbanked,” he said, meaning that even though they have access to a bank account, they still rely on expensive services like check cashing and payday loans.

Commercial banks, he argued, have little incentive to cater to these people today.

That leaves Congress with two options, Ricks said: impose “universal service requirements” on U.S. banks, like Canada has done, or resort to “direct provisioning” — a public option for digital money.

Token for your thoughts

Joining Ricks as a hearing witness was J. Christopher Giancarlo, former chair of the Commodity Futures Trading Commission. Giancarlo, whose term ended in April 2019, has since become one of the loudest advocates in Washington for the creation of a truly digital dollar.

Giancarlo and his Digital Dollar Foundation, which has partnered with Accenture to launch the Digital Dollar Project, started advocating well before the pandemic hit. His most consistent message has been that if the U.S. doesn’t start seriously thinking about how it might design a digital version of the dollar, it risks falling behind in a global race to innovate in the area of electronic money.

Giancarlo often paints a picture of a future in which a number of systems — China’s digital currency, perhaps something like Facebook’s Libra, and a digital dollar, to name a few plausible examples — are competing for global market share. The time is now, he says, for the U.S. to start designing a digital money system that reinforces the nation’s “values” on the global stage. The pandemic has only heightened this sense of urgency.

As I argued recently, however, such a design process can’t happen without a serious public conversation that still hasn’t really started. Many of the most pressing design questions are more political and philosophical than they are technical, and they’ll need to be hashed out in the public square.

An illustrative example stems from the apparent disparity between what Giancarlo and Ricks see as the path forward. Giancarlo believes that the dollar should be “tokenized” as opposed to existing simply in an account form. The Digital Dollar Project’s white paper boils the definition of a token down to a “digital bearer instrument.”

Whatever definition you prefer, the “token vs. account” framework has generated an academic debate of sorts. The Bank of International Settlements has called the choice between one or the other a “key technical design consideration” for retail-oriented central bank digital currencies.

At the highest level, the choice refers to how exactly the flow of digital money will be controlled. Will transactions have to run through a centralized database? Or will they be recorded on a distributed ledger that allows for peer-to-peer transactions that resemble passing dollar bills back and forth?

Either way, neither Ricks nor Giancarlo is proposing a system that wouldn’t have ample levels of built-in control. A tokenized dollar might be able to move more freely and independently of the banking system — similar to the way physical cash does — but anti-money-laundering policies and other regulations will undoubtedly be coded into the wallet.

How user privacy will work, from both a technical and legal standpoint, is ample fodder its own separate conversation.

The bottom line, then, is that arguing about whether or not a digital dollar should be tokenized is putting the cart before the horse. Ultimately, Ricks and Giancarlo agree on a more fundamental contention, and one that still lacks popular support in Congress: pandemic or not, if the goal is to increase access to the financial system, leaving digital money innovation completely to the private sector isn’t going to cut it. The people need a public option.