Anyone nostalgic for the good old days of 2019, or any of the previous 10 years, should check out the Digital Dollar Project’s new paper, Exploring a US CBDC [Central Bank Digital Currency]. There’s virtually nothing 2020 about the paper. 

It promotes the same general ideas that CBDC advocates have been floating for years.

For those unfamiliar, the Digital Dollar Project (DDP) is a joint venture between Accenture and the Digital Dollar Foundation, a nonprofit created by J. Christopher Giancarlo, a former chairman of the Commodity Futures Trading Commission. Its single mission is to “advance exploration of a United States Central Bank Digital Currency.” 

In his days at the trading commission, Giancarlo seemed to be a fan of financial innovation through cryptocurrency, and the DDP’s new paper superficially appears to promote financial innovation. Underneath, though, it maps out a purely establishment position that would shackle innovation and isolate existing companies from its disruptive effects.

To be fair, the paper does acknowledge that the DDP will continue to evaluate “the merits of alternative models.” But the DDP’s “champion model” calls for a CBDC that will be “primarily distributed through the existing two-tiered architecture of commercial banks and regulated money transmitters.” 

In other words, the paper calls for the government to take hold of a new (privately created) technology so that the existing financial industry can continue to function mainly as it does now. That’s not really innovation.

Similarly, the fact that the paper calls for new CBDC to be “recorded on new transactional infrastructure, potentially informed by distributed ledger technology,” does not scream innovation. Innovation in these new types of currencies hinges on the blockchain, an innovation that threatens the existing structure of the industry precisely because of its decentralized nature. It offers a new way to conduct financial transactions without a central intermediary. 

The DDP wants to centralize this technology by government fiat, a move that would stifle competition and innovation. There is no inherent reason that existing financial firms should not use this new technology to compete with new firms, but explicitly designing a system that isolates those firms from new competition by law defeats the very purpose of innovation.

The paper also echoes a common refrain among CBDC advocates: “One area of promise with respect to a US digital dollar is in expanding financial access and inclusion for unbanked populations.” 

But the paper never really explains exactly how a CBDC will expand access and inclusion. It simply cites the FDIC’s 2017 study of the unbanked which “found that roughly 14 million American adults lack a bank account.” The paper ignores, however, that this figure means that 93.5 percent of U.S. households already have a bank account. 

It also disregards that nearly half of the unbanked previously had a bank account, and that many of those without a bank account are in that situation due to credit problems or reasons related to anti-money-laundering rules. (The DDP also supports those AML rules.) Access to banking services, in the common understanding of the word, is not a problem in the U.S.

The paper also forgets to mention that more than half of those unbanked households told the FDIC that they have no account because they do not have enough money to keep in an account. (See page 4). That is certainly a broader economic problem, but it goes well beyond access to a bank account.

It is very difficult to see how tokenizing the U.S. dollar (i.e., creating a CBDC at the Fed), will solve any of these economic (or regulatory) problems. Hopefully, the DDP’s next paper will expand on these topics.

More broadly, the paper fails to distinguish between possible benefits of private sector innovations in currency and payments technology and the CBDC version. That is, the paper says nothing about the marginal improvement possible from a CBDC versus simply allowing the private sector to flourish in the payments sector. In fact, that the payment system in the U.S. is something of a fossil largely because of heavy government involvement (the Fed has taken over more and more of the system through the years).

To the extent that government mandates and requirements have held back financial innovation, the obvious solution is to roll it back and to allow this technology (created in the private sector) to flourish in the private sector. 

The most worrisome parts of the DDP approach are those that allude to more government control over money. The DDP sees benefits in being able to better “facilitate the distribution of central bank money,” in “increasing the safety and efficiency of our payment infrastructure,” and in providing a more widespread “riskless settlement medium.” The paper is short on details, but these broad ideas sound very similar to those promoted by Lael Brainard, the Fed Governor who is promoting a CBDC to ensure that “sovereign currencies stay at the center of each nation's financial system.”

This CBDC path – an expansion of access to, and therefore the role of, central bank money – underscores the core problem with the Fed creating its own digital currency. If everyone – not just banks or certain types of financial firms – has direct access to accounts at the Fed, then private banks will be in direct competition with the central bank for retail customers.

Luckily Fed Chairman Jerome Powell has expressed, repeatedly, skepticism about providing consumers with direct accounts at the Fed. This week, he said: “That would be a very dramatic change in the landscape of banking. And I would worry what would happen to the rest of our private banking system because an awful lot of people would opt to keep their personal money at the Fed, and then who would do the lending?”

Again, to be fair, the DDP paper stops short of explicitly calling for retail accounts at the Fed. And, it calls for a CBDC to operate “alongside existing monies.” As Larry White points out at Cato’s Alt-M blog, the paper is purposely “fuzzy or flexible on technical details.” Still, the paper does call for harnessing innovation in a way that insulates existing firms from innovation and competition. 

Hopefully, future DDP papers will provide detailed explanations of the costs and benefits of various approaches to creating a CBDC. Maybe that’s a great 2020 project.