Whether private or public, the United States needs a digital dollar

Whether private or public, the United States needs a digital dollar

The works of Silicon Valley Bank (SVBVB
), which went from having an A credit rating to being taken over by the Feds in three days, reminded me of the words of Morgan Ricks, a professor at Vanderbilt Law School and a former Treasury official, who said “there is nothing inherently questionable about stablecoins . But there is something inherently dubious about banking, which is why countries build elaborate regulatory regimes to protect deposits.” Indeed. We should encourage truly stable stable coins. Most of all we should encourage a digital dollar.

Stable banks

You can have stable, unsecured banks if you want them. They are called “narrow banks” or “payment banks”. They are banks that hold customer deposits but don’t take those deposits and lend them to startups or gamble them on foreign exchange transactions or bet on horses with them or whatever bank risk managers will allow. They just hold your money and instead of paying you interest on it, you pay them fees to do useful things.

Now that may sound rather unappealing, but the truth is that very many people do not need all the facilities of a commercial bank account. They need a cheaper, faster and more transparent option to pay and get paid. Wallets, for example, that can send digital dollars to other wallets over the Internet, and do not come close to the banks or banking networks.

There are two fairly obvious ways to make a digital dollar happen. The first would be to create a Federal Narrow Bank charter for fintechs, similar to a European payment institution license, which would allow someone like WalmartWMT
or Circle or AT&TT
holding customer deposits in cash or short-term government bonds (let’s label these together as safe deposits) and issuing private dollar-denominated tokens against those deposits. If such an institution were allowed a settlement account at the central bank and direct access to payment networks for entry and exit—which is what Custodia’s Caitlin Long has lobbied for in Wyoming—it would make the private digital dollars a fairly standard component of the financial system quite quickly. As Circle CEO Jeremy Allaire has said before, such an arrangement would “insulate” the world of web3 and DeFi from the underlying banking system.

Note the business implications. As Professor Larry White (author of the new book Better Money: Gold, Fiat or Bitcoin
) have previously pointed out, since stablecoins do not bear interest, their issuers compete on non-price dimensions to attract users. There are a number of other ways for narrow banks, or wallet providers, to make money: they can offer adjacent services (identity-related services are an obvious category), perhaps help people manage their liquidity, and so on.

But then, you might ask, if you as a consumer don’t get any interest on dollar tokens, just like you don’t get any interest on dollar bills, why bother with the private token intermediaries at all? That brings us to the second option. Why not just let the Federal Reserve issue a digital dollar itself? For most people, in most of the world, most of the time, a FedCoin (a US digital dollar token redeemable at the Fed at any time) is the ultimate stablecoin.

Digital power

This is about more than convenience and cost savings for American consumers. As Sam Lyman pointed out, properly regulated stablecoins have the potential to “cement US financial hegemony” for a generation. When Eswar Prasad made the prediction that “national currencies issued by their central banks … could be supplanted by stablecoins” he was right. If stablecoins really become the “run-on to the dollar economy” for billions of people around the world , it will mean that the US can exercise strategic power far beyond its capabilities today.

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