US Digital Dollar CBDC Trials Begin: Look at the Progress and Challenges Ahead 2023

US Digital Dollar CBDC

US Digital Dollar CBDC Last month, the Digital Dollar Project and the Depository Trust and Clearing Corporation or DTCC tested the trading of stocks using a central bank digital currency or CBDC, specifically a digital US dollar.

The test included some of the largest financial institutions in the world, such as Bank of America, Citibank, and Wells Fargo, and it’s the first of many that will be conducted on the road to a digital dollar.

So today I’m going to tell you everything you need to know about the Digital Dollar Project. Summarize a few of the findings from its first CBDC test and tell you what it could mean for the crypto market.

The Digital Dollar Project was founded by Christopher Giancarlo. Now if that name sounds familiar, that’s because Christopher is well-known in the crypto industry and is colloquially referred to as Crypto dad by many in the crypto community. US Digital Dollar CBDC

This is because Christopher used to be the chairman of the United States’s Commodity Futures Trading Commission or cFTC, and was one of the few US regulators who was vocally pro-crypto. US Digital Dollar CBDC

Christopher was the chairman of the CFTC between 2017 and 2019, right at the peak of the previous crypto cycle, and Christopher has since been very vocal in his defense of Ripple, which was sued by the Securities and Exchange Commission or SEC in December, 2020.

What’s interesting is that Christopher was stating that XRP is not a security as early as June, 2020 months before the lawsuit against Ripple was filed for anyone wondering, SEC Commissioner Hester Pierce is colloquially referred to as crypto mum and no, she is not married to Christopher.

She’s just one of the only other US regulators that’s been vocally pro crypto and seems to be the only one who’s pro-crypto at the SEC these days.

I digress. Now, Christopher announced the Digital Dollar Project in January, 2020, although he’s been the face of the project ever since it was technically co-founded by him, his brother, Charles Giancarlo, who’s the CEO of a publicly traded tech company called Pure Storage and Daniel Goffin a law professor.

US Digital Dollar CBDC

More importantly, the Digital Dollar Project is technically a partnership between the Digital Dollar Foundation, a nonprofit organization that’s apparently based in New York City and Accenture and IT services and consulting company that’s based in Ireland.

Now, this is a small but significant detail because Accenture seems to have a very close relationship to the World Economic Forum or wEF.

Case in point, the Accenture website has an entire page about the different initiatives it’s been working on with the wEF, such as so-called Smart Cities and Digital id, and if you need more evidence of a close relationship, look no further than the Digital Dollar Projects board of director’s profile for David Treat.

David is a managing director at Accenture and his profile basically brags about his association with the WEF and his active involvement in the WEF’S digital ID initiatives. US Digital Dollar CBDC

If you’re still not convinced, consider that David interviewed Christopher about the Digital Dollar project at the Wefts Davos Conference in January, 2020.

A few days after the project was announced, a few weeks later, a pandemic was declared and Digital IDs and CBDCs conveniently became a hot topic.

Now, conspiracy theories aside, the CBDC, the Digital Dollar Project is trying to develop does not sound nearly as dystopian as all the other CBDCs in development. … MORE ABOUT CBDC

That’s because Christopher and his colleagues have been pushing for the digital dollar to have actual privacy, at least in public.

They argue that the absence of privacy means that a digital dollar will not be adopted if privacy is not guaranteed.

They also argue that the presence of privacy will make the digital dollar the most favorable CBDC to hold.

They argue that this will ensure the US dollars reserve currency status, at least in theory, Christopher claims he’s gone as far as telling central bankers to their faces that the citizens of their countries will switch to using cryptocurrencies if they screw up their CBDC by not having enough privacy or setting ideologically motivated payment restrictions.

He’s not wrong. Now whether Christopher and his colleagues at the Digital Dollar Project are truly passionate about things like privacy and financial freedom is best assessed by their actions rather than their words.

So this brings me to the recent pilot conducted by the Digital Dollar Project and the DTCC. The pilot is titled, quote, digital Dollar Project and DTCC, security Settlement Pilot. US Digital Dollar CBDC

US Digital Dollar CBDC

As a fun fact, the security settlement pilot was originally called Project Lithium. I suppose that one raised too many eyebrows due to its potential interpretations.

