What Is A Digital Dollar And How Does It Work

Over the past month, various globe governments have stepped upwardly efforts to create their own national digital currencies. The efforts are in response to the growing popularity of private sector decentralized digital currencies, such as Bitcoin, that exist without the bankroll of a central bank or commercial banks.

In recent weeks, US President Joe Biden has issued an executive guild to investigate how to regulate  cryptocurrencies and speed up research into creating a digital dollar that would be backed past the Federal Reserve Bank and essentially “minted” by the US Treasury. Lawmakers then offered up a bill that would let the US Treasury to create a digital dollar. And soon subsequently that, the Great britain ramped up its ain efforts to regulate cryptocurrencies and create a not-fungible token backed past the Bank of England.

Creating a government-backed digital dollar involves far more than just technology. It involves public policies, monetary philosophies, and international regulations that will affect cantankerous-edge transactions. Information technology besides involves securing that digital dollar so information technology cannot exist counterfeited, and to ensure public transactions aren’t tracked by government entities.

Jonathan Dharmapalan, CEO of eCurrency, has been interim as a consultant to government bodies and central banks for more than a decade on the topic of fundamental banking company digital currency (CBDC) creation. According to Dharmapalan, eCurrency has advised more than 40 banks, including the Bank of England, the European Central Bank, the Reserve Banking concern of India, the Fundamental Bank of the Philippines, the W African Economical Matrimony BCEAO, the Bank of Republic of uganda, the Bank of Tanzania, the Central Bank of Republic of peru, and the Central Banking company of Ecuador.

eCurrency created i of the globe’south first retail CBDC solutions enabling central banks to issue secure digital-bearer instruments. Its Digital Symmetric Cadre Currency Cryptography (DSC3) technology and supporting tiered distribution solution enables transactions to be conducted through existing banking and Fintech ecosystems.

eCurrency

The digital currency can operate alongside fiat notes and coins as legal tender. The visitor combines hardware, software, and cryptographic security protocols to provide central banks the tools they need to preserve their lease as the sole issuer of sovereign currency in an increasingly digital economy.

Computerworld spoke with Dharmapalan on what steps governments must take to create digital fiat currencies, what the benefits are, and what risks are involved. The following are excerpts from that interview:

What is it your company does?
“Nosotros focus on currency — not different forms of money. Nosotros think well-nigh currency as a general public adept and as something that comes under some level of legal protection or legal doctrine that allows a sovereign [nation] to set a measuring standard for any fiscal transaction. Information technology’s a little bit like defining what an inch is. Considering someone defined what an inch is, I tin turn effectually and tell you the size of my monitor’s screen; it’s a xiii½-in. monitor.

“So, what is the currency of the United states of america? It’s a legal doctrine that says the currency of this land is the United states of america dollar. It’s legal tender. It’due south the instrument of measurement for whatever financial transaction. And, because a standard is divers and receives legal protection, we are able to execute transactions more than efficiently just considering somebody said a dollar is that unit.

“Along with that comes certain rules and regulations. Congress says this is legal tender, the Treasury shall impress it, and the Federal Reserve shall distribute it.”

So, who’south responsible for getting information technology into the hands of the public?
“The Federal Reserve recognizes information technology as a liability…and puts it into apportionment so that you and I go to use information technology with certain legal protections, such as privacy under certain conditions for executing transactions. It ensures certain security that if I buy a loaf of bread today, a week from now that loaf of breadstuff volition still be the same for a dollar. My credit worthiness, or my place of birth, or my status in society, or my accost or commuter’south license doesn’t ensure my ability to buy that loaf of bread. Information technology’south the dollar that ensures that.

“At present, the question becomes, when that dollar becomes digital, how in the world will it work? How in the earth is the Treasury going to mint this thing? Yous can’t stamp it onto a piece of newspaper, y’all can’t postage it on a slice of metal and call four quarters a dollar.

“Once it mints information technology, how volition the Federal Reserve take this thing that y’all tin’t affect … and feel … and put information technology into apportionment? And, then, how are the banks going to get information technology into the hands of the public to use information technology? All these issues offset to bubble up when you consider creating a CBCD.”

How does your visitor deal with that? “What we did is to build a mechanism past which the Treasury tin mint it, the Federal Reserve tin can issue it, and commercial banks can distribute it, and you and I can hopefully go it — not necessarily from commercial banks, only [from] whatever purveyor of payment systems. And so, you should be able to get information technology through PayPal or Venmo. And, if we do it right, nosotros should be able to hold this on our phones or in our pockets on a card.

“All this comes with strengths and weaknesses: does it ensure the instrument is secure in a way where it cannot be counterfeited? Can nosotros secure the boundaries of how much of it is in circulation? Tin yous and I execute a transaction where I can purchase bananas from yous without the authorities snooping on information technology, discovering that I just bought bananas from you?

“These are the problems that need to be solved, and I think we’re well on the way to solving them. That’south what we do. Nosotros build the machinery necessary for this to exist.”

When you lot say, yous build the machinery, what does that look like?
Are we talking about data centers, software, peer-to-peer networks, blockchain ledgers?
“So, should nosotros build a large, centralized database and everybody has to go to the oracle to ensure the validity of this musical instrument? No.

“We should be able to build this matter and so the minting can be assured at the key banking concern level. For the US, it happens with the Treasury, only for most countries at that place’s an entity called a central bank. Its validity and provenance tin be assured in a highly decentralized fashion. …It’s a picayune scrap like how nosotros went from mainframes, to distributed servers, to our ability to have it all on our mobile phones. And so, we looked at the possibility of creating a protocol that allows for centralized minting but highly decentralized transacting.

