The proposed digital dollar could be the breakthrough app many blockchain proponents are waiting for, but this excitement needs to be balanced by practical considerations.
On June 30th, 2020 the U.S. Senate Banking Committee held a second hearing to discuss the potential for a digital U.S. dollar, sparking excitement and debate across the blockchain and crypto community. The adoption and tokenization of the U.S. dollar, the most liquid currency market in the world as well as the global reserve currency, onto a blockchain is exciting news, but it is not without its detractors.
Remember, the bitcoin blockchain was explicitly designed to disintermediate the incumbent financial infrastructure. Additionally, bitcoin was specifically designed to not operate like the U.S. dollar via its hard cap, and the lack of a centralized authority with the ability to issue new units at will.
Specifically, a topic mentioned throughout the hearing centered around what governmental policies were appropriate and applicable in this situation in terms of state by state regulation versus a single federal mandate. Regulators, incumbent financial institutions, and leading crypto organizations are all expected to play large roles in the development of consistent and standardized policies to lead this experiment, and hopefully, implementation.
So, in other words, the proposed U.S. digital dollar would seemingly be flying in the face of what the creators and early adopters of bitcoin intended; that is fine. No technology or financial innovation ever develops exactly as it was originally designed or intended. Looking at the cell phone or cell phone marketplaces provides painfully obvious examples of how technologies and innovative new ways of storing and transferring information can evolve in unexpected ways.
Lastly, the U.S. is not the only country exploring the idea of a crypto-fiat hybrid, the People’s Bank of China (PBOC) is currently engaged in a similar project. A key component of the hearings to date is the national security and national competitiveness aspect of developing some sort of crypto-fiat hybrid.
Put simply, the fact that we are even discussing the potential of a U.S. digital dollar is both another sign of the shift toward permissioned solutions (exemplified by the rapid rise of stablecoins) in the blockchain space, and an indication that regulators and governments are (finally) realizing the power of blockchain and cryptoassets. These are great developments, and should be celebrated by the entire community, but like any potential game-changing application, a digital dollar should not be rushed.
Let’s take a look at a few of the issues that, while assuredly being worked on, could still represent stumbling blocks to the digital dollar coming to market.
Privacy. Consumer and data privacy are increasingly issues that are at the forefront of any business or technology decision, and the proposed digital dollar is no exception. Taking politics out of the equation for a second, which can be easier said than done in reality, the implications for hacks and breaches of a national level blockchain could be devastating. While the final form of how this nationally accessible and useable blockchain is still ambiguous, the fact that, potentially, every single transaction made using the digital dollar would be recorded (and possibly reviewed) by a centralized governmental authority should give all participants reason to pause.
Who exactly will have access to these transactions, and would it be possible for certain types of purchases or transactions to be used against taxpayers at some future date?
Implementation. The questions around implementation might seem redundant, a crypto-fiat digital dollar would, by definition, be a type of cryptoasset that runs on an underlying blockchain. Peeling back the layers, however, leads to some additional considerations that need to be part of this dialogue. Will taxpayers be able to exchange physical fiat for newly issued digital versions, or will there be some sort of national audit undertaken? Assuming the current banking system is part of the process, is there going to be a universal app that taxpayers can install on mobile and computer devices to connect current banking systems with this digital dollar platform?
Lastly, what sort of insurance and other security measures will be in place to safeguard taxpayer transactions and holdings, as well as to update the security measures that are instituted? Are these blockchain and tokenization specific issues? Not necessarily, but the on-ramps and off-ramps to any blockchain have proven, time and again, to be the weak link in the system.
Equity. Issues related to societal and economic equity are, deservedly so, receiving a large amount of national attention and hopefully will continue to do so moving forward. Although blockchain and crypto were developed to democratize access to financial assets and information, they are dependent on several factors not always readily available to everyone. Mobile devices, established relationships with financial institutions, access to consistent high-speed internet connectivity, and the time to learn about how this new digital dollar will work are factors not spread equally among the entire population.
Ensuring that these issues are addressed will be time consuming and difficult, but will help assure that segments of society are not left behind in the wake of the digital dollar revolution.
The digital dollar might finally represent the breakthrough acceptance and adoption that crypto proponents – maximalists and non-maximalists alike – have been striving to achieve since blockchain first entered the mainstream conversation.
Tempering this excitement and potential, however, are the very real considerations that need to be comprehensively addressed prior to any form of the digital dollar being ready for mass market utilization.
Exciting for sure, but every good thing takes time to get right.