Yesterday my friend Dan Gorfine, along with former CFTC Chairman Chris Giancarlo, announced the formation of the Digital Dollar Project to “encourage research and public discussion on the potential advantages of a digital dollar,” by which they mean a Fed-issued tokenized dollar. I’m glad they’re launching this conversation. If nothing else, the Fed should have a deep enough understanding of the option, even if it doesn’t see any immediate need to exercise it.

That said, I think advocates for a digital dollar have a steep hill to climb because the Fed seems distinctly disinclined to pursue the idea. You can get a sense of what the Fed is thinking through speeches by its officials, and here are some of the remarks they’ve made on the idea of issuing a central bank digital currency.

Speech by Vice Chairman for Supervision Quarles on November 30, 2017:

As a practical matter, I believe that consideration of a central-bank-issued digital currency to the general public would require extensive reviews and consultations about legal issues, as well as a long list of risk issues, including the potential deployment of unproven technology, money laundering, cybersecurity, and privacy to name a few. I am particularly concerned that a central-bank-issued digital currency that’s held widely around the globe could be the subject of serious cyberattacks and could be widely used in money laundering and terrorist financing. The effect of all this would significantly divert our focus from work to improve or establish new private-sector retail payment systems based on existing institutions. The prospect of a government-sponsored digital currency might even derail private-sector plans to enhance the payment services provided to their customers, thereby significantly disrupting the financial networks that exist today in ways that could create instability. For example, if payment activity radically shifted from using deposits at financial institutions to using central-bank-issued digital currency, deposits could significantly shrink and potentially disrupt financial institutions’ ability to make loans that spur economic activity.​

Speech by Governor Brainard on May 15, 2018

[T]here are serious technical and operational challenges that would need to be overcome, such as the risk of creating a global target for cyberattacks or a ready means of money laundering. For starters, with regard to money laundering risks, unless there is the technological capability for effective identity authentication, a central bank digital currency would provide no improvement over physical notes and could be worse than current noncash funds transfer systems, especially for a digital currency that could circulate worldwide. In addition, putting a central bank currency in digital form could make it a very attractive target for cyberattacks by giving threat actors a prominent platform on which to focus their efforts. Any implementation would need to adequately deal with a variety of cyber threats–especially for a reserve currency like the U.S. dollar. …

If a successful central bank digital currency were to become widely used, it could become a substitute for retail banking deposits. This could restrict banks’ ability to make loans for productive economic activities and have broader macroeconomic consequences. Moreover, the parallel coexistence of central bank digital currency with retail banking deposits could raise the risk of runs on the banking system in times of stress and so have adverse implications for financial stability.

Finally, there is no compelling demonstrated need for a Fed-issued digital currency. Most consumers and businesses in the U.S. already make retail payments electronically using debit and credit cards, payment applications, and the automated clearinghouse network. … As such, it is not obvious what additional value a Fed-issued digital currency would provide over and above these options.

Speech by Governor Brainard on October 16,2019:

In the United States, there are compelling advantages to the current system. First, physical cash in circulation for the U.S. dollar continues to rise, suggesting robust demand. Second, the dollar is an important reserve currency globally, and maintaining public trust in the sovereign currency is paramount. Third, we have a robust banking system that meets the needs of consumers: our banks are many in number, diverse in size, and geographically dispersed. Finally, we have a widely available and expanding variety of digital payment options that build on the existing institutional framework and the applicable safeguards.

Financial stability considerations are also important. The ability to convert commercial bank deposits into central bank digital currency with a simple swipe surely has the potential to be a run accelerant. Here, too, the role of banks in providing financial intermediation services could be fundamentally altered.

Seems to me that all boils down to:

1. If the public can hold central bank liabilities, then won’t it diminish demand for bank deposits, which could in turn hamper banks’ ability to lend?
2. Don’t Americans already have “digital dollars” via the plethora of payments options available? There seems little public demand for a tokenized dollar.
3. To the extent the payments system can be improved, the private sector and the Fed are working to do that, so why undermine those efforts?
4. Digitization creates new cybersecurity risks. Are they worth the trouble?
5. How would illicit use be addressed?

Those are the questions any effort to digitize the dollar will have to answer, and it’s the last question that most concerns me. In my view, a digital dollar that is meant to be a digital version of physical cash must have all the attributes of cash, which, as I have explained in much detail, includes censorship resistance and anonymity. To the extent such a design is not an option for the Fed, what’s the alternative? Governor Brainard addressed that in her October 2019 speech:

If it is designed to be financially transparent and provide safeguards against illicit activity, a central bank digital currency for consumer use could conceivably require the central bank to keep a running record of all payment data using the digital currency—a stark difference from cash, for instance. A system in which individual payments information would be recorded by a government entity would mark a dramatic shift.

It sure would. Centralized surveillance of that kind is not compatible with American values.

That’s all to say I look forward to the conversation but remain a little skeptical given little if any public demand, little threat from competing currencies, and, depending on the particular design, potential opposition from banks and civil liberties advocates. It’s going to be a tough row to hoe.

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