As mentioned in the introduction, the pilot was conducted with the help of Bank of America, Citibank, Wells Fargo State Street, one of the oldest US banks, virtue Finance, a newer FinTech company, Northern Trust, a financial services company, and noora, a Japanese Financial Holdings company.

The pilot report begins with a letter from DTCC director Jennifer Pave, who praises the pandemic for accelerating digitization and a letter from the Digital Dollar Project, which reveals that the pilot was the quote first private sector initiated experiment intended to inform a potential US CBDC.

In the introduction, the authors explain that the financial system is becoming increasingly digital and assert that cbdc are the quote, logical advancement for currency.

US Digital Dollar CBDC

They reveal that 105 countries representing 95% of global GDP are in the process of rolling out CBDcs, which is seriously scary.

The authors also reveal that the Federal Reserve Bank of New York recently conducted its own CBDC pilot for cross-border payments.

It’s important to note that this pilot was for a wholesale CBDC, which will be used by select individuals and institutions, not a retail CBDC that will be used by you and me in any case. US Digital Dollar CBDC

The second part of the pilot report is about its scope, objectives, and approach. In short, the pilot’s participants use a prototype of the DTCC Digital Settlement Network and a simulation of a CBDC system from the Federal Reserve to see how the two payment systems would interact.

To clarify, the Fed doesn’t have a CBDC system.

The pilot participants used a CBDC model developed by the Digital Dollar Project and pretended that it would be analogous to the one that the Fed will inevitably have.

Now, what the pilot participants quickly realized was that there is a need to have a trusted third party to settle transactions between both payment systems.

Not only that, but they also realized that this trusted third party will need to have full visibility of both payment systems for this setup to work.

In other words, it’s possible that a future CBDC setup will require a third party that can see every transaction being conducted on certain CBDC networks.

I dare not imagine what would happen if this trusted third party was hacked or compromised, but I suppose we’ll find out soon enough. Anyways, the authors go on to explain that a series of assumptions were made about the CBDC that would be used in such a setup.

The first assumption is that the Fed will be in full control of the CBDC and be the only issuer of it. US Digital Dollar CBDC

The second assumption is that the CBDC exists on a permissioned network where participants can only see information about their own transactions.

The third assumption is that commercial banks will be involved with the settlement of CBDC transactions.

US Digital Dollar CBDC

This third assumption is a bit silly because CBDC reports by central banks and the Bank for International settlements or BIS, the bank for central banks have revealed that commercial banks could very well be cut out of the payment equation by CBDC .

Now, the fourth and final assumption is that the CBDC will be programmable, meaning that the Fed will be able to set limitations on how and when a CBDC can be spent.

This is perhaps the most dystopian quality of CBD cs, and it’s sobering to realize that these four assumptions will likely become a reality if that wasn’t bad enough.

The author’s illustration of their so-called tokenized CBDC model notes that settlement times for stock trading will remain unchanged. Put simply, this means it will still take days for a stock trade to settle even though it could easily be settled instantly to add insult to injury.

The illustration notes that the tokenized CBDC model quote follows all SEC regulations and compliance procedures. It also quote follows identity management requirements. US Digital Dollar CBDC

This suggests that there will be regulations at the protocol level along with digital ID integration.

Now, the third part of the pilot report breaks down how each stock trade with CBDC would work step by step. As you can see, the settlement process is unnecessarily elaborate and takes 12 steps to complete.

Note that crypto transactions don’t require this kind of elaborate settlement process.

The fourth part of the pilot report details the findings and the authors start by explaining that there may be ways to avoid the need for a trusted third party in the CBDC stock settlement process.

One of their suggested options is to have the Fed oversee all stock transactions naturally. Another suggestion they make is to have the DTCC be the middleman between the Fed CBDC system and the settlement banks.

The authors go on to explain how the DTCC would handle different situations if selected for this role, including transaction disputes and rollbacks.

US Digital Dollar CBDC

Now, if I understand correctly, the authors explain that the middleman, be it the DTCC or otherwise would hold the keys to the smart contracts on both payment networks to ensure that payments are settled.

