Digital dollars exploded into mainstream headlines earlier this week. As the U.S. House of Representatives scrambled to craft a bill that would authorize trillions of dollars in payments to “consumers, states, businesses, and vulnerable populations during the COVID-19 emergency” it introduced the digital dollar concept that could potentially let the Federal Reserve, responsible for printing U.S. dollars, send stimulus money directly to individuals.
Inspired by bitcoin and its underlying blockchain technology that lets individuals send value to each other without any middlemen, the concept had been percolating behind the scenes in blockchain skunk works for months when millions of people around the world saw first hand evidence of how the technology could impact them personally. Why give the money to banks and hope it trickles down, if the intended recipients are actual citizens?
A previously scheduled meeting at blockchain consortium Hyperledger, about a new project called eThaler using the ethereum blockchain to create a central bank digital currency (CBDC), took on new meaning, and urgency. Until the bill, sponsored by California Congresswoman and chair of the House Financial Services Committee, Maxine Waters, mentioned the use of digital dollars, their benefits were largely theoretical. Now, all of a sudden, there was a very clear use.
Such a prominent mention of digital dollars in a House bill, in relation to the Federal Reserve, means that the largest economy in the world has officially entered what is an increasingly heated race between a number of advanced projects at central banks around the world to be the first to issue this new kind of currency. “The concept of the CBDC seems to have gotten an imprimatur from the house finance committee,” said Vipin Bharathan, 59, chair of the Hyperledger identity working group, and a former senior developer at JP Morgan Chase, speaking at the meeting. “That’s a significant step, and I argue that such crisis situations always produce new ideas, and acceptance of new ideas, that will live on long after the coronavirus has burned through the world.”
At the time of publication, an estimated 21,000 people had died from the COVID-19 globally, resulting in countless business closures, and wiping out billions of dollars in wealth. While it seems unlikely that any of the digital dollar projects currently in the works would be ready in time to transmit the trillions dollars being sought by the Congress, eThaler is a great example of the race to accommodate law-makers’ increasingly opened minds.
Another draft bill, offered by California Democrat and Speaker of the House, Nancy Pelosi and other democrats, originally also included the “digital dollar” language, which was stripped shortly after it started circulating in media reports. The Senate approved a $2.2 trillion stimulus package, without mention of a digital dollar, earlier today.
First conceived earlier this year, eThaler gets its name from the thaler, a silver coin used throughout Europe for hundreds of years, from which the word “dollar” is derived. A group of professionals from consulting firms Accenture and InfoSys and the Itau Bank in Brazil, have been working on the open-source project in their free time for the past six months to explore the future of central bank currency issued on a blockchain.
The token-issuance system will comply with the Token Taxonomy Framework, a collection of standards for enterprises using ethereum, developed by JPMorgan Chase, ConsenSys, and other members of the Enterprise Ethereum Alliance, in April 2019. The group, informally called eThaler Labs, is building on Hyperledger Besu, an enterprise version of ethereum submitted by ConsenSys subsidiary PegaSys to Hyperledger and approved last August. A slide presented at today’s meeting by Bharathan, who worked for 16 years at BNP Paribas before founding blockchain startup DLT.NYC, laid out how eThaler would work.
First and foremost, eThaler is being designed to be fungible, meaning regardless of what central bank might end up minting its currency using the technology, every token will have the same value as the underlying asset, regardless of whether the token had been previously used for some nefarious purpose. Like traditional fiat currency, any initial supply of eThaler-based tokens would need to be increased through further minting by the central bank, or destroyed through a process called burning. But like bitcoin, it would also be able to be divided into as many decimals as the bank desired, a crucial component for so-called micropayments, tiny online transactions not currency feasible with fiat currencies. Lastly, and perhaps most controversially, the asset must be “pausable” in case a bug in the software is discovered, or an update is being implemented.
The important part about this, and other more advanced work, is that the role banks play, or don’t play, is little more than a design decision. Another slide reviewed by Bharathan showed that eThaler could be implemented as a wholesale solution, meaning it would only be issued to institutions with Fed accounts, and could be used to instantly move large values directly to one another without needing to go through the Fed itself. Another implementation, for retail however, would operate just like cash, except it could be disseminated from a central bank directly to the people.
In addition to complying with the Token Taxonomy Framework, eThaler-based tokens will comply with the ERC-1155 token standard. Unlike other ethereum token standards like ERC-20, 1155 is a single standard designed to support multiple kinds of tokens. So, for example, a central bank could use it to mint fungible digital dollars or bonds, according to the project’s lead developer, Mani Pillai, president of Swapshub capital markets infrastructure firm, who was also at the meeting. In the coming weeks, the entire structure is expected to be offered to open source developers, meaning anyone will be able to build on it. While developement of the codebase and launch of a test network will be governed by a capital markets special interest group, formal admittance to Hyperledger could take months.
However, none of this is guaranteed. A diverse set of skeptics have long expressed doubt in the idea of a central bank digital currency. On one side, bitcoin purists argue that the central bank itself is a middleman that blockchain makes unnecessary. On the other are traditionalists who point out that the vast majority of global currency is already digital, no blockchain needed. According to Bharathan though, speaking in the meeting, a wallet issued by a central bank, and filled with cash, would remove the counterparty risk of the bank in the middle going under. “There is nothing standing between you and the central bank guarantee,” he said.
In an interview with Bharathan after the meeting he was quick to point out that his team’s work is among the youngest projects in the space. Perhaps the most prolific organization in the burgeoning digital dollar space is New York-based R3, which is funded by $100 million venture capital from big banks and others, and is already in advanced stages of work with four different currencies. Specifically R3 says it is now working with the Swiss National Bank to explore a central bank digital currency for settlement; the Bank of Thailand for interbank settlement; Sweden’s Riksbank on a digital version of the Swedish krona; and the European Central Bank to explore CBDCs in Europe.
On the other hand, “China has been doing this for four years,” says Bharathan. In fact, the Chinese government’s secretive work on its own CBDC, is likely a contributing factor to Congress’s interest in digital dollars. In June 2019, Facebook revealed its own plans to help launch a “stablecoin” backed by a basket of global currencies, designed to make it easier for those without traditional banks to engage in global commerce. The news reportedly accelerated China’s own plans and prompted comparisons between China’s CBDC and Facebook’s stablecoin. So serious is the competition to be first, that this January, the former chairman of the CFTC, Christopher Giancarlo, co-launched the Digital Dollar Project with consulting firm Accenture specifically to advocate for the creation of a U.S. digital dollar.
As the world of fiat and cryptocurrency increasingly merges, it’s not the currency itself that most has Bharathan’s attention. Rather, he thinks the biggest opportunity is for smart wallets that store the currency that can be programmed to automatically execute any number of tasks, from moving funds to a savings account, investing, or being made aware changes in tax codes, not just for individuals, but institutions. “It may not start off with a bang with a wallet holding a trillion dollars,” says Bharathan. “But over time, it may.”