The coronavirus pandemic is the biggest global crisis since the events that sparked the creation of Bitcoin (BTC) in 2008, and is one that will also have long-lasting effects on the economy. World governments are taking unprecedented measures to cope with the economic fallout of the virus, namely through the third coronavirus relief bill, which was approved by the United States Congress earlier this month and constitutes the biggest stimulus package in the country’s history at $2.2 trillion.

During the negotiations for the third emergency bill, one of the drafts submitted by House Democrats — the first version of the Take Responsibility for Workers and Families Act — caught the attention of the cryptosphere with mentions of a digital dollar, hinting at the creation of a U.S. central bank digital currency that could possibly be underlied by blockchain technology.

Although all mentions of the digital dollar were scrapped from the final version and did not appear in the signed Coronavirus Aid, Relief, and Economic Security Act — known as the CARES Act — the cat seems to be out of the bag. In a recent conference, House Speaker Nancy Pelosi said it is likely that the digital dollar, which was referred to as direct payments, will appear again. With rumours of a fourth stimulus bill, and with additional support from a few members of both the House and the Senate, it may be sooner rather than later.

According to the authors of the bill, the digital dollar would have served as a means to deliver stimulus payments into the hands of struggling citizens that have not provided their direct deposit bank account information to the Internal Revenue Service. A recent analysis of previous stimulus packages showed that the wait could take up to two months or more for those who receive aid through stimulus checks.

However, the digital dollar referred to in the bill was a different concept than the one crypto enthusiasts had previously heard about and may bring consequences that extend far beyond the technological aspects of electronic payments.

The crypto digital dollar

The term “digital dollar” has been most noticeably used by J. Christopher Giancarlo, the former chairman of the Commodity Futures Trading Commission. He established the Digital Dollar Foundation back in January to promote and help guide the creation of a blockchain-based CBDC, dubbed the digital dollar.

While the technology used would be permissioned and centralized in practice, the use of a distributed ledger would be a tentative step in the right direction, as it can bring advantages for citizens when it comes to security and privacy, although the technology comes with a few performance and compatibility trade-offs. In an opinion piece in the Wall Street Journal, Giancarlo wrote:

“We propose a digital dollar — a government-sanctioned blockchain protocol, created and maintained by an independent nongovernmental group but administered by banks and other trusted payment organizations.”

According to Giancarlo, focusing on decentralization is key to compete with cryptocurrencies like Bitcoin, corporate blockchain projects like Libra or open source ones like Celo, and with other CBDCs like China's digital yuan, which has been in the works since 2015 and may pose a threat to the U.S. dollar by making the Chinese yuan more accessible to foreigners.

The central bank digital dollar

Giancarlo’s digital dollar has kept a fairly low profile since its inception, but the term has now resurfaced alongside the government's efforts to keep the economy afloat. During the negotiation process for the third coronavirus-related bill, three drafts mentioned the digital dollar.

Although the final CARES Act dropped the digital dollar idea and any other types of electronic alternative for stimulus checks, the topic may soon resurface as additional legislation to mitigate the coronavirus crisis is likely to be required. When asked about the timeframe for the stimulus checks during her March 26 press conference, House Speaker Nancy Pelosi emphasized the need for electronic payments:

“I said, ‘Why don't we do the direct payments technologically so that they can be received more immediately?’ I don't know if that's their plan, but I hope that it would be. [...] We had bigger direct payments in our bill, I don't think we have seen the end of direct payments.”

It is important to understand the difference between Giancarlo’s digital dollar and the one proposed to the Senate in the first draft of the Take Responsibility for Workers and Families Act, as the two couldn’t be further apart but have been conflated by many in the crypto community and by industry leaders. Giancarlo recently told Cointelegraph:

“We did not have anything to do with what was in that House bill. We’ve been using the phrase ‘digital dollar’ quite consistently to refer to a US central bank digital currency.”

The technicalities

While most have focused on the technological aspects of this concept, the digital dollar as presented in recent legislative drafts would not rely on any technological innovation, decentralized or otherwise.

