China DC / EP enters the test, may wish to see how the US "Digital Dollar Program" intends to do

Source: Digital Dollar Foundation

Translation: Lu Jiangfei

Source: Lianwen

Christopher Giancarlo, former chairman of the United States Commodity Futures Trading Commission (CFTC), has created a non-profit organization, "Digital Dollar Foundation" to promote the idea of ​​"digital dollar" in order to "combat" China's digital RMB project.

Christopher Giancarlo, former chairman of the US Commodity Futures Trading Commission (CFTC)

In an interview with the media, he said, "As China's digital RMB project is proceeding smoothly, if the United States lags behind China, the United States may lose its global economic leadership. The goal of the Digital Dollar Foundation is to safeguard the national interests of the United States. ".

The Digital Dollar Foundation is a non-profit organization that aims to study the conversion of U.S. dollars into blockchain-based digital currencies, and to conduct research and exploration on the potential benefits of digital dollars. Other founders of the foundation include Daniel Gorfine, a former CFTC official and head of financial technology research at a regulatory agency, and Charles Giancarlo, a brother of Christopher Giancarlo, a former Cisco executive. The foundation and the "Digital Dollar" project have been supported by consulting giant Accenture . The founders of the foundation provided initial funding for the foundation. Accenture will focus on providing research and logistical support.

The following is the specific details of the "Digital Dollar Foundation" project, the content comes from the project introduction.

Why do you need a "digital dollar"?

Since Western Union remitted money for the first time in 1871 using the telegraph network, even when humans have moved to the changing digital technologies today, the basic processing flow of this "old" business has not changed much. You need to send a message to the network that contains the payment information, and you need a bank that can provide peer accounts and other functions for the sender and receiver, so that you can fund the remittance transaction. The whole process may be very slow, the price is very expensive, and even there will be many uncertainties, especially when cross-border remittances often encounter problems such as exchange rate fluctuations.

The remittance process is changing at a slower pace, but there is an increasing demand for more features to support faster, more certain, and more accessible currencies, which has also attracted the attention of central banks around the world. More than two-thirds of central banks have begun to study new payment applications. Some of these banks are becoming potential innovators of new technologies. These new technologies include "tokenization", which provides representative value and transfer. More possibilities for value. Let us give a few examples:

  • The Swedish central bank Riksbank has begun testing the digital currency e-krona in a pilot environment, and is the first central bank to try to do so;
  • China is exploring the digital currency issued by the Central Bank, namely the Central Bank Digital Currency (CBDC), which is expected to be launched in the short term;
  • The European Central Bank (ECB) has also been actively exploring various functions of digital currencies.

However, the central bank is not the only institution exploring how to use the demand for new currency functions, and technology giants and other financial institutions are also seeking innovation, such as:

  • Facebook-supported "Libra" shows that private, non-state stablecoins can also be used as cross-border payment media and play an important role in cross-border remittances.
  • Companies including Goldman Sachs, JP Morgan, MUFG and Wal-Mart are also trying to develop their own digital currencies to provide users with payments that are not available in the current national currency Technology and features.

These private companies have greatly helped drive innovation, but it ’s time to explore digital dollar implementation to prove the future of the dollar. The recently established key members of the Digital Dollar Foundation (he Digital Dollar Foundation) have issued a call for the need to innovate the US dollar, and will form a "Digital Dollar Project" with Accenture, a global leader in central bank digital currency. To study how to promote the potential ways of digital dollar tokenization in the United States and its impact on the US and global economic and financial systems.

What exactly does "Digital Dollar" do?

The project will focus on three main aspects:

  1. Will encourage people to study and publicly discuss the potential advantages of digital currency,
  2. Convene thought leaders and actors in the private sector;
  3. Propose feasible solutions to support potential models in the public domain.

