What will be the future of electronic payments? What are the advantages of a “digital dollar,” and how has the COVID-19 pandemic changed the way we distribute payments? Jim Harper, a visiting fellow on AEI’s Technology Policy Studies team, joined the latest episode of “Explain to Shane” to discuss the growth of digital payment technologies in the context of COVID-19, data privacy, and cybersecurity.
Below is an edited and abridged transcript of our talk. You can listen and subscribe to “Explain to Shane” via your preferred listening platform here and read the full transcript of our discussion here.
Shane Tews: So, Jim,
COVID-19 generated a renewed interest in the digital dollar, and Congress has
had some hearings on it recently. Can you explain the basics to us? What is the
Jim Harper: The idea of a digital dollar has been
percolating around for a while, but it really took off with COVID-19 and the
economic stimulus measures that Congress took, where it was quickly discovered
that it’s awfully hard to distribute payments to a lot of people. Even though
the IRS has information about all taxpayers, pushing money out to them is not
easy to do.
There are really two digital dollar conversations going on
in tandem. The thing that spurred things was a proposal that was introduced in
the Senate to create a digital dollar and give everybody accounts run by the
Fed, from which they could access their digital dollars. That was put forth by
[Senator] Sherrod Brown from Ohio, but that was really quite similar to the
e-money that we have now that you transfer through your bank, or Venmo, or
PayPal, or any other thing.
The real digital dollar, if you will, or the interesting
digital dollar, is a truly tokenized dollar, where you aren’t passing it
through a bank or another financial services provider. You’re not passing it
through the Fed. So the dual conversation, or the urgency in Congress to get
people stimulus funds, has sort of raised the tide for both discussions, but
especially for the true tokenized digital dollar.
A tokenized dollar — how does that work?
Well, it’s tough to explain because sometimes “token” is
just a metaphor, and there isn’t actually a real digital token going around. It’s
really a technical infrastructure that would allow treatment of dollars
digitally exactly the same as they’re treated in paper. So you’d be able to
hand a $20 bill to a person, using your phone, you know, bluetooth connection
or exposing a QR code to them, or whatever the technology would be, and $20 in
value would move from you to this other person, just like pulling a $20 bill
out of your billfold and handing it to them. So “tokenized” is really
metaphorical, because what’s under the hood could be any number of things, but
the idea is having something that you can hand over to somebody without going
through a bank, without going through the Fed. That has a lot of important
consequences for privacy and security, for example.
So what are some of
the current approaches to helping the unbanked get access to the system?
Well, there are a lot of options. One that springs to mind for me is to reduce the amount of — because of my policy interests — reduce the amount of financial surveillance. It’s costly to maintain the records that are required under US federal law. It’s costly to require proof of identity to get accounts. Again, people who have suffered homelessness or addiction and things like that often don’t have the documentation they need to get the modern ID cards and things like that. But at the operational levels, our system is kludgy and expensive because there are so many actors, or so many hands, or businesses involved. So again, this has a potential for driving down those costs, which just naturally would help the unbanked. The proposal for a system run by the Fed would probably be tax-subsidized, so it would be cheaper on the retail side, but not necessarily cheaper and better overall.
How does the digital
dollar differ from cryptocurrencies such as Bitcoin?
So I’ll speak in terms of the tokenized digital dollar. I’m
an advisor to the Digital Dollar Project. That might be one of the leading
digital dollar discussions, though I don’t think it’s necessarily the only one.
The Digital Dollar Project has put out a white paper arguing that there are a
lot of benefits to a digital dollar — that it’s a way of upgrading our payments
infrastructure, and that it would maintain the primacy of the dollar, globally.
The project has refrained, actually, from selecting a technology, though I
think it’s fair to say that it’s inspired by blockchain technology, which is
the technology that underlines Bitcoin. They haven’t selected a particular
technology, but instead, I think smartly, have put forward the characteristics,
and are going to sort of build out what the characteristics are that you want
in a digital dollar, and then see what technologies satisfy those
I’m attracted to blockchain, of course, because I can see a number of benefits to it, including open-data and security benefits. It has characteristics that I think are good for public projects, because you could run fully open-source software that people are able to audit themselves, and that would create good oversight dynamics and things like that. But again, the Digital Dollar Project hasn’t selected a technology, and you could run something entirely centrally, but you would get certain costs from that, such as a breakdown in the system if the centralized operator hasn’t got it right, and also surveillance costs and things like that.
