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Surprising outcomes: COVID-19 driving digital reserve currencies?

Experts are opining that the measures taken to control the COVID-19 pandemic have propelled the world 10 years into the technological future. The most obvious impact has been a massive change in work routines – millions of workers are spending an extended period in home-offices using remote collaboration tools for the first time. But while security flaws in the leading video conferencing systems grab headlines, most of us missed how close we came to an upheaval in the global monetary system.

Crypto’s a distraction – the world runs on fiat
Unless you’re a confirmed anti-central bank ideologist, forget about Bitcoin, Ethereum and other crypto currencies (yes, we know it’s a punchy statement – it’s the subject of an upcoming opinion piece). The big news is Central Bank Digital Currencies (CBDC) – sometimes also referred to as digital fiat. These are Distributed Ledger Technology (DLT) based representations of a national (or in Europe of regions of Africa, extra-national) central bank issued fiat currencies.

In response to the COVID crisis, in March the US Congress rushed to prepare a bail out package that would soften the blow to the American economy. The first bill, prepared by the Democrat-controlled House, prominently featured two elements that would have been unthinkable only weeks before – a natively digital US dollar held by individuals in a US Federal Reserve account.

The Digital Dollar & the Pass-Through Digital Dollar Wallet
The bill’s solution to the problem of distributing cash payments to hundreds of millions of individuals – some without conventional bank accounts, was the use of a central bank issued digital representation of the Dollar.

Historically, a bank account’s balance exists only as a ledger entry at the bank in question (with the exception of the use of governmental deposit insurance). Under the proposed system, a Pass-Through Digital Dollar Wallet (PTDDW) would have instead given individuals a pro-rata share of a master cash account at the Fed maintained exclusively for these purposes.

While the customer facing entity would not have been the Fed, all bank members of the Federal Reserve System would have had to: provide PTDDWs, use a separate corporate entity for the purpose and provide this free of charges and account balance limitations.

This is remarkably close to an individual account directly at the central bank and would have represented a disenfranchisement of US banks from one of their primary historical roles – holding customer cash in current-use accounts (and the monetization thereof).

The term “revolutionary” is so often used that its meaning has been degraded – but sometimes its original, superlative connotation is the only descriptor that fits.

To be fair, the legislation didn’t make specific reference to DLT and there are surely a number of technological paths to the goal. But the Digital Dollar Project is a collaborative initiative with leadership from Accenture’s DLT practice (led by David Treat – a leading thinker in the space) and is based on the use of distributed ledger technology. It would furthermore be difficult to imagine a better class of technology than DLT for this application.

So close!
But alas, the intricacies of the US legislative process meant that the final COVID relief legislation (the CARES Act) originated in the Republican-controlled Senate, an unlikely group for leading an upheaval of the US banking system. Through either oversight or intention, the use of the Digital Dollar and the PTDDW was not present.

Based on the challenging roll out of the cash relief offered by the CARES Act, one could argue that the Digital Dollar system could have been a far more efficient platform than sending paper checks. Indeed, the use of paper-anything seems like a retrograde solution when matched-up against the overwhelming scale of the program.

The Chinese have talked about the Digital Yuan for a while and, if rumors are true, they are now speeding up the implementation based on the near-miss of the Digital Dollar. It’s unlikely that the Chinese government would not jump at the chance to track the movement of hitherto un-trackable paper-based cash in its economy.

Sweden has been contemplating the e-krona for a while, not to be confused with the name of the virus itself. Interestingly, according to a 2018 report, there is only 1% of the Swedish GDP in circulation as physical banknotes, compared to close to 10% in the US.

The prudence of a hasty implementation of the Digital Dollar is debatable, but there is no doubt that it is closer to reality now than it ever has been. As millions of people around the world have become slightly more tech savvy or at least users of new technologies, the idea of digital cash issued and maintained by a central bank becomes less science fiction and more feasible. Looking further afield for inspiration, Africa’s M-Pesa system (and others like it) provide ample evidence of the impact of cost-free electronic financial transactions on the poor and under-banked (presumably a driver behind the Digital Dollar legislation).

“Never let a good crisis go to waste” – Winston Churchill