In response to the actual steps required by the US dollar central bank digital currency project, the "Digital Dollar Project" will also develop a framework and further explore the design schemes and methods of designing digital currencies through the review process, including holding stakeholder meetings, round table discussions, and public Forums, etc. While seriously considering the core interests of the government, the project will focus on a series of key guiding principles based on the support of existing Federal Reserve related projects. The "Digital Dollar Project" will eventually find a clear central bank digital currency solution that not only enhances the effectiveness of monetary policy and financial stability, but also provides the scalability needed in retail, wholesale, and international payments , Security and privacy, and support integration with existing financial infrastructure.

The digital dollar value case

Since the beginning of the printing of banknotes in the 19th century, there has been no innovation in the currency of the US Central Bank, the issuance of US dollars has remained strictly local, and there are many restrictions on the function of the US dollar. Banknotes issued by the U.S. Central Bank are either provided to the public or used as reserves in the banking system.

The digital dollar project aims to promote the dollar to explore the next major innovation: the digital dollar issued by the Fed system will enjoy all the faith and credibility of the US government, and it represents the third central bank currency other than banknotes and reserves.

Digital dollars will serve the infrastructure of the digital financial market. In order to expand the existing functions more meaningfully, a new exchange medium must be convenient, can be delivered as easily as text messages, and can be carried out without time and space constraints. Settlement. Digital dollars will enhance people's confidence in digital payment transactions, and expand the scope, diversity and flexibility of dollar payments.

The digital dollar issued by the Federal Reserve will expand the scope, use, diversity and flexibility of dollar payments, and support retail, wholesale and international payment use cases:

  • The currency issued by the Central Bank is no longer suitable for online retail payments. Banknotes are still important for small payments, although on average, tangible cash has declined as a percentage of total currency. Digital dollars will provide new options for digital transactions, provide real-time P2P payment services, and provide more diversified payment methods-especially in the case of intensified financial crisis, giving currency greater autonomy. Digital dollars can be distributed to end users through commercial banks and trusted payment intermediaries, and provide other mechanisms to ensure and promote financial inclusion.
  • The wholesale payment will be based on the national payment system. This payment method is generally carried out through inter-bank clearing, using central bank funds to settle securities and other large payments. The central bank currency usually plays a very important role in conducting large-value payment transactions, which means that the fiat currency issued by the central bank has a distribution effect, and the digital dollar can also provide more diverse access methods for large-value payments and provide digital finance. Support the emergence of market infrastructure.
  • Currently, when using digital cross-border payments, the US dollar cannot be used, and digital dollars can establish a more direct currency relationship, reduce risks, solve the defects that have always existed in the existing agency model, enhance the competitiveness of international payments, and promote Financial market integration. Not only that, the use of digital dollars in cross-border and offshore transactions allows the central bank ’s currency to be used directly for digital payments, such as remittances and large payments, but also provides the possibility of supporting offshore securities settlement.

Key principles

The "Digital Dollar Project" aims to incorporate the broad views and needs of stakeholders and provide implementable solutions, including staged and careful testing, to meet existing performance standards for US financial infrastructure. Before being fully generalized to all use cases, digital dollars may first be limited to some decentralized pilot projects, and will follow the following ten key principles:

  1. To ensure the practical benefits and inclusive benefits of the digital dollar before it can be widely used, the digital dollar will become the Fed ’s liability and form part of the monetary base.
  2. Maintain the effectiveness of monetary policy and financial stability and ensure the forward-looking nature of the US dollar.
  3. Ensure that the privacy and security required for retention payments are guaranteed.
  4. Comply with the existing "KYC / AML" requirements, distribute through regulated payment intermediaries and banks, and maintain a two-tier banking system.
  5. Set special rules for those who cannot use digital payments.
  6. Strengthen economic policy insights through digital payment transparency.
  7. By connecting with existing core banking and payment functions, escrow solutions and e-wallets, it provides full and seamless integration with financial infrastructure.
  8. Develop first-class technology to support the required digital currency functions.
  9. Promote collaboration between public and private stakeholders to harness and promote the vitality and innovation of the private sector.
  10. Provide flexible project element development and testing.

How is the digital dollar internationalized?