Again, this could lead to some serious issues if this middleman is hacked or compromised as a cherry on top, the authors explain that a trusted middleman will be required for all CBDC transactions.

This is because of potential payment disputes, particularly when purchasing physical products. US Digital Dollar CBDC

Assuming CBDC is built on a blockchain, transactions will not be easy to reverse anyhow, the fifth part of the pilot report talks about the opportunities and trade-offs of the CBDC settlement design.

The authors reveal that the exchange industry is trying to move to shorter settlement times and note that their CBDC design could facilitate same day settlement if institutions wanted.

They also acknowledge that cryptocurrencies provide real-time settlement, but note that many non-US stock market operations allow for the same fast finality.

They explain that the only way instant settlement would work in the US stock market would be if all securities were tokenized, and this reminds me of a BIS report about the possibility that all physical assets will be tokenized on a blockchain owned and operated by the central banks and governments.

This would be a terrifying outcome because they would have the power to turn off your ownership of well, everything.

The scariest part of all is that you wouldn’t even realize how oppressive that system is until your assets are digitally seized for speaking out against the elites or refusing to comply with the current thing.

It’s almost like you would unknowingly own nothing and yet be happy. Now regarding the benefits of the digital dollar project CBDC settlement design, the authors highlight transparency as the primary perk.

They note that the central banks and regulators would be able to see everything, which would give them better oversight of the stock market and of course maximize taxes. US Digital Dollar CBDC

They also reiterate that the ideal CBDC would use a blockchain to make transaction settlement truly final.

That way participants in a transaction would never have to fear that their transactions will be reversed just like with cash, assuming the middleman allows that transaction to go through at all.

In the sixth part of the pilot report, the authors shill the digital dollar projects CBDC model, which you’ll recall. They use to simulate the fed’s future CBDC model for the purposes of the pilot.

The digital dollars CBDC model is called the champion model and it doesn’t sound like what’s being advertised.

That’s because its definition of privacy means that the participants of a transaction, the middleman of the transaction and the Federal Reserve will be the only ones that see transaction details.

Its definition of privacy also includes everyone knowing who is partaking in these transactions. This warped definition of privacy is one I’ve seen many times in CBDC reports.

The authors of CBDC reports seem to believe that privacy means that everything is shared with the government and central bank, just not with the private sector.

It’s unfortunate that Chris PhoneCo appear to adhere to this idea. For what it’s worth, the authors of the pilot report argue that the Fed should allow other financial institutions to settle transactions.

As it stands today, all transactions are ultimately settled at the Fed via settlement banks, which the authors argue creates system risk due to centralization. They’re not wrong. US Digital Dollar CBDC

Now, the seventh and final part of the pilot report explores future pilots for CBDC settlement.

This includes assessing the risks and rewards of CBDC settlement, identifying any unwanted impacts of CBDC settlement, and assessing the technological requirements and hurdles for CBDC settlement.

As I mentioned earlier, the CBDC settlement pilot is just the first of many that the Digital dollar project will do. The project announced last May that there would be five pilots in total at the time.

It specified that three of the five pilots would be announced in the coming months.

The thing is that the Digital dollar project only announced the CBDC settlement pilot in April this year and didn’t provide details about the other two pilots it’s supposed to be conducting.

What’s more is that I couldn’t find any details about these five pilots. That said, I did manage to find a document from the Digital Dollar Project that seems to have been prepared for the Senate Banking Committee way back in 2020.

It includes not five but four digital dollar pilots, each of which has some interesting bullet points.

The first pilot is titled Quote, UN and Underbanked Consumers, and it includes peer-to-peer payments, offline transactions, remittances, distrust of banking, whatever that means, fraud reduction and programmable tokens, which doesn’t sound concerning at all. US Digital Dollar CBDC

The second part is titled quote, banked Consumers and it also includes programmability but seems to suggest that the digital dollar will exist alongside cash and other kinds of money.

If you’ve been keeping up with our CBDC updates, you’ll know most central banks and governments don’t want alternatives.

The third pilot is titled Quote, small, medium and multinational Business users, and it includes retail payments, international payments, and the quote, ability to pay counterparties without an intermediary call me crazy, but that sounds like big businesses won’t require that trusted third party.

