Congress Is Discussing a Digital Dollar Pilot. It's Not What You Think

Quick. What's the first thing you know about a hypothetical digital dollar. It's that it's a central bank digital currency, or CBDC, right?

Wrong.

At least not the bill Congressman Stephen Lynch (D-MA) is floating. Rep. Lynch, the chair of the House Financial Services Committee's Fintech Task Force, introduced today the Electronic Currency and Secure Hardware (ECASH) Act, which would establish a digital dollar that is neither tied to a distributed ledger nor issued by the Federal Reserve—but instead "printed" by the Treasury. The timing of the bill coincides with a committee hearing Tuesday on CBDCs.

The act, if passed, would create a Treasury-led pilot program to test the digital dollar's safety, functionality, and interoperability with other payment systems and financial institutions. According to a press release, the bill mandates that the e-cash include features "generally associated with the use of physical currency—including anonymity, privacy, and minimal generation of data from transactions."

Not only that, but the digital dollar must also work for peer-to-peer payments offline and be stored on hardware devices that are "distributed directly to the public." 

The mechanics have yet to be fully articulated, and companies will bid on a government contract to lead the pilot. But cryptography researchers have been laying out ways for digital currencies to leverage public key cryptography while cutting out financial intermediaries—without using a public blockchain or distributed ledger. These would theoretically create an end product that is as anonymous as cash.

CBDCs differ in their intent and design, but at their most basic are digital representations of state-issued currencies. That can be hard to wrap one's head around because much of the money we deal with already isn't physical—it only pops up in debit card balances on screen. But there is quite a bit going on in the back end, and transactions can take days to actually settle—meaning funds take some time to arrive. CBDCs would theoretically make payments more efficient. 

Thanks, in part, to China's digital yuan pilot, cryptocurrency advocates who once salivated at the possibility of governments co-opting blockchain technology have instead mostly turned against it as an "Orwellian spy surveillance nightmare," in the words of ShapeShift founder Erik Voorhees.

“[The US] can either go the way of China and make this Orwellian, super-centralized CBDC world, or they can be a little more free market about it and acknowledge that private companies like Circle, like Tether, have already created a CBDC that’s better than anything they would create,” said the ShapeShift founder during a Decrypt podcast.

Voorhees was referring, of course, to stablecoins—currencies designed to hold a value equivalent to a fiat currency such as the dollar. 

The bill's authors aren't into stablecoins, though. One of the key advisors on the ECASH Act was Rohan Grey, best known for his work on the STABLE Act, a piece of legislation proposed by Congresswoman Rashida Tlaib (D-MI) that would have required stablecoin-issuers to get a banking charter plus approval from the Federal Reserve and Federal Deposit Insurance Corporation. Grey told Decrypt in December 2020 that he disagreed with critics who painted that bill with an anti-privacy brush. 

“We think that it’s more important to preserve anonymous decentralized privacy when it comes to public money than forms of private money,” he said. “The idea that we don’t care about privacy is bullshit...I care so much that I think the only fight worth having is over public money."

Grey told Decrypt that the privacy angle is one reason why this bill would not go through the Fed, whose CBDC model wouldn't be anonymous. The Treasury, which has traditionally printed money, is better suited to that role as it has broader jurisdiction than the Fed, which he referred to as "a bunch of macroeconomists trained in statistical modeling." 

Said Grey: "If the central banks had not already dominated the conversation and refracted our entire discourse through the lens of CBDCs, and someone said 'we should create a bearer instrument, hardware-based form of currency that has all the features of physical cash and is made available directly to the public with no intermediaries, which agency should take the lead?' the obvious answer would be Treasury."

So, what exactly will we call this new breed of Treasury-issued digital currencies? TBD on whether the TDC label sticks.