The importance of the US dollar in international transactions is obvious. More than three-fifths of the foreign exchange reserves of central banks around the world are in US dollars (see Figure 1). For US dollar users, no matter where they are innovated, there is no direct benefit to the innovation of the US dollar, let alone the global influence of the US dollar as an international settlement method. But on the other hand, people also think that excessive dependence on the US dollar will be problematic, and as the international liquidity of the US dollar gradually shrinks, factors such as motivation, geopolitical pressure, and intergenerational preferences have caused many people to consider alternative methods to replace Dollars for international payment media. For example, it is believed that China ’s introduction of the RMB Central Bank Digital Currency (CBDC) is largely to promote the internationalization of the RMB, which may pose a threat to the dollar ’s “hegemony”.

Figure 1: Scale of foreign exchange reserves of central banks worldwide

Figure 2: International dollar liquidity

Figure 3: U.S. portfolio securities holdings by country

International dollar liquidity is shrinking. In emerging markets, particularly in Asia, cross-border payment of U.S. dollars and local U.S. dollar credit liquidity are beginning to decrease, and people are increasingly motivated to seek alternative settlement media (see Figure 2). The size of the Asian credit market has fallen from a peak of 6.9% of GDP in 2013 to 5.1% in 2018, and in the Asian cross-border credit market, the share of the US dollar has also dropped from 11.9% in 2014 to the number in 2019. 8.5% in the first quarter.

At the same time, the US dollar share of the bill business is estimated to be approximately 4.7 times the US share of global trade. In Japan, the share of imports denominated in US dollars is estimated to exceed two thirds, while the share of imports from the United States accounts for about one tenth of total imports. Because the US dollar is heavily experimented in international transactions, many people also hold large amounts of US securities assets, especially in Asia (see Figure 3). Therefore, the decline in the global use of the US dollar may cause many countries to reduce the holdings of US securities, which in turn may cause downward pressure on US securities prices and the US dollar itself.

What are the challenges?

Central banks in many countries are still cautious about issuing central bank digital currency. To some extent, the central bank will worry that the central bank's digital currency may have an impact on the national financial system and the national economy, and may even trigger a run-off crisis for commercial banks. In addition, digital currency also has other issues such as privacy and security. Although US dollar banknotes have been widely used, there are still some worrisome situations, so people want to use digital central currency more widely. The introduction of digital dollars in the US banking system can alleviate concerns about fraud and money laundering, but the offshore use of digital dollars still requires other protective measures.

Some people think that the reason why central banks in other countries adopt digital currencies is to a large extent to reduce their dependence on the US dollar in international transactions. Therefore, compared with other digital currencies becoming more and more attractive in international transactions, the United States may need to readjust the US dollar strategy in an orderly manner so that the US dollar can continue to meet the conditions of being a stable international currency. Therefore, the adoption of digital dollars in the United States is crucial.

The US dollar has a special global status, which also means that the issuance of any form of US dollar or any changes to the US dollar must be evaluated and tested with extreme caution. We must clearly express and understand the intent and meaning of digital dollars, so as to guide the market how to respond to the possible impact of the use of digital dollars. Not only that, because the US dollar is an international currency, we should also consult and cooperate with policy makers in other countries.

It should be noted that do n’t expect digital dollars as the third form of dollars to change the behavior, regulations, and effectiveness of monetary policy and financial stability.

Who is the project team?

The Digital Dollar Foundation and Accenture have formed a multidisciplinary core team. Both parties will consider the preliminary design and recommendations of the first phase of Digital Dollar. The team will work with economists, technicians, lawyers, academics, and consumers. Rights groups, human rights experts and ethicists. Over the next few months, the team will consider potential designs and suggestions, as well as a multi-step plan to experiment, test, learn, and enhance the digital currency functions needed.

The progress and direction of the plan will be determined by a governing body. With the completion of the first phase of work, the Digital Dollar Foundation will propose the establishment of the governing body. At the end of the first phase, the team will introduce the research results to the main stakeholder groups and decision makers, and begin to consider the next phase of work, while expanding the pilot and determining a broader solution.

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