While not specified, the digital dollar would likely rely on commonplace technology used by banks today. The draft hinted at this when mentioning that stimulus payments would be made through two options: check or direct deposit, including a pass-through digital dollar wallet. Crypto trader and YouTuber Tone Vays, who previously criticized the digital dollar initiative for this lack of innovation, told Cointelegraph:

“I believe that digital currencies are already here. 97% of currencies are already digital. If they have a different digital dollar than the current digital dollar then it’s just a gimmick because there will be absolutely no difference between the two. The digital dollar will still be consicatable and they will still be censored if the banks want it to be.”

The key difference lies with who is providing and managing this account. The digital dollar would allow a central bank to offer bank accounts to individuals. Giancarlo has previously denounced this idea, saying he doesn’t see the “Federal Reserve becoming a deposit-taking institution,” which further cements the difference between the two projects.

FedAccounts: central banking for all

The concept presented in the draft was not new and can be found in work published by Morgan Ricks, a professor at Vanderbilt University Law School who worked with members of Congress to bring forth the digital dollar. Ricks, along with John Crawford and Lev Menand, published a paper in 2018 titled “Central Banking for All: A Public Option for Bank Accounts.”

Here, wallets are called FedAccounts, which were also briefly mentioned in the draft bill when referring to a ‘‘pass-through FedAccount.” FedAccounts would be easier to open, free of fees and minimum balances, and would have the same interest rate that commercial banks receive on deposits. One of the main value propositions of this concept is the financial inclusion of the unbanked and underbanked among the U.S. population.

Although the term “digital dollar” is an established one, it could be argued that it’s not a step toward Bitcoin, as it brings no technological innovation and further accentuates centralization into one single entity. The aforementioned paper does mention blockchain technology, but quickly dismisses it due to its decentralized nature and technical limitations. The paper reads:

“Given that much of the excitement about distributed ledgers arises from distrust of government and of central intermediaries, the central bank’s role here seems strange. Besides, in their current forms distributed ledgers are painfully slow and costly compared with centralized systems like Fedwire.”

Advantages of the digital dollar

In essence, both the end users of the digital dollar and the population as a whole can benefit from a digital dollar regardless of whatever shape it comes in. Users wouldn’t need to pay account maintenance or interchange fees, nor would they need to have a minimum balance. Transaction speed would also be improved, and the interest received on these accounts would be matched to the higher rate currently available to commercial banks. Moreover, balances would also be fully sovereign money, which means there would be no possibility of default on balances, removing the need for deposit insurance.

The individual advantages mentioned above have the potential of increasing financial inclusion for U.S. citizens. Improved financial and macroeconomic stability would be achieved by eliminating cash equivalents, which have been problematic throughout history. Lastly, the creation of FedAccounts could potentially help streamline and simplify regulation while generating fiscal revenue through increased remittance fees. Vays also outlined another short-term advantage for the digital dollar, while highlighting one of the potential issues:

“What the bill has done is that now there’s a potential for direct money infusion from the central banks to the end consumer. This is very important because in 2008 when the banks were given all this money, they did not want to lend it out to the consumer. Because of that issue, now there is a chance people will get money directly from the Federal Reserve but at the same time that also destroys the capitalistic model of private banks.”

The dangers of centralization?

However, there are concerns such as privacy and security risks that are not addressed in the paper, which fails to account for changing regulatory and technological conditions. For example, when addressing the benefits of FedAccounts in spotting suspicious activity such as money laundering and tax evasion, the paper mentions the Bank Secrecy Act of 1970, which has been amended by the Patriot Act.

Coincidentally, the Patriot Act has made it harder for U.S. citizens to open a bank account, which has led to a higher number of unbanked or underbanked citizens and has put the privacy of bank account holders in check. When asked about the possible dangers of the Fed’s digital dollar, James Lee, the founder of privacy-centric blockchain projects Komodo and PirateChain, told Cointelegraph:

“It should be self-evident what the dangers are, if the government knows exactly how much you have, and everything you spend your DD on, maybe it gets combined with some scoring system of what you post on social media and if you post things that are not allowed, then all your funds are frozen. This type of threat will basically eliminate free speech.”

