This is the first article in EPCOR’s new Innovation Insights series, a new column focused on providing analyses on the impact of new payment technologies and trends.

Recently, the Digital Dollar Project released its first white paper detailing a proposal for a tokenized U.S. digital dollar to spark debate and discussion in the industry. According to The Digital Dollar Project: Exploring a US CBDC, unlike electronic payments account holders frequently send and receive from their financial institution account, a digital dollar would be a “token-based representation of money issued by a central bank that is a digital bearer instrument.” The funds consumers and businesses hold in financial institution accounts, otherwise known as commercial bank money, are a liability of the institution, not the Federal Reserve. In essence, the Digital Dollar Project is calling for a central bank digital currency (CBDC) that would exist alongside physical currency and reserves held by financial institutions. A digital dollar would not inhibit the development of new initiatives, such as FedNow℠; instead, it would offer an additional option for payments and serve as a foundational system for future innovation.

What is the Digital Dollar Project?
Launched in January 2020, the Digital Dollar Project is a joint venture between Accenture and the Digital Dollar Foundation, an organization led by Chris Giancarlo, former chairman of the Commodity Futures Trading Commission (CFTC). In his role at the CFTC, Giancarlo spearheaded some of the earliest U.S. regulatory responses to digital assets, like cryptocurrencies. Following his departure from the CFTC, Giancarlo created a new group, the Digital Dollar Project, that seeks to encourage the creation of a tokenized digital dollar for the United States. The Digital Dollar Project is a small team, but it facilitates larger forums with leading researchers and policymakers on money, monetary policy, payments and economics.

How would a tokenized digital dollar work?
The group argues for a token-based digital dollar because it could permit direct transactions between two parties, without the need for trusted third-parties to transfer funds and reconcile balances (e.g. ODFIs and RDFIs in ACH). It is like a digital equivalent of the cash you carry in your purse or wallet—paying with a dollar bill simply requires two parties agreeing to a transaction and then the recipient accepting the dollar as the real deal and not a counterfeit. Two people cannot lay claim to the same physical dollar—you either possess it or you don’t—and the group envisions using distributed ledger technology and digital wallets to provide a similar cash-like experience and to guard against duplicate spends and counterfeit digital dollars. It is important to note that financial institutions would still play a vital intermediary role by trading reserves to make cash or digital dollars available to account holders, thus maintaining the existing financial system wherein banks and credit unions use deposits to extend credit to borrowers.

How would a digital dollar work in the real world?
There are more questions than answers at this point, especially around critical topics like user privacy, AML/KYC and cybersecurity. However, numerous factors continue to drive significant interest, research and development in central bank digital currencies. Domestically, several lawmakers expressed frustration at the slow dispersal of COVID-19 stimulus funds via the ACH Network and checks. On June 11, the House Financial Services Committee held a hearing to examine the creation of digital dollars or permitting individuals to maintain Federal Reserve accounts as possible ways to speed up the delivery of government payments and expand access to financial services. Giancarlo testified before the task force and several lawmakers voiced support for exploring a digital currency to continue America’s legacy of innovating financial services.

Across the world, at least nine central banks have piloted or will soon pilot a digital currency, including economic superpowers like China. China’s efforts to introduce a digital currency have raised concerns across the political spectrum that a digital yuan could threaten the U.S. dollar’s decades-long status as the primary reserve currency and lead to other geopolitical and economic consequences. Other factors, notably the growth of the global digital economy and the impact of the coronavirus on payments, are also motivating governments and central banks to encourage electronic payments and test new technology.

What comes next and what is EPCOR doing?
EPCOR is dedicated to keeping our members informed about the latest developments in payments and remains committed to engaging with the industry to elevate members’ concerns. At this point in time, the digital dollar is only an idea, but the concept is sparking exciting new academic research and prompting debates in the payments industry about what the future may bring. The pilots launched in other countries may not lead to wider adoption if the market fails to accept the technology. But, as more countries advance their efforts and private companies, like Facebook, push the envelope with new payment services powered by digital currencies, policymakers and regulators in the U.S. will likely continue their efforts to evaluate the possible benefits and impacts of adopting new payment technologies.

EPCOR is hosting a FREE Special Industry Update webinar on July 15 about the OCC’s Notice of Proposed Rulemaking (NPR) to update 12 CFR 7 and Advance Notice of Proposed Rulemaking (ANPR) for 12 CFR 7, subpart E and 12 CFR 155. The OCC has recently advanced several regulatory changes to support responsible innovation, and the NPR and ANPR are their latest attempts to update digital banking regulations. In particular, the OCC seeks feedback from national banks and federal savings associations about the impact of innovative new technologies, like digital currencies and artificial intelligence, on the banking industry, their organization and account holders.The OCC is particularly interested in learning more about innovation-related issues unique to smaller institutions, as well as issues resulting from the industry's response to COVID-19. We strongly encourage you to participate in this free Special Industry Update webinar to learn more and express your opinion. Your participation will help inform EPCOR's responses to the NPR and ANPR. Register now!