Whether Private Or Public, The U.S. Needs A Digital Dollar

The travails of Silicon Valley Bank (SVB
VB
), 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 the Vanderbilt Law School and a former Treasury official, who said “there’s nothing inherently dodgy about stablecoins. But there is something inherently dodgy about banking, which is why countries build elaborate regulatory regimes to protect deposits”. Indeed. We should be encouraging truly stable stablecoins. Most of all, we should be encouraging a digital dollar.

Stable Banks

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

Now, that may sound rather unappealing, but the truth is that a great many people do not need all the facilities of a commercial bank account. They need cheaper, quicker and more transparent options for paying and getting paid. Wallets, for example, that can send digital dollars to other wallets over the Internet, not going anywhere near the banks or banking networks.

There are two rather 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 licence, that would allow someone like Walmart
WMT
or Circle or AT&T
T
to hold customer deposits in cash or short-term treasuries (let’s label these together as safe deposits) and issue private dollar-denominated tokens against those deposits. If such an institution was allowed a settlement account at the central bank and direct access to the payment networks for on- and off-ramps — which is what Caitlin Long at Custodia has been lobbying for in Wyoming — that would make the private digital dollars a pretty standard component of the financial system pretty 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

BTC
?) has pointed out before, since stablecoins do not bear interest, their issuers compete on non-price dimensions to attract users. There are a number of other ways for the narrow banks, or wallet providers, to make money: they could provide adjacent services (identity-related services being an obvious category), perhaps help people to manage their liquidity and so on.

But then, you might ask, if as a consumer you are not getting any interest on your dollar tokens, just as you are not getting any interest on your dollar bills, why bother with the private token intermediaries at all? That brings us to the second option. Why not just have 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 that can be redeemed at the Fed at any time) is the ultimate stablecoin.

Digital Power

This is about more than convenience and cost-saving for U.S. consumers. As Sam Lyman pointed out, properly regulated stablecoins have the potential to “cement U.S. financial hegemony” for a generation. When Eswar Prasad made the prediction that “national currencies issued by their central banks…could be displaced by stablecoins” he was right. If stablecoins do indeed become the “onramp to the dollar economy” for billions of people all around the world, then that would mean the U.S. could exert strategic power well beyond its abilities today.