I’m totally with you
on the potential for the technology being much more efficient than our current
currency system, but law enforcement is very interested in the whole money
laundering aspect and, candidly, I am too. What do we do to appease their
concern that this will become, we’ll say, a dark web asset?
Well, that’s the tough conversation that I think is coming
up because one of the, I suppose, fundamental distinctions between a tokenized
dollar and a paper dollar is that a tokenized dollar can be transferred across
time. Sorry, across space, not time, quite yet, where physical can’t.
Let me know when we
get that time element, I’m going to be fascinated by that.
Well, these coders will figure something out to transmit
across time. You’re going to be able to move potentially large amounts of value
across long distances, including state and national borders, without any of the
effort that it takes to move $100 bills and $20 bills. So money will be easier
to move around under a tokenized dollar, and obviously we have a rather
substantial infrastructure of surveillance that relies on money being a little
bit hard to move around. If you want to move it quickly, you have to go through
a bank or other provider that’s regulated, and that provides surveillance
services to the government. And if you don’t want to do that, you have to
actually deal with bulky and heavy dollars, or gold, or whatever else.
So this is one of the basic differences between a tokenized
dollar and a physical dollar, so there will have to be a discussion. I think
that the best approach right now is to have technology that could implement
whatever the policy ends up being, so a base technology that can support
fully-anonymized payments and payments that are subject to certain levels of
surveillance and even blocking. For OFAC purposes, the Office of Foreign Assets
Control requires people not to trade with folks in Iran and other places that harbor
terrorist organizations or what have you.
There’s going to be a lot of challenge in a digital dollar
to nest those kinds of policies with the technology, but the technology should
support anything, and then the policy discussion will get hammered out. I would
love for there to be a nice, clear debate. I don’t suspect there will be a
nice, clear debate on the actual costs and benefits of the financial
surveillance regime we’ve got now. I don’t think it actually has a very big
payoff relative to the billions of dollars worldwide that are spent on it.
Facebook tried to put
something together, which makes sense when we think about how many Facebook
users are actually in areas where they’re unbanked. They tried to do this
without tethering it to a particular asset, as the US dollar. Do we see
anything with that kind of global backing?
Yeah, I think Libra. Certainly, you might credit Bitcoin and cryptocurrency first, and then Libra, and then China for spurring forward the discussion in a serious currency country like the United States. The potential in all those things I just mentioned ranges from modest to significant. Facebook has something special, and that’s a user base, and the original version of Libra was to have a basket of currencies, and if I recall correctly, they’ve now moved to where they’re going to have a bunch of stable coins. That is a token that represents a dollar, and a token that represents a Swiss franc, and a token that represents a Euro, whatever the case may be. It has helped spur the conversation and moved things forward. I wish Facebook and Libra the best. I’m interested in anything that brings progress, especially because in places outside of the United States where the financial services infrastructure is frankly quite poor, it’s holding back those economies. That is unfortunate on humanitarian grounds, and it’s unfortunate on national security grounds.
There are lots of places in the world that I’d love to see
have the economic development so that there’s a rule of law, so that they can
secure their own internal country, so that they can be safer international
actors. I think there are real benefits to be gotten, perhaps, by loosening up
a little bit on the financial surveillance regime so that there can be economic
development that flourishes. I think Facebook fell on the wrong side of that,
and was really beaten up by — I should say Libra, because Facebook had started
the project but it’s not Facebook, per se, that runs Libra — Libra got on the
wrong side of that, and has dramatically scaled back what they were hoping to
But, there is a future out there where good people across
the world are able to trade using digital currency, and they’re able to lift
themselves up using this technology, which can easily be truly global and truly
beneficial to markets and to freedom around the world.