“You don’t take to become back to the oracle to validate every instrument. That’s why nosotros call this a digital bearer instrument because it carries its ain legitimacy – the fact that it came from the US Treasury and the Fed put it into apportionment.

“Now, that comes with risks. If it’s a bearer instrument and you lot drib it in a lake, it’south in the lake. You don’t get to use information technology. So, it’due south very much like a concrete bearer instrument, which is what a dollar bill is. Information technology’s recognized, it’due south minted by the treasury, and the Fed will laurels its validity, which means if yous take it to the Fed and say I don’t want this 1, they’ll give you another of the very same thing.”

Unlike a concrete dollar bill it won’t wear out, right?“No, but its security volition. Interestingly enough, a physical dollar’south security also wears out. As applied science advances, we have to add more and more security onto a physical dollar, meaning when we didn’t take color printers, you could get abroad with a relatively simple dollar bill. But over time we had to create everything from secure fabric it’s on, to water marks becoming more complex to metal inks and strips and all the rest of the stuff we put into currency to keep information technology secure in such a way that the Central Banking concern stays a twenty-four hours ahead of other technologies.

“A similar thing will have to happen with a digital dollar. So, it has to be an instrument that can evolve. That’south an architectural blueprint that has to be considered.”

How did your company get started?
“…We started off with thirty or 35 central banks, and almost all of them agreed to talk to us, which is interesting. This was in 2011, 2012. This information began to create what I like to call our hole-and-corner sauce or our requirement fix. And nosotros starting edifice to that requirement ready. Fast forrard five or 6 years afterward and people were going all kinds of different directions with this concept. Only now information technology’s starting to converge again around what’southward required to make this happen.”

What missteps are nations making in their attempts to create digital currencies?
“I call back the single biggest misstep is starting [the process] with the technology. I think the popular sentiment is asking what it will look like. Will it look like blockchain or it volition expect like Bitcoin, or information technology will be on a distributed ledger, or [is it] consensus-based — all that stuff. Y’all’re starting off on the wrong end of the problem.

“The problem yous have to solve first is whether there’s a legal doctrine that enables your central bank to issue digital currency in the outset place. Current laws enable you to issue notes and coins, but those laws haven’t recognized the digital nature of information technology.

“From in that location, at that place are policy questions that must be recognized. Is this going to exist a office of M0 or M1? In other words, is this a public currency that’s a direct liability of a cardinal bank — not commercial banks, not stablecoins. So, are you going to recognize this every bit a liability on the Central Bank’s books?

“As a Primal Bank liability, it simply changes when the Central Bank issues more, or redeems some out of apportionment.

“The 2nd question is volition the Cardinal Banking concern get into the business organisation of issuing this directly to the public, or are they going to apply a two-tier machinery, which is what they use today. Fundamental Banks consequence currency…and exit the distribution to commercial banks, and then merchants, and ATM machines and and then whatever. They leave it to the private sector to go this matter out there.

“From there, there is a question of whether this will be a surveillance tool or a public good? If it’s a public good, and then our privacy laws and our ability to, and our liberty to, use this digital currency and amass vast availability become important. Fortunately for united states in the US, nosotros have laws that should guarantee our privacy — laws that continue the regime from snooping on our twenty-four hours-to-day activities.”

What real laws now protect the average citizen from government snooping?“Our Constitution ensures us sure rights to privacy and there are other laws that add to that. For the nigh function, I think we should insist that the information most individuals and their activity should be kept private, whether or not we have a digital currency.

“If nefarious activities take place nosotros have a legal system to investigate that, but it still requires a legal process. It doesn’t require that everything is tracked. And the problem with everything being tracked is…that’due south already happened and it involves the internet. It’s a problem with monopolistic entities violating our privacy for the benefit of profits. The net has been hijacked by the private sector. We don’t need to echo that hard-learned lesson when we create a digital currency.

“That doesn’t hateful in that location shouldn’t be a legal system that addresses nefarious activity. The default, notwithstanding, shouldn’t be we will track everybody so nosotros can grab that one bad role player.”

What hurdles do governments face in creating CDBCs, whether cross-border regulatory bug, technological or otherwise? “Frankly, at that place are no technological hurdles. What I see as the biggest hurdle is political volition. Do we or practice we non want this, and do nosotros or do we not want a public skillful provided by a sovereign or nation state?

“There is an argument that says leave this up to the individual sector. Let the individual sector exercise any. Some other statement is leave it up to the private sector and and so regulate the crap out of it. I think both of those are problematic because the private sector’s primary purpose is making a profit. So, it’ll naturally gravitate to whatever is the about profitable scheme.

“Currency is a public good. It keeps the states out of a world where I take to merchandise a pound of flesh for the service you provided me. I get to settle it in something other than my daughter’s hand in marriage or my favorite goat.”

From a technology standpoint, what’s involved in creating a national digital currency? “Security. Yous are really protecting a national asset, and then technology wise yous’re going to have to create a not-counterfeitable detail. Yous’re going to accept to rely on the highest level of security and that’s never going to stop. …You’re going to have to really step it up. And, even after we’ve stepped up, it won’t exist good enough in a year… or, I don’t know, in day. Information technology’southward a constant battle, and the responsibility for staying ahead of that game is the various nations’ treasuries.”