Continuing on, the paper mentions the IRS as a “useful model” for privacy in the FedAccount system, although it fell victim to a historic data leak in 2005 that saw hundreds of thousands of taxpayers' information stolen and distributed. Moreover, centralizing this information in one single entity may create an incentive for further hacks. Vitalik Buterin, the founder of Ethereum, expressed such security and privacy concerns in a podcast earlier this month:

“The main challenge with central bank and even corporate currency is basically the concentration of power, the concentration or data collection — that you become dependent on potentially central intermediaries that can exercise a very fine-grained degree of control over who has the ability to participate in these systems and who can’t.”

Crypto digital dollar vs the Fed’s digital dollar

Despite sharing the same name, these two versions of the digital dollar have many differences. While the Fed’s digital dollar would not use blockchain technology, the crypto digital dollar would place it at the heart of the project. It goes without saying that the Fed’s digital dollar would be centralized by design, while Giancarlo’s digital dollar aims to take another path.

While there are arguments to be made for both cases, Giancarlo’s vision seems more aligned with that of Bitcoin advocates. It proposes a “government-sanctioned blockchain protocol,” one that would still allow for issuance to be controlled by the government but would ultimately involve more entities in the process, as the ledger would be maintained and administered by independent private entities.

Not only would the prospect of a distributed ledger decentralize the issuance process to some degree, the structure described above would also strengthen security and privacy, as any attack by malicious actors would require several entities to be compromised. As long as the majority of administrators remain uncompromised, attacks can be theoretically avoided.

Although blockchain has been in the forefront of the currency digitalization race, this may be owed to the popularity of the distributed ledger technologies rather than the underlying technology itself, which has been known to show some limitations when it comes to performance. On that note, Sonja Davidovic, an economist with the International Monetary Fund, recently stated, “What we've seen a lot is that there's a hype out there, and people are quickly jumping to choosing that technology just because it's popular."

From project to reality: when and how

While CBDCs have been gaining traction, the leap to a blockchain-based currency is one that will most likely take years for any country to achieve, if achieved at all. Given that the technology is still in its infancy and has been, unfairly or not, associated with criminal activity, governments will likely be even more cautious than they usually are when it comes to relying on new technology.

So, when can a digital dollar, blockchain-based or otherwise, appear? While the aforementioned projects have clear differences, they still have one thing in common: a focus on digitalization, which is becoming a prevalent factor when looking at a currency from a competitive point of view. Judy Shelton, President Donald Trump’s nominee to the Federal Reserve Board of Governors, said, “We need the digital currency a little bit less I would argue internally, but rather to help preserve the primacy of the dollar worldwide.”

With Treasury Secretary Steven Mnuchin stating that the Fed does not see the need to issue a new digital currency within the next five years, one is not likely to appear soon. While this statement may be true when it comes to a blockchain-based CBDC, the digital dollar proposed in the stimulus bill in response to the coronavirus pandemic is a whole other story.

Ricks, who worked on the development of the digital dollar proposal found in the coronavirus relief bills, has stated that while the concept will not be used for direct payments right now, it will likely be implemented some time next year. Giancarlo has also stated that any implementation of the digital dollar will need to be carefully considered. He told Cointelegraph:

“The United States has to proceed thoughtfully, intelligently, deliberately. We advocate pilot programs as a way to explore the utilization of the digital dollar and how it can be used, including how it can be used in a crisis. But I think one needs to be very cautious about trying to launch something as big as this amidst a crisis.”

While the details remain, for the most part, unknown, one thing is certain: The desire to digitalize the U.S. dollar will drive the creation of some version of a digital dollar. And since the U.S. government will continue to look for ways to give the dollar an edge over other national currencies, it's just a question of when and how.