Yesterday, several current and former U.S. officials announced support for a digital version of the U.S. dollar. The prior CFTC Chairman and CIO, J. Christopher Giancarlo and Daniel Gorfine, penned an oped in the Wall Street Journal advocating for a “government-sanctioned” virtual currency — and various alumni of the Federal Reserve and FDIC went on the record with Politico’s Zachary Warmbrodt, calling on the Fed to explore similar proposals. These endorsements represent an early milestone in mainstreaming discussions about a digital dollar, and spur us to offer some guidelines about what should come next.
Support for a digital dollar is generally encouraging, and something that Misha and I have long been urging the U.S. government to prepare for, both in writing and in private conversation. It’s also a marked contrast from when we first began talking with central bankers, who were deeply skeptical (to put it mildly) when we discussed Bitcoin or the prospect of a Central Bank Digital Currency (CBDC). One regulator abroad even called Bitcoin “evil spawn” — as Kanye West might say, “that’s a pretty bad way to start the conversation.” The political backlash to Facebook’s Libra currency proposal, together with some foreboding around a “digital yuan” promoted by China, has shifted the policy dialogue rather quickly. Competition can breed innovation.
Building a digital dollar is a live issue that will continue to percolate in Washington and beyond. Members of Congress are nudging the Fed (and even appearing on Bitcoin podcasts), pro-digital currency leader Christine Lagarde is taking the reigns of the European Central Bank, and former central bank governors like Mark Carney are continuing to balance regulating private technologies like Libra with potentially creating a public, digital reserve currency.
In the meantime, here are a few initial guidelines policymakers should consider:
– Start small: Giancarlo and Dorfine are right to suggest a pilot program may be the best way to kick things off. The United States can build upon what worked (and did not work) in other pilot programs at central banks abroad — and also elevate research by officials at Regional Fed Banks, who have begun to explore a Bitcoin monetary “standard” and the prospects of digital currency competition.
– Don’t reinvent the wheel: For all the ups and downs of the cryptocurrency ecosystem, there has been an immense amount of activity that we can all learn from. The Fed does not necessarily need to build everything from scratch — and should not waste billions of dollars and years of development on a bloated private contract, only to yield an inferior version of Bitcoin.
– Support open source protocols: Creating a successful digital dollar is not just about having a killer app — it will also hinge upon the functionality and adoption of the underlying protocols that power the network. In the 1970s, the U.S. Defense Department funded open-architecture networking protocols like TCP/IP that form the backbone of the Internet today. The Internet succeeded because it was open: anyone could participate and launch a website, app, or browser. Similar principles bear with us today.
A digital dollar will not — and should not — develop overnight. But it is good to see some progress in the conversation. As the world flirts with digital money, the dollar should stay ahead of the curve.