Bill offers digital currency that replicates cash, bypasses the Fed

The Electronic Currency and Secure Hardware Act (ECASH Act), introduced today in the U.S. House of Representatives, could herald a new direction in government-sponsored digital currencies.

The legislation directs the U.S. Secretary of the Treasury to develop and pilot an electronic version of the U.S. dollar that is easy to use for economically marginalized or technically disadvantaged people. It would also “maximize” consumer protection and data privacy, according to its lead sponsor, Rep. Stephen Lynch, chair of the Fintech Task Force on the House Financial Services Committee.

Interestingly, e-cash, as it’s called, would be issued by the US Treasury Department, not the Federal Reserve Board, which means it wouldn’t technically be a digital currency. from the central bank (CBDC), nor would it be built on a blockchain or require the internet to function. It is designed to “mimicking as closely as possible the privacy characteristics of cash”, such as coins and banknotes.

However, the initiative is not necessarily intended to rule out a Fed-issued CBDC. The pilot program launched by the ECASH Act “will complement and advance ongoing efforts undertaken by the Federal Reserve and President Biden to examine potential options for designing and deploying a digital dollar,” said Lynch, a Democratic Representative. of Massachusetts, in a statement. Representatives Chuy Garcia, Ayanna Pressley and Rashida Tlaib are co-sponsors of the bill.

The bill calls for the launch of a two-phase e-cash pilot program within 90 days of enactment – ​​with the rollout of e-cash to the American public expected no later than 48 months after enactment.

The legislation is being proposed and supported by a coalition of progressives, consumer advocates, civil liberties advocates and even some crypto “true believers,” Rohan Gray, assistant professor at Willamette University College of Law, told Cointelegraph. . Most Republicans will probably oppose it, “but I hope to be pleasantly surprised,” he added.

What is striking is that the proposal does not involve a central bank or digital ledger technology (DLT), which could herald a new path in the development of state-sponsored digital currency. It arguably offers more privacy and anonymity than any other government-sponsored digital currency project to date, calling for an “electronic dollar” to be used by the general public and capable of:

“Instant, final, direct, peer-to-peer, offline transactions using secure hardware devices that do not involve or require subsequent or final settlement on or through a common or distributed ledger, or other endorsement or additional validation.”

There is currently no other similar CBDC proposal in the world like this, said Gray, who worked with Congressman Lynch’s office to craft the bill.

The current CBDC debate over digital currency often pits currencies with a centralized digital ledger, such as the Chinese digital yuan, against digital currency issued on a distributed (decentralized) ledger, or blockchain. What is suggested in almost all cases, however, is the use of a ledger. That is, “the transactions are recorded on a common balance sheet somewhere,” Gray said, adding:

“So far, all the discussion about digital currency has been in the realm of cash in account.”

But, with electronic money, there would be no ledger, just like no ledger is used for physical cash transactions. This should appeal to privacy advocates and civil liberties who want to preserve the anonymity of monetary transactions. Digital ledger technology, even decentralized, does not allow complete anonymity. “If you don’t have a ledger, nobody can censor transactions and nobody you have to ask permission for,” Gray explained.

US Treasury building. Source: Sealy j.

How would that work? Electronic money could be exchanged by two people putting their phones together. It can be sent remotely like secure text messages, although that would require phone service, unlike face-to-face. It is intended to be easily used in a retail environment. Gray envisions a future mobile phone application with three accounts or options: one for the owner’s bank account, the second for a credit card account, and a third e-cash account.

But, doing without any intermediaries like credit card companies, banks or the government also presents certain risks. Gray added:

“You hold the money on your device. If you lose your device, you lose money — that’s the risk. Just like you lose your physical wallet on the train, you lose all the money inside the wallet.

In recent years, the United States has come under increasing pressure to develop a central bank digital currency, especially as China nears a full rollout of its digital yuan. Lynch referenced the challenges in today’s statement: “As digital currency and payment technologies continue to develop rapidly and Russia, China and more than 90 countries around the world are already researching and launching a form of central bank digital currency, it is absolutely essential that the United States remain a global leader in the development and regulation of digital currency and other digital assets.

As noted above, a digital dollar issued by the Federal Reserve could still follow. “There is nothing stopping the Fed from also issuing a CBDC,” Gray told Cointelegraph. “In fact, you would expect it since different designs perform different functions, like cash and checking accounts today.”

Electronic money will also be subject to US regulations. It would be “classified and regulated in a manner similar to physical currency and would therefore be subject to existing anti-money laundering, anti-terrorism, know-your-customer and transaction reporting requirements and regulations. financial”, according to the sponsors.

Yet why would electronic money be issued by the Treasury Department and not by the Federal Reserve? “If you said you wanted to create something digital that works like physical currency: it’s a token, it’s a bearer instrument, there are no accounts, no intermediaries or it’s going to be retail-focused, who should issue this?” Gray asked. The Treasury is the obvious candidate in his eyes.

After all, the Treasury already houses the United States Mint, the nation’s oldest monetary institution, as well as the Bureau of Engraving and Printing. The Treasury is now involved in activities similar to electronic money, such as the provision of prepaid debit cards. Moreover, the institution is more capable than the Fed of balancing competing political interests, he added.

“The Federal Reserve is made up primarily of academics and bankers trained in macro economics,” Gray said. They are not specialists in civil liberties or foreign affairs. The Treasury, on the other hand, includes agencies like the Office of Foreign Assets Control, which enforces foreign economic sanctions. The Treasury has a broader reach and a broader skill set, in his view.

Additionally, US central bankers have been saying for some time that critical decisions about digital currencies must be made by elected lawmakers, Gray added. “So now we’re taking them at their word.”

Sylvia B. Polson