The fourth pilot is titled quote, financial Market Infrastructure Players, and this seems to be what the CBDC settlement pilot was about, at least in part that’s because the fourth pilot includes banks paying banks Central Bank Money settlement, and the DTCC, which participated in the CBDC settlement pilot.

US Digital Dollar CBDC

This suggests that the Digital Dollar project is falling behind on development, and I suspect this might be because the project has turned its focus to Europe. This is because Christopher was recently knighted.

That’s right Knight by the French government due to his work in crypto. Now, this is odd because the digital dollar Christopher is working on is obviously not a cryptocurrency.

It’s even more odd because Christopher did in fact work in the crypto industry, but only temporarily. He was on Block Five’s board of directors for four months in the summer of 2021.

If he wants even more oddity, consider that former acting comptroller of the currency. US Digital Dollar CBDC

Brian Brooks became the CEO of Binance US one day before Christopher sat on Block Five’s board of directors and Brian stepped down as CEO shortly before Christopher left.

Now, the collapse of FTX and Alameda Research, you might remember that Brian was allegedly leaking information about Binance to FTX and Alameda who in turn allegedly gave this information to mainstream media companies to run hit pieces on Binance.

If this is even remotely true, then it’s possible that Christopher joined Blackfire under similarly dubious circumstances.

The fact that Christopher couldn’t give a good reason for why he joined Block FiVe in a subsequent interview adds to the circumstantial evidence, but I suppose it’s just speculation.

So this brings me to the big question and that’s what the Digital dollar Project CBDC pilot means for the crypto market.

While some believe that the Digital Dollar project is somehow bullish for XRP, I have yet to see any concrete evidence that the project has been leveraging the XRP ledger for anything. US Digital Dollar CBDC

It’s important to point this out because it really looks like the Digital Dollar Project was trying to appeal to the crypto community to get exposure and support.

Christopher’s constant appearances in the crypto media and interviews with crypto YouTubers makes this abundantly clear.

Well, at least to me, funnily enough, the digital dollar projects attempts to appeal to the crypto community appear to have backfired because it seems to have been lumped into the same bucket by the powers that be.

It doesn’t look like the Fed or any other central bank is taking the project seriously despite its WEF affiliations and sure the Digital Dollar Project was able to recruit some financial heavyweights for its CBDC settlement pilot, but it doesn’t have all that much to show for it.

Nevermind the fact that each of these institutions is working on other CBDC pilots and in some cases working on their own digital currencies.

Now, to be fair, the lack of development on the Digital Dollar project could just be because interest in digital currencies in general has declined significantly over the past year.

This is due in part to the collapse of the crypto market and in part due to even more pressing issues that have arisen in 2022 alone, if I’m correct here, than the Digital Dollar Project.

CBDC pilot could be quite bullish for cryptocurrency because it means the rollout of CBDC has been delayed. As we’ve seen in many countries, CBDC rollouts seem to be preceded by a crackdown on cryptocurrency, so any CBDC delays are welcome.

Conversely, it’s possible that the digital dollar project’s lack of development is because another digital dollar system has already been developed.

The one that’s top of mind for me is the Fed’s Fed Now fast payment system, which is scheduled for release sometime in the second half of 2023.

According to the BIS fast payment systems are almost exactly like CBDC systems when they’re paired with a digital id. It’s reasonable to assume that the Digital Dollar Project knows this. US Digital Dollar CBDC

After all, they are putting themselves forward as the digital dollar experts and even claim to have coined the term.

As it so happens the specifics of the Fed’s Fed Now payment system were finalized in August, 2020.

Less than a year after the Digital dollar project was announced, that could be the moment when the project was doomed or at least the moment when its participants turned their focus to Fed Now.

Now our repeat that this is mostly speculation, but there’s no denying that there are some peculiar relationships between these entities.

The one that really got my Noggin Jogging is the co-chair of the Brookings Institution, which is close connections to the Fed, sitting on the Board of directors for Digital Currency Group.

Anyhow, it’s going to be very interesting to see what the Digital Dollar Project does in its upcoming pilots, and you can rest assured that I will keep you posted.

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