Digital Dollars Are Already Here: How Crypto Innovators Are Modernizing Our Money

This is the first of three posts exploring the current debate on digital dollars. Part two of this series will offer a deep dive on the potential for digital dollars to promote broad financial inclusion for underserved communities. Our third and final post will contextualize the digital dollar debate in terms of the global struggle between the United States and China for hegemony in the worldwide financial system.

In an increasingly digital world, the modernization of money is a worthy pursuit. On June 11, 2020, the House Financial Services Committee Task Force on Financial Technology held a hearing to consider how federal accounts and digital tools could improve the distribution of CARES Act stimulus checks. Hearing witnesses outlined how various dollar modernization proposals could speed those disbursements and how they might address some of the current limitations of our financial system. However, the hearing’s review of modernization proposals failed to include existing crypto-powered solutions that are already beginning to address the shortcomings of our financial system.

“Digital dollar” means different things to different people. For some, it is a weapon in the global battle for the future of reserve currencies. For others, it is a worthy tool to promote financial inclusion. Because of its nebulous meaning, it is important to define key terminology and be aware of projects that might be included under the broadest definition of the term. The effort of entrepreneurs to speed the creation of a digital version of the US dollar has led to different solutions, commonly referred to as “stablecoins.” In May, the value of the stablecoin marketplace surpassed $10 billion and continues to grow, partially driven by the circumstances of the pandemic. We urge policymakers to consider how these solutions — which already exist — can be leveraged to solve some of the critical problems that lawmakers are addressing today.

How crypto innovators define digital dollars

In order to advance the conversation and debate around digital dollars, it’s helpful to understand stablecoins. Stablecoins are digital assets that aim to maintain a stable value relative to another asset or assets. The mechanisms that these coins use to stabilize their prices differentiate them from one another, and generally speaking, they fall under one of two categories. The first category is fully-reserved stablecoins. An example of this type of coin is US Dollar Coin (USDC). For each USDC token in circulation, there is a United States dollar held in a reserve bank account. This means that each coin is backed by a dollar and can be redeemed at any time with a 1:1 exchange.

The other category is protocol-based stablecoins, which maintain a stable value via protocols operated by community governance that may vote to modify incentives which impact the stablecoin’s supply and demand. Some examples of coins that use protocols to maintain their value are DAI and cUSD. Of course, because these coins exist independently of “actual” dollars in bank accounts, their price can fluctuate away from a perfect 1:1 exchange ratio. However, the stabilization protocols and often the community governing them aim to maintain the stablecoin’s value at $1.

Although there are differences in the types of mechanisms that pin the value of stablecoins to fiat currencies, the fundamental similarity between these coins is that they attempt to maintain a stable value relative to another asset or basket of assets. The price stability of stablecoins differentiates these tokens from well-known cryptocurrencies like bitcoin which often have volatile values. Thus, stablecoins offer opportunities and uses that other cryptocurrencies are unable to provide.

Because dollar-pegged stablecoins aim to always be worth $1, they are a type of “digital dollar” that can help solve many of the shortcomings of our existing financial system. And because they are already in use, Congress should consider how dollar stablecoins can be quickly leveraged to achieve public policy goals.

The many benefits of using stablecoins

Since dollar stablecoins aim to approximate the value of fiat currencies, they are more likely to be used in transactions where fiat currencies are already used. However, because stablecoins rely on blockchains to track transactions, they can facilitate faster and more cost effective dollar transactions for individuals, businesses, and governments. Together, stable value digital currency and blockchain technology offer many advantages. Some of these benefits include 24/7 instant transferability, lower transaction fees, the ability to do micro and macro payments at low cost, increased programmability, expanded global reach, and more interoperability. Different stablecoins have different features aimed at different consumer and business needs.

As our world has become more digitized, some of the existing uses of fiat currencies have become more limited. We believe stablecoins can advance the use of the dollar and bring it up to speed with the digital world we live in without the need to wait for the US government to take action. Modernizing the dollar through stablecoin innovation will further entrench the dollar’s status as the world’s reserve currency without undermining the monetary sovereignty and autonomy of the United States.

How policymakers can accelerate adoption of stablecoins

As a matter of national policy, we should support ongoing innovation in stablecoins.

The first step is easy: policymakers should acknowledge and learn about the work that has already been done in this space. Innovators have long been working to produce stablecoins that offer the benefits mentioned above, and many have succeeded in bringing digital dollars to market. Therefore, when lawmakers and regulators meet to discuss ideas like a digital dollar developed by the Federal Reserve, it is vital that they consider projects that are already addressing the limitations of the infrastructure underlying the dollar.

The second piece: policymakers should develop and implement a federal payments charter. Such a charter would create a consistent regulatory licensing regime for organizations and consortiums that are creating fully-reserved stablecoins. This licensing would allow stablecoin projects to operate safely on a national level without the expense and delay of obtaining 50 individual state-level licenses. Moreover, this charter would enhance regulatory clarity and compliance, as stablecoin issuers would have a single set of rules and regulations with which they would have to comply.

Modernizing the dollar is an exciting and necessary endeavor. Innovators have already devised ways to update the dollar and overcome some of the obstacles traditional currency faces in our increasingly digital age. By embracing current technology rather than only discussing theoretical frameworks that are years away from implementation, policymakers can meaningfully advance the cause of modernizing our money.